The effect of managerial ability on financial statement comparability in korea

This study investigates the relation between managers’ ability and financial statement comparability. Based on the findings in prior studies, we propose two competing predictions. On the one hand, prior studies document that firms with more competent managers tend to manage accruals less, resulting in higher financial reporting quality. In addition, competent managers are more likely to put their efforts to improve the performance of the firms and try to convey the performance accurately to the outsiders. Therefore, it is likely that competent managers produce financial statements with greater comparability. On the other hand, we may expect the opposite result suggesting that more competent managers prepare less comparable financial statements. When it comes to disclosure, able managers will determine the level and quality of disclosure by comparing the benefits and costs of disclosure. If they determine that the disclosure costs associated with financial reporting, in particular the proprietary costs, are higher than the benefits, they will strategically decide to disclose only part of their firm’s financial information, resulting in less comparable financial statements. Using 8,360 firm-year observations of Korean listed firms collected over the period from 2004 to 2016, we empirically test the above predictions. We find that both high-ability managers and low-ability managers, compared with those in the middle, tend to have low financial statement comparability, resulting in a non-linear, inverted U-shape association between managerial ability and financial statement comparability. Additionally, the extent of financial statement comparability of firms with low-ability managers decrease more when these managers try to manipulate earnings, while for firms with high-ability managers, its financial statement comparability decrease more when the proprietary costs of financial reporting is high. These findings provide an important implication for the consequence of managerial ability to several interested parties, including researchers and practitioners.