Antitakeover legislation and accounting conservatism: New evidence

Cheng, Shijun; Duru, Augustine; Zhao, Yulin

doi:10.1016/j.jaccpubpol.2017.02.003

Cited by 15 publications

(14 citation statements)

References 79 publications

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“…Prior research has documented both positive and negative effects for shareholders, and our paper identifies an additional impact of the director–liability–reduction laws. Finally, we extend recent research that uses staggered law changes to infer causal links between conditional conservatism and other variables such as law enforcement (Jayaraman []), managers’ agency problem (Jayaraman and Shivakumar [], Cheng, Duru, and Zhao [], Manchiraju, Pandey, and Subramanyam [], Chen, Li, and Xu []), and debtholders’ demand (Aier, Chen, and Pevzner []).…”

Section: Introductionmentioning

confidence: 64%

“…We interact POST with every term of the Basu model so that we can separate changes in conditional conservatism (as captured by β 7 ) from changes in the earnings reaction to cash flow news and the bad news indicator (as captured by β 5 and β 6 , respectively). Following Cheng, Duru, and Zhao [], to fully disentangle the change in conditional conservatism after the new laws from the level of conditional conservatism determined by time‐invariant state‐level variables and the market‐wide time trend, we further build a fixed‐effects structure into the slope coefficients

β_{j}

( j = 1, 2, 3) as below:

β_{j} = \sum_{K} δ_{j, k} {italicState}_{k} + \sum_{M} θ_{j, m} {italicYear}_{m},

where State and Year are state and year indicator variables, respectively . Adding this fixed‐effects structure can eliminate alternative explanations such as that states differ in their conservatism levels before the law enactments because similar firms often colocate (Ellison and Glaeser []).…”

Section: Methodsmentioning

confidence: 99%

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Director–Liability–Reduction Laws and Conditional Conservatism

Basu

Liang

2019

J of Accounting Research

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We study nonofficer directors' influence on the accounting conservatism of U.S. public firms. Between 1986 and 2002, all 50 U.S. states enacted laws that limited nonofficer directors' litigation risk but often left officer directors' litigation risk unchanged. We find that conditional conservatism decreased after the staggered enactments of the laws, which we attribute to less nonofficer director monitoring of financial reporting in affected firms. Conservatism fell less when shareholder or debtholder power was high, consistent with major stakeholders moderating the influence of nonofficer directors. We verify that our results stem from reductions in the asymmetric timeliness of accruals and, specifically, its current assets components. We also show that affected firms * Fox School of Business, Temple University.Accepted by Douglas Skinner. We thank an anonymous reviewer,

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Section: Introductionmentioning

confidence: 64%

β_{j}

( j = 1, 2, 3) as below:

β_{j} = \sum_{K} δ_{j, k} {italicState}_{k} + \sum_{M} θ_{j, m} {italicYear}_{m},

Section: Methodsmentioning

confidence: 99%

Director–Liability–Reduction Laws and Conditional Conservatism

Basu

Liang

2019

J of Accounting Research

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“…For example, often in a business the agent takes advantage of the residual right to deprive the interests of the shareholders (LaPorta et al, 1999). According to the "shareholder demand" view (Cheng et al, 2017), conservatism facilitates efficient contracting between executives and shareholders (Ball, 2001;Watts, 2003). As the severity of conflicts between executives and shareholders increases, shareholders would demand more conservatism as a substitute for corporate governance mechanisms to constrain executives' opportunistic behavior (e.g., excess compensation payments and inefficient investments).…”

Section: Research Hypothesesmentioning

confidence: 99%

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

Zhang

Gao

Zeng

2019

IJAIM

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Purpose The purpose of this paper is to study the relationship between accounting conservatism and executive compensation-performance sensitivity with a view to identify the influence of accounting conservatism on the efficiency of executive compensation contracts. Design/methodology/approach This study uses multiple regression models based on the approach of Iyengar and Zampelli (2010), Clarkson et al. (2011) and Huang and Kisgen (2013) with the data from all of China’s listed non-financial firms over the period of 10 years to test the relationship between accounting conservatism and the sensitivity of executive compensation-performance. Findings This study finds a positive association between executive compensation and accounting-based measure of performance. More importantly, it reveals that conservatism has a positive relation with the executive compensation-performance sensitivity after controlling for a number of firm-specific factors and control variables. This study shows that the sensitivity of executive compensation to firm performance is higher for firms with higher accounting conservatism. Originality/value This is one of the few studies to examine the relationship between accounting conservatism and executive compensation-performance sensitivity. It provides supportive evidence to the argument that accounting conservatism, being an efficient governance mechanism, can help mitigate information risk and moral risk for agency problems.

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“…In Contrast, Cheng, Duru, and Zhao [] document a negative relation between accounting conservatism and state antitakeover laws. This effect, Cheng, Duru, and Zhao [] argue, is due to antitakeover laws decreasing shareholder‐debtholder conflicts and, consequently, reducing debtholders’ demand for conservatism.…”

Section: Introductionmentioning

confidence: 99%

“…Callen, Guan, and Qiu [] find accounting conservatism increases after the passage of state antitakeover laws, proposing that firms substitute a more conservative financial reporting policy for weakened external governance. In Contrast, Cheng, Duru, and Zhao [] document a negative relation between accounting conservatism and state antitakeover laws. This effect, Cheng, Duru, and Zhao [] argue, is due to antitakeover laws decreasing shareholder‐debtholder conflicts and, consequently, reducing debtholders’ demand for conservatism.…”

Section: Introductionmentioning

confidence: 99%

International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism

Khurana

Wang

2018

J of Accounting Research

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Exploiting the staggered enactment of country‐level mergers and acquisitions (M&A) law as an exogenous increase in corporate takeover threat, this paper examines how a disciplinary market for corporate control affects accounting conservatism. Following M&A law adoption, we find increased accounting conservatism, with more pronounced effects in countries with weak shareholder protection and in those experiencing larger growth in takeover activity. Further analysis reveals that elevated takeover threats increase conservatism through changes in capital structure and investment decisions as well as improvements in board monitoring. Our findings highlight the importance of the market for corporate control in shaping financial‐reporting outcome.

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Antitakeover legislation and accounting conservatism: New evidence

Cited by 15 publications

References 79 publications

Director–Liability–Reduction Laws and Conditional Conservatism

Director–Liability–Reduction Laws and Conditional Conservatism

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism

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