A Study On Managerial Ability, Earnings Quality And Capital Allocation Efficiency

Capital is an important motive force and source of enterprises’ survival and growth. It is an essential factor of a country’s economic growth. Its allocation is an important part of resource allocation and its efficiency plays a vital role on macro-economy and enterprise development. For macro economy, the increase of future cash flow from capital allocation is the source of its growth. For micro-businesses, capital allocation, as a part of corporate strategy, determines business risk, profitability levels, the prospects and its value. Related literatures show that an effective way to improve the efficiency of capital allocation is to increase the transparency of information and ease its asymmetry. Accounting information, especially the earnings information, is one of the most direct basis to make decisions.Since reforming and opening, Chinese accounting standards continues to change to adapt to the rapid development of the economic situation. The changing standards have left more space for top managers to select accounting policies. The current studies mostly focused on the relationship between earnings quality and ownership concentration, equity balance degree, board characteristics, characteristics of the Supervisory Committee, political relations, the growth and so on. There is little literature on the management ability, earnings quality, and then capital allocation efficiency. However, in reality, the impact is impossible to be ignored. The main feature of Modern Corporation is the separation of ownership and management, which makes the managers have company control. Therefore, the top executives will have a great impact on company’s behavior and future performance, especially accounting behavior. As we know, the company is a combination of a series of contracts, and the accounting information, especially the earnings information is an important basis to sign, execute and revise the contract for stakeholders. In fact, managers are not entirely rational and homogeneous. Facing the same situation, managers with different abilities will have different judgments and diverse accounting policies. Undoubtedly, managers, as an important part of the modern corporation, have some impact on earnings quality, and then capital allocation efficiency. But it is little study on how does the managers with different ability affect the earnings quality and the efficiency of capital allocation and it worth to research. Research on these issues will help to understand the effect of high-level human capital in the fields of earnings quality and the capital allocation efficiency. It also help regulators to make relevant policy to perfect accounting information disclosure system. So, this dissertation has some theoretical significance and practical value.Based on the related research, this dissertation, starting from the principal-agent theory, asymmetric information theory and signal transmission theory, conducts a normative analysis and empirical research on the relationship between the managerial ability, earnings quality and capital allocation efficiency. First of all, this dissertation, based on the analysis of relevant literature, selects suitable model to measure managerial ability, earnings quality and efficiency of capital allocation. Secondly, some corresponding assumptions are put forward on the basis of the interaction mechanism, the ultimate control property, ownership structure, product market competition and institutional investors. Then the proposed hypothesizes are tested used by multiple regression analysis method. Finally, this dissertation summarizes the findings, puts forward corresponding countermeasures and points out some directions for further study. This research mainly draws the following conclusions.1. The relationship between managerial ability and efficiency of capital allocation is significantly negative in Chinese listed companies and this correlation is unrelated to the nature of ultimate controllers. Further study finds that increasing the proportion of the first shareholder can only strengthen their negative correlation in state-owned holding companies, other effects are not significant; equity restriction has not significantly affect their correlation; product competitiveness can abate their negative correlation and this effect is more significant in the non-state-owned holding companies; institutional investors can only significantly reduce the positive correlation between the managerial ability and overinvestment.2. The existing literature suggests the managers who use a firm resources more efficiently will have a positive effect on the earnings quality in a mature capital market. But the relationship between managerial ability and earnings quality is significantly negative in Chinese listed companies. This dissertation argues that a good conduction effect is based on a good economic environment and social mechanisms, efficient supervision system and reasonable competitive managerial appointment. And such an ideal system environment has not formed in China. Further research finds that increasing the proportion of the first shareholder can only strengthen their negative correlation in state-owned holding companies; equity restriction, in generally, could weak their negative relationship, but the effect is not significant, and this weakening effect is very significant in the state-owned holding companies but not significant in the non-state-owned holding companies; product competitiveness, in generally, could significantly attenuate their negative relationship, and this weakening effect is very significant in both companies; institutional investors generally decreased the negative correlation between managerial talent and accrued earnings quality and smoothness, but increased the negative relationship between the managerial ability and real earnings quality. And this effect has nothing to do with the nature of ultimate controller.3. Regardless of the nature of the ultimate controller, the correlation between earning quality and company’s capital allocation efficiency is significant positive. The high quality of the earnings information could alleviate the company`s information asymmetry, inhibit excessive investment behavior, improve investment deficiency, To enhance the efficiency of capital allocation. And this has nothing to do with the nature of the ultimate controller. regardless of the nature of the ultimate controller, the study on the relationship among managerial ability, earnings quality and capital allocation efficiency find that, with the enhancement of managerial talent, earnings quality`s inhibition in excessive investment will decrease, and improvement in investment deficiency is not significant.The innovation in this dissertation is mainly reflected in two aspects as follows:1. This dissertation, compared with the existing research literature, introduces the factors of human capital in the study of factors which affect capital allocation efficiency. This expands the research field of the capital allocation efficiency and enrich literature about the relationship between managerial ability and the efficiency of capital allocation. The researches on capital allocation efficiency in existed literatures were basically from the governance mechanism, the quality of accounting information, non-financial information and the information content of stock price. And the study from the managerial talent was less. A growing body of literature suggested that top managers, as corporate strategy makers and implementers, had great impact on the company’s capital allocation. Managers, who have different managerial ability, will choose distinct investment strategy when facing the same opportunity and this undoubtedly has great effect on the company’s capital allocation. This dissertation thoroughly studies whether and how managerial talent affects the company’s capital allocation and then examines the role of the internal and external governance mechanisms, such as ownership structure and product market competition.2. This dissertation, compared with the existing research literature, expands the research field of the earnings quality and enrich literature about the relationship between managerial ability and earnings quality. The researches on earnings quality in existed literatures were basically from the internal governance mechanism, such as ownership structure, board characteristics or from the external governance mechanism, such as financial ecological environment, institutional investors etc. Some researches were from the managerial overconfidence, top management features, CEO reputation and so on, but there is little study from the perspective of managerial ability, which use the existed assets to create the output. The typical feature of Modern Corporation is the separation of operating rights and ownership. In modern companies, senior managers are the important participators and executors to the company`s strategy and their ability will undoubtedly has a great impact on the earnings quality. There was little research on how does managerial talent affect earnings quality but it’s a worthy studying topic. This dissertation systematically studies the relationship between managerial capabilities and earnings quality of the listed companies in Chinese weak efficient capital market and then further empirical study on the impact of their relationship from corresponding governance mechanisms. The research enrich the literature about the impact of managers’ non-homogeneity.