Research On Corporate Governance And Accounting Conservatism

It is well established that the separation of ownership and control is modern organizations leads to agency problems. Separation of ownership from control and its consequent agency problems give rise to demand for a variety of incentive and monitoring mechanisms by stakeholders of firms to ensure that professional managers act in their best interests. Both corporate governance and conservatism serve to reduce the problems that arise from the separation of ownership and control in corporations. Corporate governance can be divided into internal governance mechanisms and external governance mechanisms in accordance with the scope, involving contents of shareholder governance and board governance et al. Corporate governance can also be divided into monitoring mechanisms and incentive mechanisms according to the role of corporate governance. The monitoring role of corporate governance consists of both external and internal corporate governance. Another equally important role that corporate governance plays in organizations besides monitoring is the contracting role.Both monitoring mechanisms and incentive mechanisms are based on the information disclosure. Financial reporting plays a fundamental and critical role in this context because financial reports serve as a primary source of information for outside stakeholders both for firm valuation and to evaluate managerial performance.Conservatism accounting information is the result of fully take into account of the risk and uncertainty in the enterprise, which will restrain managers’ opportunistic reporting behavior, reduce agency costs of the firm, improve the relativity of decision-making, relieve the information asymmetry,and optimize the distribution of resources.Corporate governance serve to solve the problem arised from the separation of ownership and control and it will influence the enterprise operating activities including financial accounting report. Accounting conservatism comes from uncertainty, and was influenced by many factors. Corporate governance is one factor which affects Accounting conservatism. While prior research has focused on corporate governance mechanisms, and separately on conservatism, it has ignored how corporate governance and conservatism relate to each other and how they impact firms’ reporting behavior.This dissertation investigates the relationship between corporate governance mechanisms and accounting conservatism and its implications for firms’ financial reporting behavior. The purpose of my dissertation is to develop a conceptual framework to understand governance mechanisms and accounting conservatism, and develop and test hypotheses that emerge from this framework.The central thesis in this dissertation is that incentive alignment is a key construct in understanding the relationship between corporate governance, conservatism, and financial reporting behavior.This dissertation has been divided into five chapters as follows:First of all, in the introduction, present the research background, researeh motive, research method, research significance and research framework.This chapter develop a logic conceptual framework of the dissertation.Secondly, in the literature review, introduces the prior literature on accounting conservatism, corporate governance, and literature linking corporate governance and accounting conservatism. About the accounting conservatism, from the existence of accounting conservatism, the effect factors of accounting conservatism, measurement of accounting conservatism and the economic consequences of the accounting conservatism introduces the literature. Then, introduces the studies in the past examined the relationship between different aspects of corporate governance and accounting conservatism. Much of this literature focuses on board characteristics as proxies for strong corporate governance or some regulatory aspects of corporate governance and tests whether such governance encourages firms to adhere to favorable reporting practices or increase firm value. At the end of this chapter, introduces the starting point and the emphasis of my dissertation.Thirdly, separately states the contract theory, signal theory, and stakeholder theory, so builts the theoretical analysis framework of corporate governance and accounting conservatism.Then, this dissertation carrys on empirical research separately from three aspects:(1) I begin my analysis by testing and finding that the degree of conservatism is increasing in the strength of reporting controls regardless of the level of incentive alignment of corporate governance. A strong monitoring role of corporate governance implies that managers are more likely to have enforcement mechanisms that govern them in various aspects of the corporation. I use coefficient of variation method to built shareholders governance index, board governance index and the strength of corporate governance index. I examine the influence of shareholders governance, board governance and the strength of corporate governance on accounting conservatism. (2)Traditionally, strong corporate governance mechanisms have been shown to induce higher conditional conservatism. I argue that this relationship is modified by the level of incentive alignment. I hypothesize and find that the degree of conservatism is decreasing in the extent of incentive alignment, regardless of the strength of corporate governance. Thus I establish that when there is higher incentive alignment, firms report less conservatively. These hypotheses also give rise to some interesting testable implications for managerial reporting behavior and earnings quality. Consider a firm with weaker reporting controls relatively speaking. If such a firm has minimal agency problems namely the extent of incentive-alignment is high, its management can potentially use its reporting discretion to mute the conservative bias, with the express purpose of improving earnings quality. (3) As noted above, the demand for conservatism is arguably less when incentives are aligned and the agency problem is minimal, and so will be the need for reporting controls. So I hypothesize that the degree of conservatism is decreasing in the extent of incentive alignment, after controlling for the strength of shareholders, the strength of board governance and the strength of corporate governance.Lastly, I come to the conclusions, put forward the suggestions, and point out the research limitation.The policy recommendations are to perfect the accounting standards construction,raise demand for conservative accounting information, and to improve the quality of the corporate governance.There are four conclusions of this dissertation:(1)The empirical result shows the presence of overall conservatism during the period of 2002-2011 in the Chinese listed companies.(2)I find that shareholders governance, board governance and the strength of corporate governance are all positive with accounting conservatism which means the stronger monitoring mechanisms is, the more conservatism is achieved. The research findings suggest that selective strengthening of corporate governance and selective adoption of conservative reporting for low incentive aligned firms provide a cost-effective option for managing agency conflicts.(3)Greater incentive alignment is associated with lower conditional conservatism regardless of the strength of corporate governance. I find that as the level of incentive alignment increases, conservatism is lower.Moreover, greater incentive alignment is associated with higher earnings quality.(4)The empirical results show that greater incentive alignment is associated with lower conditional conservatism after controlling for the strength of shareholders, the strength of board governance and the strength of corporate governance. These results support the notion that the agency problem among firms has a crucial role to play in understanding the relationship between governance structures and managerial reporting behavior, both of which address the problem of separation of ownership and control.