Who manages the firm matters: the incremental effect of individual managers on accounting quality

2013-05-29I investigate whether individual managers have an incremental effect on their firms’ accounting quality (AQ) after controlling for known determinants of AQ, time fixed effects and firm fixed effects. To identify the manager-specific effect on firm AQ, I construct a data set that tracks the movement of 720 managers across firms over the period 1992-2011. Results indicate that individual manager fixed effects explain a statistically and economically significant proportion of the cross-sectional variation in AQ, which is three times larger than that of industry fixed effects and comparable to that of firm fixed effects. Moving from the quartile of most aggressive managers to that of the most conservative managers, results in a 41% improvement in the firms’ AQ. I also examine the consequences of switching between conservative and aggressive managers on the firms’ AQ. Results show that a firm that switches from an aggressive (conservative) manager to a conservative (aggressive) manager increases (decreases) the firm’s AQ by 32% (94%). My study underscores the importance of understanding individual manager styles in the determination of the firms’ AQ