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.
Auditors incur a loss of credibility and/or status or litigation costs only when investors recognise audit failures. In this respect, auditors may be concerned about an increase in market-perceived risk even though the total amount of audit risk is constant. Consistent with this reasoning, I find that auditors increase audit effort in response to increases in market-perceived information risk. This suggests that the expected costs of audit failures are a function of investors' recognition, and thus increased market-perceived risk causes auditors to become more concerned about their audit failures and to increase audit effort. Further, this study shows that audit effort is effective in reducing market-perceived information risk, suggesting that auditors contribute to the information environment.
This study provides evidence that the cost of equity capital decreases with the number of analysts who issue both cash flow and earnings forecasts (cash analysts). The evidence also shows that cash analysts reduce information asymmetry and predict long-term earnings more accurately than analysts who issue only earnings forecasts. Taken together, these findings suggest that cash analysts provide market participants with high-quality information and, as a result, firms benefit from cash analyst coverage in the form of a reduced cost of equity capital.
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