Regulatory oversight and managerial ability
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Regulatory oversight and managerial ability Reza Hesarzadeh1 Received: 19 July 2019 / Revised: 27 November 2019 / Accepted: 18 January 2020 © Eurasia Business and Economics Society 2020
Abstract This paper examines whether regulatory oversight affects managerial ability. To measure regulatory oversight, I use comment letters from two Iranian regulatory agencies. Furthermore, to measure managerial ability, I employ managerial ability-score introduced by Demerjian et al. (Management Science 58(7):1229–1248, 2012). Using a difference-in-differences design with a propensity score matching approach, I reveal that the managerial ability of a firm is enhanced following the receipt of a comment letter by the firm. I further reveal that the managerial ability of a firm is enhanced following the receipt of a comment letter by the firm’s industry peers. Collectively, the findings highlight the internalities and externalities of regulatory oversight in the context of managerial ability. Keywords Regulatory oversight · Managerial ability · Spillover effect · Differencein-differences design · Emerging capital market JEL Classification G32 · M42 · M48
1 Introduction Managerial ability is a central concept in many studies, such as those investigating managerial contributions to investment decisions or corporate performance (Chang et al. 2010; García-Sánchez and García-Meca 2018). To infer managerial ability, prior empirical literature bases its assessment on the managerial ability score, introduced by Demerjian et al. (2012). This score is derived from the managerial efficiency in converting resources to revenues. An implicit premise held in much empirical literature employing the managerial ability score is that the score reflects the level of managerial knowledge and skill. For instance, Demerjian et al. (2012) and Karasamani (2018) state that a higher managerial ability score is obtained by managers who “are more knowledgeable of * Reza Hesarzadeh [email protected] 1
Ferdowsi University of Mashhad, Mashhad, Iran
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Eurasian Business Review
their business”. Moreover, García-Sánchez and García-Meca (2018) and Gan (2018) conclude that the managerial ability score represents managerial “skill sets”. However, as an alternative view, the managerial ability score may reflect the level of managerial effort. This is because, theoretically, the managerial efficiency in transforming corporate resources to revenues may be driven by managerial effort (Hilary et al. 2016). I address this issue by examining whether managerial ability is influenced by regulatory oversight. To clarify, regulatory oversight is unlikely to affect managerial knowledge and skill, but it significantly affects managerial effort (Shumsky 2016), thus, with regard to other related measures such as corporate governance, regulatory oversight enables us to understand whether managerial ability is significantly influenced by effort. This research focuses on both financial and operational oversight procedures provided by two supervisor
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