Why 'Talking Past Each Other' About Managerial Discretion Matters

Abstract

The degree of managerial discretion permitted to a senior corporate manager is at the heart of the trust and control continuum in agency relationships, and thus has significant implications for a better understanding of the mechanisms for effective governance and exemplary accounting. There has been little progress since Hambrick and Abrahamson noted in 1995: “Managerial discretion is a concept of great potential significance, both in its own right and in its potential to improve understanding of other organizational phenomena…. Discretion is a multi-faceted, highly abstract concept that, by its very nature, cannot be directly observed. If empirical research in discretion is to proceed, progress must be made on its measurement”.Discussion concerning how we understand and ‘measure’ managerial discretion appears in diverse academic scholarship reflecting the latitude managers, and in particular CEOs, are able to exercise without recourse to the BoD for prior approval for their actions. This study adopts a multi-disciplinary perspective, suggesting there are twelve diverse propositions in which managerial discretion is invoked, as a variable, or as an underlying controlling or causal mechanism. In particular, there is a wealth of accounting research into discretionary accruals, abnormal accruals, and earnings management, and in this research managerial discretion is proxied for by discretionary accruals. This study contributes to developing a clearer understanding of the diverse causes and drivers to different levels of such discretion.