CEO's Operating Ability and the Association between Accruals and Future Cash Flows

Abstract

This study investigates whether an individual CEO's operating ability, operationalized as the extent to which an individual CEO utilizes the company's assets efficiently to generate profits, explains the association between accruals and future cash flows. While this mapping can be driven by both the quality of accounting measurement and CEO operating ability, there is little empirical evidence on the latter link. After controlling for the CEO's accounting estimation ability, we find that the association between current period accruals and future cash flows is stronger when the CEO demonstrates superior operating ability. This suggests that a CEO's operating ability is an important determinant of the informativeness of current accruals for future cash flows.

Bank Liquidity Creation and Risk‐Taking: Does Managerial Ability Matter?

“…For instance, Bertrand and Schoar () find that managers influence their organization's behavior over and above time‐ and firm‐specific characteristics. Management ability has been shown to have a distinct effect on a firm's disclosure policies, accounting behavior and reporting quality incrementally to the effects driven from the firm and environment characteristics (see, for example, Bamber et al., , Ge et al., , Dejong and Ling, , Choi et al., , among others). Similarly, Rajgopal et al.…”

Female Commissioner and Earnings Quality: a Moderating Role of President Director's Ability

“…Furthermore, Choi et al (2015) strengthen the research of Bertrand & Schoar (2003) regarding specific characteristics of CEO (managerial) as an essential dimension in quality of earnings. Dejong & Ling (2013) focus on the impact of specific individual in accrual that could not be explained by the company's characteristics.…”

“…CEO with high capacity will be effective and efficient in applying operational policy and able to provide reflective future cash flow in current accrual (Choi et al, 2015). By observing data from the year of 2000 until 2011, Choi et al (2015) find that accruals reflecting information regarding future cash flow in the case of the manager do have a high level of operational ability. Choi et al (2015) claim that results could complement the measurement of managerial ability by Demerjian et al (2012) by showing not only accuracy of judgment and estimation ability in mapping current accrual with future cash flow, but also the need of ability on arranging an efficient operational decision.…”

“…In short, the more capable the manager, the more efficient and effective the company is. Choi et al (2015) analyzes the operational ability of CEO to explain the relationship between current accruals and future cash flow. CEO with high capacity will be effective and efficient in applying operational policy and able to provide reflective future cash flow in current accrual (Choi et al, 2015).…”

“…Choi et al (2015) analyzes the operational ability of CEO to explain the relationship between current accruals and future cash flow. CEO with high capacity will be effective and efficient in applying operational policy and able to provide reflective future cash flow in current accrual (Choi et al, 2015). By observing data from the year of 2000 until 2011, Choi et al (2015) find that accruals reflecting information regarding future cash flow in the case of the manager do have a high level of operational ability.…”