Empirical Research On Managerial Ability And Earnings Quality

Earning is the operating result of the firm during a certain period, is also was the most important information what firm delivery to the outside world. Now in our stock market people always focus on the disclose information of the earning, for it not only affect the decision-making of the investors and creditors, but also was one of the important indicators of the supervision of the securities market. And Earnings quality has been studied nearly two decades in the abroad, but in our country the research is lagging behind and is not specific and deep enough. Although in January1st,2007our country introduced of the new accounting standards it in a certain extent curb the excessive earnings management and the intentional financial fraud behavior, some of the provisions also expanded the operational space of the accrued profit.The most remarkable characteristic of modern enterprises-is the separation of the ownership and management, which often makes the target of the management and the shareholders are not completely consistent. For management may deviate from the shareholders’ interests in order to pursue their own benefit. However the decision-making of the management does have an impact on the really economic activity. Such as confirm the accruals, determine the company’s development strategy and the investment program. Each of this will affect the quality of the earning quality. So it is essential to study the relationship between management and earnings quality. When comes to earnings quality foreign author always focuses on the relationship between earnings quality and corporate characteristics, while the majority of the domestic research on management and earnings quality focused on the characteristics of the management. Few of people concern the relationship between the managerial ability and earnings quality. The reason may be the substitute variables of managerial ability are not easy to find. Empirical data show that in the foreign mature markets the superior management tend to disclose higher quality earnings information. But this conclusion is often based on the paradigm of the good mechanism-normal disclosure-earnings quality, if there not have enough incentives or is in a transition economic environment this paradigm may be not necessarily true.In this paper our main studies the relationship of the managerial ability and earnings quality. We try to test whether competent management trend to disclose higher quality earning. We use theory analysis first then use empirical test to validate the theory and the assumptions. In this paper, we use the Shanghai and Shenzhen A-share listed company’s annual disclosure of data from2006to2010to an empirical test. We use the matching degree of the working capital accruals to the operating cash flows as the measure of earnings quality indicators. And we get managerial ability from data envelopment analysis method. The empirical results show that they existence the correlation and the results also show that the way we measure the managerial ability and the earnings quality is accurate. Specifically, we find that capable executives can lead to higher future earnings, but accompany with enhance of the managerial ability the executives are tend to disclosure worse quality of the earnings. This conclusion is opposite to the empirical evidence of the U.S capital market, We consider that for the defect of the economic environment, accounting system, market supervision, and corporate governance and other aspects of china. competent management will be better expected accrued profit and for some motivation if they find the costs of control profit is less than its the cost to bear the consequences then capable management may manipulation it then resulting in poor earnings quality. The innovation of this paper is that the article is both contribute to the literature on earnings quality and management capabilities. Establish a positive and important relationship between the management ability and earnings quality, and given some policy recommendations for above problems in the end of this paper to improve the earnings information disclosure system and enable it to be deliver truly effective message to the investors.