Keywords

managerial ability, earnings smoothing, accruals earnings management, real earnings management

Abstract

We investigate if high-ability managers are more likely to intentionally smooth earnings, a form of earnings management, and when they are more likely to do so. Although prior studies provide evidence that high-ability managers report higher quality earnings, the literature does not indicate whether this behavior is common because of (or happens in spite of) high-ability managers’ intentional smoothing activities. We find that (1) high-ability managers are significantly more likely to engage in intentional smoothing, (2) their intentional smoothing is associated with improved future operating performance, and (3) their intentional smoothing is more prevalent when the smoothing either benefits shareholders, the manager, or both. We do not, however, find evidence that high-ability managers who smooth are more likely to have engaged in informed trading or are more likely to consume perquisites. High-ability managers’ intentional smoothing is also associated with increased voluntary (but not forced) executive turnover, consistent with high-ability managers being motivated, at least in part, by how the capital market consequences of smoothing are expected to benefit shareholders, thereby bolstering their reputation.

Original Publication Citation

Demerjian, P., M. Lewis-Western, and S. McVay. 2020. “How Does Intentional Earnings Smoothing Vary with Managerial Ability?” Journal of Accounting, Auditing & Finance 35 (2): 406–437.

Document Type

Peer-Reviewed Article

Publication Date

2017

Publisher

Journal of Accounting, Auditing & Finance

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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