The Impact of Managerial Ability and Investment Efficiency on Earnings Management

[Purpose] This study examines how managerial ability and investment efficiency influence earnings management, addressing accounting distortions from managerial and economic perspectives. [Methodology] The analysis tests the link between managerial ability and earnings management, as well as the moderating role of investment efficiency, using accrual－ based models (Kothari, 2005；Dechow & Dichev, 2002) and a real earnings management model (Cohen & Zarowin, 2010). [Findings] Managerial ability shows a negative association with accrual－based earnings management under the Kothari model, but a positive relation under the Dechow & Dichev and Cohen & Zarowin models. Investment inefficiency increases earnings management in the Kothari and Modified Jones models, while opposite results are observed in others. In inefficient firms, high managerial ability further raises the likelihood of earnings management. [Implications] Low investment efficiency heightens earnings manipulation risks regardless of managerial ability, and capable managers may engage in it strategically. Auditors and investors should consider both factors when evaluating reporting quality.