The Effect of Managerial Ability on Earnings Classification Shifting and Agency Cost of Iranian Listed Companies

Table 1

Variable definition.

	A core earnings is defined as sales minus COGS and selling, general and administrative expenses scaled by sales
	Lagged core earnings
	Asset turnover ratio (total sales divided by average net operating assets)
	Different between operating earnings and cash flow from operations scaled by sales
	Lagged accruals (ACCt)
	The percentage of change in sales
	is a dummy variable, 1 if different between current year sales and the previous year sales is negative and 0 otherwise
Lev	The ratio of total debt to the total assets
CFO	The ratio of cash flow from operation to the total assets
ROA	The net income divided by average of the total assets
Operating cycle	The period of inventory turnover plus accounts receivable period minus the period of creditor’s payment period at the beginning of the year
HighNOA	HighNOA is a dummy variable equal to 1 if the net operating assets (i.e., shareholders’ equity less cash and short-term investment plus total debt) at the beginning of the year divided by lagged sales, is above the median of the corresponding industry-year, and 0 otherwise
AC	The costs of the agency to calculate the operating cost divided by net sales
BIG	BIG is a dummy variable, and it is 1if the firm audited by audit organization and 0 otherwise
AEM	The abnormal level discretionary accruals, derived from the residuals of the Dechow et al.’s (1995) model. This model is represented in model (12)
REM	The abnormal level of cash flows from operations, derived from the residuals of model (8). The abnormal level of production costs, derived from the residuals of model (9). The abnormal levels of discretionary expenditures, derived from the residuals of model (10). REM is equals (−1∗abnormal level of cash flows from operations) +abnormal level of production costs+ (−1∗ abnormal levels of discretionary expenditures). This model is represented in model (11)
LNTA	LNTA is the natural logarithm of the book value of total assets
MS	Market share is the ratio of firm sales to total sales in the same industry
LnAge	LnAge is the natural logarithm of firm age
PFCF	Positive free cash flow is a dummy variable that is one if free cash flow is positive, otherwise 0
	where FCF is free cash flow; INC operating earnings before depreciation; TAX is the total tax paid; INTEP interest expense paid; CSDIV is common stockholders’ dividends; and A is total assets