Evidence on the relation between managerial ability and financial reporting timeliness

• Author: Thomas R. Kubick,John L. Abernathy,Adi Masli
• Published date: 01 July 2018
• DOI: http://doi.org/10.1111/ijau.12112
• Date: 01 July 2018

ORIGINAL ARTICLE

Evidence on the relation between managerial ability and

financial reporting timeliness*

John L. Abernathy

1

|Thomas R. Kubick

2

|Adi Masli

2

1

University of North Texas, Denton, TX, USA

2

University of Kansas, Lawrence, KS, USA

Correspondence

John L. Abernathy, University of North Texas,

Denton, TX 76203, USA.

Email: john.abernathy@unt.edu

While prior research has investigated the relation between firm‐level attributes and financial

reporting timeliness, there is little evidence on whether managerial ability is associated with

financial reporting timeliness. We examine the relation between managerial ability and financial

reporting timeliness. Managers with higher ability possess greater human capital and are better

able to maintain the systems and controls underlying the company's financial information. We

therefore predict that managers with higher ability produce more timely financial disclosures.

We find that, incremental to firm‐level attributes, higher managerial ability is associated with a

shorter earnings announcement lag, a shorter audit report lag, and a lower probability of a late

US Securities and Exchange Commission filing. Collectively, our results suggest that managerial

ability has a positive influence on the timeliness of financial reporting.

KEYWORDS

Audit report lag,earnings announcement lag, financial reporting timeliness, human capital,

managerial ability, SEC filing

1|INTRODUCTION

The purpose of this study is to examine the relation between managerial

ability and financial reporting timeliness. Financial reporting timeliness

has been a priority for regulators, standard setters, and academics over

the past several years (Bryant‐Kutcher, Peng, & Weber, 2013; Schmidt

& Wilkins, 2013). For example, the US Securities Exchange Commission

(SEC) has accelerated the deadlines for various corporate filings,

including periodic accounting reports (Behn, Searcy, & Woodroof,

2006). Additionally, the Financial Accounting Standards Board and the

International Accounting Standards Board Conceptual Framework for

Financial Reporting consider timeliness a primary characteristic of

relevant financial information. Furthermore, empirical research has long

emphasized the importance of timely financial reporting (e.g., Feltham,

1972; Impink, Lubberink, van Praag, & Veenman, 2012; Kross &

Schroeder, 1984; Wang, Raghunandan, & McEwen, 2013).

While prior research has investigated a number of firm‐, economic‐,

and auditor‐specific characteristics associated with financial reporting

timeliness (e.g., Abernathy, Barnes, Stefaniak, & Weisbarth, 2016;

Bamber, Bamber, & Schoderbek, 1993; Knechel & Payne, 2001;

Sengupta, 2004), research has yet to investigate the association

between management characteristics (particularly human capital

attributes) and financial reporting timeliness. This lack of evidence is

surprising given the influence that managers have on the financial

reporting and audit process, particularly subsequent to the passage of

the Sarbanes–Oxley Act (Sarbanes–Oxley Act, 2002). Accordingly, we

employ a measure of managerial ability (described in detail in Section 3)

developed by Demerjian, Lev, and McVay (2012) to investigate the rela-

tion between managerial ability and financial reporting timeliness.

We conjecture that managerial ability can influence three aspects

of financial reporting timeliness: earnings announcement lag (EAL),

audit report lag (ARL), and SEC late filing (LATE). Krishnan and Yang

(2009) provide evidence that most companies release earnings in

advance of the completion of the audit, suggesting that EAL captures

to a certain extent management's confidence in its internal reporting

system. ARL is often considered a measure of audit efficiency, and

therefore captures management's ability to facilitate the audit process

and negotiations with the auditor. Finally, LATE is an objective mea-

sure of management's failure to report on a timely basis. We expect

that more able managers will have greater confidence in the internal

reporting system, be able to more efficiently facilitate the audit, and,

therefore, have a lower likelihood of a late SEC filing.

Using a sample of 38,476 firm‐year observations from 2003

through 2014, we estimate a regression of our timeliness measures

(EAL, ARL, and LATE) on managerial ability and several determinants

of financial reporting timeliness. Given that companies have different

*

Data availability: data are obtained from public sources identified in the paper.

Received: 12 December 2016 Revised: 4 January 2018 Accepted: 8 January 2018

DOI: 10.1111/ijau.12112

Int J Audit. 2018;22:185–196. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 185