Corporate governance report compliance rate and accounting conservatism: New evidence from Korea

Abstract

This study investigates the relationship between the corporate governance report (CGR) compliance rate and a company’s accounting conservatism, utilizing the CGR compliance rate as a novel method to evaluate the effectiveness of corporate governance practices. Given the challenges of applying global indices to measure corporate governance in the Korean market, this study focuses on the CGR compliance rate as a key indicator. Utilizing the ordinary least squares (OLS) regression model, specifically the Ball and Shivakumar (2005) model widely employed in previous studies to assess accounting conservatism, this paper conducts empirical analyses based on 784 observations from Korean listed firms between 2018 and 2021. The main analysis reveals a positive association between the CGR compliance rates (coef = –2.416, p-value < 0.01) and accounting conservatism. A fixed-effect model and a propensity score matching (PSM) model also show a positive association between the CGR compliance rates, respectively (coef = –2.507, p-value < 0.01; coef = –3.118, p-value < 0.1) and accounting conservatism. This study proves that firms with high CGR compliance rates tend to promptly recognize financial losses in financial reporting, thereby safeguarding investors. This suggests that investors should consider the CGR compliance rates when evaluating potential investments. Overall, these findings contribute to validating the CGR compliance rates as a valuable proxy for assessing corporate governance practices in Korean firms.