Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

Manuscript type Empirical Research question/issue The main objective of this paper is to examine the influence of managerial ability on investment efficiency. Using a sample of 2185 firms from 24 countries for the period 2006–2015, we hypothesize a positive association between investment efficiency and managerial ability and suggest that able managers make fewer over‐ and underinvestment decisions. As a unique and helpful feature of this study, we also employ a model to capture the different interactions between internal and external corporate governance mechanisms and managerial ability. Research findings/insights Our results show that managerial ability is an economically relevant determinant of investment efficiency, resulting in lower levels of underinvestment and overinvestment. Additionally, our findings note that the benefits of able managers for investment efficiency are reinforced when companies are located in countries with better board effectiveness, superior investor protection, and better legal enforcement, suggesting that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. The results also indicate that the advantages of having able managers are especially noticeable during a financial crisis and under conditions of greater information asymmetry. Theoretical/academic implications Our findings suggest that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. Specifically, our results highlight the relevance of the monitoring role of the board, noting that the efficiency of this internal control mechanism complements the effect that able managers have on investment efficiency. Practitioner/policy implications The paper has relevant implications. First, boards of directors must be aware that, although the access to financial resources is a determinant of firms' financial success, the individual ability to manage them is essential in making efficient investment decisions, which should be considered when recruiting new managers and establishing compensation schemes. Second, the paper shows that managerial ability is reinforced when the company is in a country with strong corporate governance mechanisms, implying that regulators should be aware of the relevance of investor protection, legal enforcement, and board effectiveness to improve the benefits of managerial attributes and therefore the financial efficiency of firms.