Managerial Discretion and Firm Fundamentals

48 Pages Posted: 15 Jan 2016

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

Per Olsson

ESMT European School of Management and Technology

Date Written: January 14, 2016

Abstract

We hypothesize and provide evidence that the economic consequences of managerial accounting discretion vary systematically with volatility in firm fundamentals. Unlike common approaches in the literature that identify managerial discretion as orthogonal to business volatility, we use a model structure that identifies both types of variation in earnings attributes and allows for a correlation structure between the two. Our results show that in the eyes of three types of capital market participants, investors, financial analysts and regulators, managerial discretion is overall viewed as enhancing information uncertainty, but the effect is attenuated with volatility in firm fundamentals. Our findings suggest that broad samples may exhibit different types of managerial discretion and that volatility in firm fundamentals is key in identifying accounting choices that reduce information uncertainty.

Keywords: earnings quality, volatility, opportunism, performance measurement

JEL Classification: M41, G12, G14, G18

Suggested Citation

Athanasakou, Vasiliki E. and Olsson, Per, Managerial Discretion and Firm Fundamentals (January 14, 2016). 2016 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2715636 or http://dx.doi.org/10.2139/ssrn.2715636

Vasiliki E. Athanasakou (Contact Author)

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Per Olsson

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

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