Examining Financial Reporting Quality Effects on the relation between Managerial Ability and Future Stock Price Crash Risk

The aim of this study is to examine financial reporting quality on relation with managerial ability and future stock price crash risk. Statistical population of the study consists of 109 companies attended in Tehran Stock Exchange during 2008 and 2014. Managerial ability measure is part of corporate efficiency that is not affected by intrinsic factors of company. A model proposed by Demerjian et al. (2012, 2013) was applied for calculation and analysis of managerial ability data. Moreover, accruals quality intended in this study (as an index of financial reporting quality) for each company-year was measured using accounting data for a five year period and application of rolling regression. To achieve study objectives, two hypotheses were developed and tested by multivariate logistic regression and Data Envelopment Analysis (DEA). The results of testing first hypothesis indicted that managerial ability has a significant positive effect on future stock price crash risk. This is consistent with this presumption that by hoarding bad news, managers with agency stimulus may create information barrier, price bubble and eventually stock price crash. The results of testing second hypothesis indicated that quality of financial reporting has a significant negative effect on relation with managerial ability and future stock price crash risk.  Thus it may be concluded that quality of financial reporting may reduce negative effects of managerial ability on risk of stock price crash.