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

Abstract

This research investigates the impact of interaction between managerial ability (MA, hereafter), and earnings management by classification shifting (EMBCS, hereafter) on financial reporting transparency and firm value. This study examines whether highly competent managers are more likely than other managers to intentionally classification shifting as a means of managing earnings. Furthermore, this study also tests economic consequences associated with the inter-relationship between EMBCS practices and MA. We collected data from 125 nonfinancial firms listed on the Saudi Capital Market from 2015 to 2019. The results demonstrate that a high MA mitigates EMBCS practices. The results also show that the inter-relationship between EMBCS practices and MA reduces the costs of the agency as an indicator of the transparency of accounting information. Moreover, our findings show that the relationship between EMBCS practices and MA has a positive influence on the value of the firms listed on the Saudi Capital Market.