High ability managers and corporate ethical decisions: an empirical evidence from China

Abstract

Purpose This study aims to explore whether managers with superior skills engage in unethical earnings management to mask firm performance despite their capacity to optimize firm resources. Design/methodology/approach Panel data regressions were estimated using data from firms listed on Chinese stock exchanges from 2010 to 2019. The robustness of the results was tested with various managerial ability and earnings management indicators. To address potential endogeneity issues, the authors used a two-stage least squares regression approach. Findings The findings reveal that highly capable managers often use their skills to manipulate accounting information unethically, rather than relying on genuine resource optimization. This supports the upper-echelon theory, where managerial traits influence firm-level decisions, and contrasts with prior studies suggesting superior management abilities lead to better resource management rather than better accounting manipulation. These results emphasize the need for effective corporate governance and highlight the economic costs associated with managerial ability, including impacts on reported profits, equity market value and legal risks. Originality/value This study contributes to the literature by directly examining the impact of individual managerial characteristics on earnings management. It challenges the notion that higher managerial ability inherently leads to ethical behavior, revealing a tendency among high-ability managers to engage in earnings manipulation. The research underscores the importance of rigorous monitoring and auditing practices and the strategic hiring of competent managers to ensure ethical financial reporting.