The Role of Managerial Ability in Classification Shifting Using Discontinued Operations

The Effect of Managerial Ability on Earnings Classification Shifting and Agency Cost of Iranian Listed Companies

“…Hence, expected capable managers, due to being more knowledgeable about the firm and the industry, are more able to use earnings management [13]. In addition, results of prior research show that there is a different relationship between managers' ability and earnings management through its all patterns [12][13][14]. Taken together, we do not have a special directional prediction and state the following null hypothesis:…”

“…Previous studies on managerial ability find that highability managers can have a positive impact on firms' current and future performance (e.g., [12][13][14]) and there is a negative association between managerial ability and earnings management (e.g., [12,28,29]). Hence, high-ability managers can reduce the negative impact of earnings management and improve future performance.…”

“…where FCF is free cash flow; INC operating earnings before depreciation; TAX is the total tax paid; INTEP interest expense paid; CSDIV is common stockholders' dividends; and A is total assets and earnings classification shifting. In other words, highability managers due to recognition and understanding in meso/macroeconomic conditions [8], achieve the target earning [14].…”

“…ese managers can use the company's resources to create higher sales, and under the financial distress conditions, they manage earnings via three strategies: manipulation of real actives, accrual-based earnings management, and classification shifting [8,12,14]; to maximize the earnings, they must choose its strategy based on the limited information they are able to obtain [15]. On the other hand, management may show (for reasons such as job security, receiving compensation, increasing the firm value, and other factors) the firm earning more than actual numbers, to provide a good picture of the firm's performance [16].…”

Managerial Ability and Firm Performance: A Labour Management Perspective.

“…Introduction of the managerial ability measure by Demerjian et al (2012) spawned a new literature examining how managerial ability affects various aspects of managers' decision-making. These studies have documented that managerial ability has a distinctive effect on a firm's financial reporting quality and earnings quality (Demerjian et al, 2013;Huang & Sun, 2017;Wang, Chen, Chin, & Zheng, 2017), earnings management activities (Skousen, Sun, & Wu, 2019), accounting and disclosure policies (Abernathy et al, 2018;Baik et al, 2011;Luo & Zhou, 2017;Sun, 2016), information environment (Baik et al, 2018), tax avoidance behaviour (Koester, Shevlin, & Wangerin, 2017), investment practices (Andreou et al, 2017;Gan, 2019;García-Sánchez & García-Meca, 2018;Habib & Hasan, 2017;Lee et al, 2018), risk-taking behaviour (Andreou et al, 2016;Yung & Chen, 2018), innovation activities (Y. Chen, Podolski, & Veeraraghavan, 2015), credit ratings (Bonsall, Holzman, & Miller, 2017;Cornaggia, Krishnan, & Wang, 2017), structure and pricing of debt (Bui, Chen, Hasan, & Lin, 2018;De Franco, Hope, & Lu, 2017;Petkevich & Prevost, 2018), dividend policies (Guan, Li, & Ma, 2018;Jiraporn, Leelalai, & Tong, 2016); audit fees (Gul, Khedmati, Lim, & Navissi, 2018;Li & Luo, 2017); firm performance (Banker, Darrough, Huang, & Plehn-Dujowich, 2013;Cox, 2017;Demerjian et al, 2012;Francis, Hasan, Mani, & Ye, 2016), and corporate social responsibility (CSR) performance …”