Abstract
The objective of this study is to examine the relationship between managerial ability and earnings classification shifting of firms listed in the Tehran Stock Exchange (TSE). The paper consists of a sample of 1,875 firm-year observations after applying systematic elimination sampling method during a period of fifteen years, from 2005 to 2019. This study used the multivariate panel data regression for testing the links between variables. The results of this study provide that there is a positive relationship between managerial ability and earnings classification shifting. The obtained results indicate that there is a negative relationship between managerial ability and real earnings management and no relationship between managerial ability and AEM. In addition, managerial ability mitigates the negative effect of earnings management on future firm performance. Furthermore, managerial ability affects its agency cost positively due to the reduction in earnings management. This paper contributes to developing management literature and financial reporting literature. The study focuses on links managerial ability and earnings classification shifting and agency cost in a developing country like Iran, and the results of the paper can fill distance theory and practice by empirical test. Furthermore, the results of this study indicate in an emerging market, namely, Iran, that has a political business environment among the other countries of the Middle East, managerial ability can release Iranian firms on economic sanctions and financial pressures. This paper is the first study of its type in Iran.
Highlights
Today, information plays an important role in economic decision-making, and no doubt, the quality of it, including accuracy in providing it to a wide range of users, can be useful for decision-making
We examine the relation between managerial ability and earning classification shifting and the impact of managerial ability on the relation between real earnings management (REM)/unexpected core earnings (UCE) and future firm performance
We provide evidence that firms with higher-ability managers have higher earnings classification shifting and lower real earnings management
Summary
Information plays an important role in economic decision-making, and no doubt, the quality of it, including accuracy in providing it to a wide range of users, can be useful for decision-making. Chen and Howard (2016) believe that the accounting earnings reported in this financial statement can be an important element of information for stakeholders to determine stock prices and evaluate management performance [2], which is consistent with the comments of Ball and Brown (1968) [3]. Based on the positive theory and executive compensation plans, net earnings are very important for managers [4]. Erefore, they may manipulate and manage earnings. Eisenhardt (1989) stated that agency problems arise when managers manipulate the corporate financial information to achieve their private motivations [5]. Jiraporn et al (2008) assume that the conflicts of agency can drive managers to use the flexibility of accounting procedures [6]
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