Purpose This study aims to scrutinize the effect of managerial ability on corporate risk-taking. Likewise, it investigates how earnings quality and the dark side of conservative reporting affect this nexus. Design/methodology/approach This study uses IV/GMM and IV/2SLS estimators to analyze a sample of nonfinancial Egyptian firms listed from 2012 to 2024. It relies on the data envelopment analysis–Tobit model developed by Demerjian in 2012 to measure the managerial ability score. In addition, corporate risk-taking is estimated by using dual risk measures. Findings The findings reveal a curvilinear relationship between managerial ability and corporate risk-taking. This implies that managerial ability initially reduces corporate risk up to a turning point, after which risk increases with managerial ability. Furthermore, a nonlinear relationship between managerial ability and accounting-based corporate risk is transformed into a positive linear effect by earnings quality, while low earnings quality distorts investors’ perceptions of corporate risk. The results also indicate that excessive conservative reporting constrains the influence of managerial ability and affects market-based perceptions of corporate risk. Practical implications Regulators, investors and firms should pay more attention to managerial ability and consider it a key factor affecting corporate risk-taking. They should also use earnings quality as a proactive indicator when evaluating this relationship and should carefully consider the impact of excessive conservatism. Originality/value To the best of author’s knowledge, this study provides the first evidence from an emerging market that conservative reporting and earnings quality moderate the association between managerial ability and corporate risk-taking, a pattern distinct from that in developed economies.
Mai Mohammed Alm El-Din (Wed,) studied this question.