Accounting conservatism and corporate governance |
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Authors: | Juan Manuel García Lara Beatriz García Osma Fernando Penalva |
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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 |
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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.
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Keywords: | Conditional conservatism Corporate governance Managerial discretion |
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