How Does a Firm’s Earnings Response Coefficient Vary with Managerial Ability? Evidence from Korea

This study investigates managerial ability’s effect on firms’ earnings response coefficients (ERCs). We find that ERC increases with managerial ability, suggesting that investors more favorably perceive earnings from competent managers. Further, managerial ability influences ERC via the information environment; the influence is positive only for firms with better information environments. Meanwhile, since foreign investors have incentive to improve the information environment to overcome their informational asymmetry, the positive managerial ability-ERC association is more pronounced when firms have higher foreign ownership. These results indicate that managerial ability is an important determinant of ERC and that the information environment explains their relationship.