What affects accounting conservatism: A corporate governance perspective

Chi, Wuchun; Liu, Chiawen; Wang, Taychang

doi:10.1016/j.jcae.2009.06.001

Cited by 76 publications

(85 citation statements)

References 65 publications

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“…If the industry category is different, the profit models are different due to industry characteristics. Chi et al (2009) suggest that there are two different perspectives regarding the relationship between corporate governance and accounting conservatism. One is the complementary perspective and the other is the substitutionary perspective, and their findings show that a substitutionary relationship exists between the corporate governance mechanism and accounting conservatism.…”

Section: Accounting Conservatismmentioning

confidence: 99%

“…Some studies find that the corporate governance is positively correlated with accounting conservatism (Ahmed and Duellman, 2007;Beekes, Pope, and Young, 2004), others show that they are negatively correlated (Bushman, Chen, Engel, and Smith, 2004;LaFond and Roychowdhury, 2008), while yet others find that they are not correlated. In addition, Chi et al (2009) indicate that there are two different perspectives regarding the relationship between corporate governance and accounting conservatism, with one being complementary and the other substitutionary. On the basis of complementarity, a sound corporate governance mechanism can provide stronger supervision for managers, and so it is anticipated that managers will be willing to adopt conservative accounting under pressure.…”

Section: Corporate Characteristics Accounting Conservatism and Finanmentioning

confidence: 99%

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Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

Kao¹,

Sie²

2016

International Journal of Financial Research

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To consider a firm's characteristics endogeneity and thereby determine its trend toward accounting conservatism, which in turn affects its financial distress, this study adopts the two-stage least squares approach. The first stage involves investigating the effect of the corporate characteristics on accounting conservatism. The empirical results indicate that financial distress and accounting conservatism exhibit a positive correlation. With respect to the non-financially distressed company, the accounting conservatism of the financially-distressed company is higher. The second phase in the logistic regression is to explore the relationship between the accounting conservatism trends and financial distress. The empirical results indicate that the trends and volatility of the accounting conservatism are significant and positively related to the financial distress, which may be due to the recognition of the company's annual loss on one occasion or the accountants' role in the function of exercising external oversight, thus increasing the company's accounting conservatism. According to the empirical results of this study we have found that the accounting conservatism trends of different company characteristics helps to determine the signs of financial distress. It is recommended that within the management of the company's operations the users of financial statements be aware of the trend and volatility of the accounting conservatism. This is of particular importance due to the probable development of the relevant decision-making processes of the company's stakeholders.

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Section: Accounting Conservatismmentioning

confidence: 99%

Section: Corporate Characteristics Accounting Conservatism and Finanmentioning

confidence: 99%

Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

Kao¹,

Sie²

2016

International Journal of Financial Research

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“…He states that conservatism is applied when there is news by requiring higher degree of verification for recognising good news compared to bad news. Chi, Liu and Wang (2009) state that there are two important reporting features of earnings conservatism, which are asymmetric timeliness in recognition of gains versus losses and, a systematic understatement of net assets. The term "systematic" provides an explanation that the earnings conservatism based on valuation needs a formal indication on when to recognise and how much to recognise.…”

Section: Empirical Predictionsmentioning

confidence: 99%

Earnings and Balance Sheet Conservatism in Malaysia: The Effect of Malaysia's Convergence to International Financial Reporting Standards (IFRS)

Marzuki¹,

Wahab

2017

AAMJAF

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“…Tung and Wang focus on banks and find that inside debt holdings by bank CEOs are negatively related to bank risk taking during the Global Financial Crisis [6]. Wang, Xie and Xin study the effects of inside debt on terms of syndicated loans.…”

Section: Literature Reviewmentioning

confidence: 99%

Debt Contracting and Conditional Accounting Conservatism

Suleiman¹

2017

Int J Account Res

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IntroductionDebt contract is among the most important sources of conditional conservatism. The demand for conservative reporting flows from the agency cost of resolving uncertainty in the principal-agent setting. According to Watts, conservatism is an important mechanism that resolves agency cost. Managers have incentive to inflate accounting numbers in the statements of accounts where their performance is measured by earnings declared. Researchers who study accounting conservatism argue that conservative accounting limits a manager's incentive and ability to manipulate earnings thus yielding a more efficient contract. Watts argues that the contracting explanations for the existence of conservatism stem from the fact that the parties to the firm have asymmetric information, asymmetric payoffs, limited liability, and different time horizons [1].According to Watts and Zimmerman, Positive Accounting Theory (PAT) suggests that the agency cost related to debt represent a specific setting that highlights the ambiguity about the role of conservatism. Agency conflicts exist between managers and creditors which give rise to concerns for creditors. These concerns are actions by firms that increase the risk or probability that the creditors will not see their investment returned.However, this earnings management behaviour can be mitigated by employing conservative reporting. Accounting conservatism is the differential verifiability required for the recognition of accounting gains versus losses that generates an understatement of net assets [2]. Lafond and Watts suggest that conservative financial reporting act as a governance mechanism that reduces the managers' ability to manipulate and overstate financial performance and increases the firm's cash flows and value [3].Conservative accounting reduces the tendency of managers to invest in negative NPV projects, making managers aware that they will not be able to defer the recognition of losses to the future and imposing greater costs to biasing financial reports upwards [4]. Thus, conservative accounting can be used as mechanism to motivate managers to cut losses earlier and abandon poorly performing projects. In addition, conservative accounting improves monitoring of debt contracts that can be written based on conservative numbers, triggering violations of debt covenants faster [1,4]. This paper investigates whether debt holders employs accounting conservatism in debt agreements with firm. Because of the benefits of accounting conservatism to debt holders, the author can expect negative relations between amount of debt and extent of conservative accounting practice. Also because management of the firm have possible short term tenure, adoption of income increasing accounting practice might be of detriment to the firm.Another explanation for possible negative relation between debt and accounting conservatism is due to costs associated with violation of debt contracts. Managers tend to overstate profits so as not to violate debt agreements. Therefore increase in declared earn...

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What affects accounting conservatism: A corporate governance perspective

Cited by 76 publications

References 65 publications

Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

Earnings and Balance Sheet Conservatism in Malaysia: The Effect of Malaysia's Convergence to International Financial Reporting Standards (IFRS)

Debt Contracting and Conditional Accounting Conservatism

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