Information Technology Capability, Managerial Ability, and Financial Reporting Quality: A Research Note

Abstract

The role of a firm’s information technology (IT) capability and managerial ability on financial reporting quality has been documented in prior literature. However, scant empirical work exists on the moderating effect of managerial ability on a firm’s IT capability and its impact on financial reporting quality. Drawing on the resource-based view of the firm and a sample of firms from 2000 to 2013, we predict and find that InformationWeek 500 (IW500) firms with high-ability managers are associated with better financial reporting quality than non-IW500 firms. Specifically, we find that IW500 firms have better financial reporting quality and are less likely to restate their financial statements in subsequent periods and the interaction of IT capability and managerial ability improves financial reporting quality. Our findings document the importance of IT and the moderating effect of managerial ability on IT in influencing financial reporting quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40.