Accounting conservatism and corporate governance

Accounting conservatism and corporate governance We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Accounting conservatism and corporate governance

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-007-9060-1
Publisher site
See Article on Publisher Site

Abstract

We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.

Journal

Review of Accounting StudiesSpringer Journals

Published: Nov 30, 2007

References

  • An empirical investigation of audit fees, nonaudit fees, and audit committees
    Abbott, L. J.; Parker, S.; Peters, G. F.; Raghunandan, K.
  • Incentives versus standards: Properties of accounting in four East Asian countries
    Ball, R.; Robin, A.; Wu, J. S.
  • Earnings quality in UK private firms: Comparative loss recognition timeliness
    Ball, R.; Shivakumar, L.
  • The conservatism principle and the asymmetric timeliness of earnings
    Basu, S.
  • The effect of audit quality on earnings management
    Becker, C.; DeFond, M.; Jiambalvo, J.; Subramanyam, K. R.
  • The link between earnings timeliness, earnings conservatism and board composition: Evidence from the UK
    Beekes, W.; Pope, P. F.; Young, S.

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