Does managerial ability enhance earnings quality? The moderating role of corporate governance quality and ownership concentration

Abstract

Earnings quality is information that can be determined by various factors, one of which is managerial ability. Thus, management quality itself can have a positive or negative impact on earnings quality, depending on the factors that affect their relationships. This study was conducted to reexamine the effect of managerial ability on earnings quality by including corporate governance quality and ownership concentration as factors that are expected to be able to explain the inconsistencies in the results of previous studies. This study used the data of manufacturing companies listed on the Indonesia Stock Exchange in 2010-2016 as study sample with total observations were 253. The analysis technique used for hypothesis testing was a multiple linear regression analysis. This study succeeds in proving the moderation role of governance quality in strengthening the relationship between managerial ability and earnings quality. However, the role of ownership concentration as moderator factors failed to prove in this study. Interestingly, there is a negative effect between managerial ability and earnings quality. The opportunistic actions taken by managers who want to meet their performance targets was considered as the reason of the negative effect between managerial ability and earnings quality.

Managerial ability and informative earnings management: the role of CEO-commissioner relationship and board independence

“…As OEM makes shareholders get misleading information (Roychowdhury, 2006), they will get lower quality information about earnings. Romadhon and Kusuma (2020) find that higher managerial ability can lead to lower earnings quality.…”

“…Based on agency theory, managers and shareholders have agency conflicts that can lead managers to take an opportunistic behavior, such as OEM. Romadhon and Kusuma (2020) find higher ability managers reduce earnings quality. As OEM refers to earnings management that leads to earnings quality reduction (Healy and Wahlen, 1999; Menicucci, 2020), the result by Romadhon and Kusuma (2020) indicates that higher ability managers also can engage in OEM.…”

The Impact of The Relationship Between Managerial Ability and Earnings Management by Classification Shifting on Transparency of Financial Reporting and Firm Value: An Empirical Evidence from The Saudi Capital Market

“…The opportunistic behavior of earnings management aims to maximize the benefit of management function by distorting accounting information (Menicucci, 2020). As for the opportunist hypothesis, some studies indicate that there is a significant and negative relationship between the MA and earnings quality that measured by accrual accounting and real activities (Romadhon and Indra ,2020;Huang and Sun ,2017). The second stream consists of studies that support the hypothesis of efficiency earnings management for managers with high ability.…”

Dividend policy, ownership structure and corporate governance: An empirical analysis of Indonesian firms

“…On the one hand, the dividends are viewed as the control mechanism of the directive, therefore it can be used to mitigate any agency-related issues that may arise in the future. On the other hand, the big shareholders may restrain dividend payouts and trigger agency conflicts by using their majority ownership to acquire resources for their advantage at the expense of the minority (Khan et al, 2022;Romadhon & Kusuma, 2020;San Martin-Reyna & Duran-Encalada, 2015;Trihermanto & Nainggolan, 2018). The agency conflict between majority and minority shareholders has commonly happened in emerging markets (Setiawan & Kee Phua, 2013).…”

“…Moreover, Egri et al (2004) found that the relationship between corporate governance and dividend payouts is limited depending on the mechanism of protection both from the firm level and country level for investors. Baker et al (2020), Pahi & Yadav (2019), and Romadhon & Kusuma (2020 added that the implementation of a good corporate governance system is covetable to prevent managers and/or majority shareholders' opportunistic behavior and strengthening the ability of managerial to enhances corporate earning quality.…”