Does Managerial Ability Matter in Private Firms? Evidence from Korea

Using a large dataset of Korean private firms, we examine the value consequences of managerial ability. We document that private firms with more able managers achieve better performance, are less likely to over-invest, and are more likely to go public. However, we find that these firms experience more severe underperformance following an IPO than firms with less able managers. We provide evidence of more capable managers exhibiting lower earnings quality before an IPO, which is a potential explanation for our findings. The results are consistent with the notion that in the absence of effective monitoring mechanisms, owner-managers in private firms can use their discretion in an opportunistic way.