Corporate managerial ability,earnings smoothing,and acquisitions |
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| Affiliation: | 1. Department of Accounting, Robert J. Manning School of Business, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, United States;2. Department of Accounting, School of Business, Virginia Commonwealth University, Snead Hall, 301 W. Main Street, Richmond, VA 23284, United States;1. Department of Accounting, Deakin University, Australia;2. Department of Accounting, Monash University, Australia;1. Department of Banking and Finance, Monash University, W1016, Building 11, Monash University Clayton Campus, VIC 3800, Australia;2. School of Accounting and Finance, Hong Kong Polytechnic University, China;3. Department of Finance, La Trobe University, Martin Building 470, La Trobe University Melbourne Campus, VIC 3086, Australia;4. Finance Area, T.A. PAI Management Institute, P.B. No-9, Manipal, Karnataka 576104, India |
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| Abstract: | This paper examines whether high-ability managers’ earnings smoothing is motivated by the need to mitigate the adverse effects of heightened information asymmetry triggered by mergers and acquisitions (M&As) on managers’ reputation capital (job loss) and firm value. We document that acquirers led by high-ability managers engage in more pre-acquisition earnings smoothing and experience more significant announcement abnormal returns and operating performance in post-M&A periods than their low-ability counterparts. This result is consistent with the theory of managerial response to asymmetric information, amplified by M&As, where high-ability managers use earnings smoothing as a signaling device to ensure that the market quickly discovers their superior abilities, to increase acquirers’ future growth prospects and avoid the adverse effects of information asymmetry on managers’ job security and career prospects in a competitive executive labor market. |
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