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

تأثير القدرة الإدارية للمديرين على العلاقة ما بين إدارة الأرباح الحقيقية والأداء المستقبلي لمنشآت الأعمال: دراسة تطبيقية

  • Mohamed Ibrahim Mohamed Hessian Accounting and Auditing Dep., Faculty of Commerce , Ain shams University
Keywords: Managerial Ability, Real Earnings Management, Future Firm Performance.


This study aims to investigate the managerial ability of executives’ managers’ role on 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 of real operational activities.

Author Biography

Mohamed Ibrahim Mohamed Hessian, Accounting and Auditing Dep., Faculty of Commerce , Ain shams University

Mohamed Hessian is an Assistant lecturer in the Faculty of Commerce at Ain Shams University. His research interests include Financial Reporting Quality, Earnings Management, Corporate Governance and Accounting Conservatism.