The Impact of Managerial Ability on the Relation between Real Earnings Management and Future Firm’s Performance: Applied Study

Abstract

This study aims to investigate the managerial ability of executives’ managers’ role in mitigating the ‎negative impact of real earnings management on future firm’s performance. The researcher ‎operationalizes managerial ability by using a measure developed by Demerjian, Lev, and McVay (2012). ‎This measure captures managers’ ability to efficiently convert firm resources into sales revenue relative to ‎their industry peers. In other words, higher-ability managers are more likely to generate more sales ‎revenue for a given set of resources compared to lower-ability managers. The researcher follows ‎Roychowdhury (2006) and Kothari et al. (2016) to calculate abnormal sales, abnormal production costs, ‎and abnormal discretionary expenses. To capture the total effects of three REM methods an aggregate ‎REM that is a proxy for real earnings activities was used. Following Gunny (2010) and Huang & Sun ‎‎(2017) future performance proxies are ROA and operating cash flows to total assets (CFO) for the next ‎three years each year. Using a panel sample of 605 firm-year observations from 2005 to 2015. The study ‎concluded that there is a positive significant relationship between the managerial ability of managers and ‎earnings management through manipulating real operational activities. ‎

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