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Accounting conservatism and corporate governance
Authors:Juan Manuel García Lara  Beatriz García Osma  Fernando Penalva
Institution:(1) Department of Business Administration, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Madrid, Spain;(2) Department of Accounting, Universidad Autónoma de Madrid, Fco. Tomás y Valiente 5, Madrid, 28049, Spain;(3) IESE Business School, University of Navarra, Av. Pearson 21, Barcelona, 08034, Spain
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.
Contact Information Fernando Penalva (Corresponding author)Email:
Keywords:Conditional conservatism  Corporate governance  Managerial discretion
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