Managerial ability and real earnings management

Prior studies investigate the determinants and consequences of real earnings management (REM) as a function of firm-specific characteristics. In this study, we examine how managerial ability relates to the use of REM and future firm performance. We find that higher-ability managers engage in less REM. Furthermore, we find that managers with superior ability reduce the negative impact of REM on future firm performance. This is consistent with prior studies, which link higher-ability managers to better management of firm resources and more positive outcomes.