This study aims to discover whether managers of Indian listed firms with extraordinary managerial abilities refrain from real earnings management (REM). The measure of managerial ability used in this study is based on the firm’s ability to utilize its resources into sales revenue. To examine the relationship between managerial ability and REM, a fixed-effect model is used on a balanced panel of 108 National Stock Exchange-listed non-financial firms from 2006 to 2017. The findings of the study provide empirical evidence indicating that a proficient manager is more likely to refrain from REM. The decrease in REM with an increase in managerial ability is on account of containing REM in overproduction by managers with higher abilities. Besides, the study also finds a complementary association between REM and accruals-based earnings management.
AshiqA., & WeiningZ. (2015). CEO tenure and earnings management. Journal of Accounting and Economics, 59(1), 30–49. 10.1016/j.jacceco.2014.11.004
2.
BallR., & ShivakumarL. (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83–128. 10.1016/j.jacceco.2004.04.001
3.
BallR., & ShivakumarL. (2008). Earnings quality at initial public offerings. Journal of Accounting and Economics, 45(2–3), 324–349. 10.1016/j.jacceco.2007.12.001
4.
BerkJ. B., & StantonR. (2007). Managerial ability, compensation, and the closed-end fund discount. Journal of Finance, 62(2), 529–556.
5.
BertrandM., & SchoarA. (2003). Managing with style: The effect of managers on firm policies. Quarterly Journal of Economics, 118(4), 1169–1208.
6.
ChemmanurT. J., & PaeglisI. (2005). Management quality, certification, and initial public offerings. Journal of Financial Economics, 76(2), 331–368. 10.1016/j.jfineco.2004.10.001
7.
CohenD. A., & ZarowinP. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19. 10.1016/j.jacceco.2010.01.002
8.
DasR. C., MishraC. S., & RajibP. (2017). Real versus accrual-based earnings management: Do Indian firms prefer one over the other?Paradigm, 21(2), 156–174. 10.1177/0971890717736214
9.
DechowP. M., & DichevI. D. (2002). The quality of accruals and earnings: The role of accruals estimation errors. Accounting Review, 77(s-1), 35–59. 10.2308/accr.2002.77.s-1.61
10.
DemerjianP., LevB., & McVayS. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58(7), 1229–1248. 10.1287/mnsc.1110.1487
11.
Di MeoF., García LaraJ. M., & SurrocaJ. A. (2017). Managerial entrenchment and earnings management. Journal of Accounting and Public Policy, 36(5), 399–414. 10.1016/j.jaccpubpol.2017.07.003
12.
DormannC. F., ElithJ., BacherS., BuchmannC., CarlG., Carré, G., García MarquézJ. R., GruberB., LafourcadeB., LeitãoP. J., MünkemüllerT., McCleanC., OsborneP. E., ReinekingB., SchröderB., SkidmoreA. K., ZurellD., & LautenbachS. (2013). Collinearity: A review of methods to deal with it and a simulation study evaluating their performance. Ecography, 36(1), 27–46. 10.1111/j.1600-0587.2012.07348.x
13.
FerentinouA. C., & AnagnostopoulouS. C. (2016). Accrual-based and real earnings management before and after IFRS adoption: The case of Greece. Journal of Applied Accounting Research, 17(1), 2–23. 10.1108/09574090910954864
14.
HambrickD. C., & D’AveniR. A. (1992). Top team deterioration as part of the downward spiral of large corporate bankruptcies. Management Science, 38(10), 1445–1466. 10.1287/mnsc.38.10.1445
15.
HambrickD. C., & MasonP. A. (1984). Upper Echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193–206. 10.5465/AMR.1984.4277628
16.
HuN., HaoQ., LiuL., & YaoL. J. (2015). Managerial tenure and earnings management. International Journal of Accounting & Information Management, 23(1), 42–59. 10.1108/IJAIM-04-2014-0025
17.
HuangX., & SunL. (2017). Managerial ability and real earnings management. Advances in Accounting, 39, 91–104. 10.1016/j.adiac.2017.08.003
18.
KorY. Y. (2003). Experience-based top management team competence and sustained growth. Organization Science, 14(6), 707–719. 10.1287/orsc.14.6.707.24867
19.
KothariS. P., LeoneA. J., & WasleyC. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197. 10.1016/j.jacceco.2004.11.002
20.
LiC., TsengY., & ChenT. K. (2016). Top management team expertise and corporate real earnings management activities. Advances in Accounting, 34, 117–132. 10.1016/J.ADIAC.2016.07.007
21.
RoychowdhuryS. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370. 10.1016/j.jacceco.2006.01.002
22.
SwitzerL. N., & BourdonJ. F. (2011). Management quality and operating performance: Evidence from Canadian IPO companies. International Journal of Business, 16(2), 133–148.
23.
ZangA. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Accounting Review, 87(2), 675–703. 10.2308/accr-10196
24.
ZhangW. (2009). CEO tenure and earnings quality. Dallas. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=E3CDBB4FD24AAB49089ACD111CD6466B?doi=10.1.1.181.287&rep=rep1&type=pdf
