ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Does Firm Value Reflect Managerial Ability?

  • Yun Jeong Heo Department of Accounting and Taxation, College of Business Administration, Kyung Hee University
  • Seung Uk Choi Department of Accounting and Taxation, College of Business Administration, Kyung Hee University

Asian Tax Journal Vol. 25 No. 2 (2024), pp. 133-155

Abstract

Hiring a competent manager may be one of the most important decisions of a company. Prior research suggests the possibility that competent managers will be more active in risky decisionmaking, make appropriate investment decisions, and thereby enhance business performance. However, it is not clear in advance whether these managers’ abilities will ultimately be reflected in investors’ decision－making in the capital market. This is because the evaluation of firm value in the capital market is affected by the nature of investors, the ability to use accounting and financial information, and the faithful of firm disclosures. Therefore, this study examines the effect of managerial ability on firm value. It also examines whether the cross－sectional differences such as the managerial compensation or accounting quality affect the relationship between managerial ability and corporate value. As a result of analyzing 14,960 domestic listed company－year samples from 2013 to 2021, we find the followings. First, managerial ability has a significant and positive relationship with corporate value. The result is also consistent in the analysis with several endogeneity controls. Second, we divide the sample into two groups based on the median value of manager compensation and accounting quality, respectively. The positive relationship between managerial ability and firm value is maintained in both samples. Overall, these results suggest that managerial abilities are properly reflected in firm value. This study is making an academic contribution by expanding and supplementing previous studies related to managerial ability. It also provides practical implications by suggesting the possibility that investors in the domestic capital market reflect managers' abilities in their decision－making process.

Keywords

  • managerial ability
  • firm value
  • CEO compensation
  • accounting quality

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