When Top Talent Gets More Leeway: The Hidden Impact on Financial Reporting

Summary

This study evaluates the relationship between managerial ability and financial reporting conservatism. Specifically, it examines whether high-performing executives influence the level of conditional accounting conservatism (CAC)—the accounting practice of recognizing bad news in earnings more quickly than good news. The researchers analyze 29,473 firm-year observations from 2,498 U.S. nonfinancial firms in the S&P 1500 between 1996 and 2017 to determine whether managerial ability affects firms’ reporting policies and the level of conservatism used in financial statements.