The Impact Of Corporate Governance Structure On Accounting Conservatism

Investors heavily rely on financial statements to make investment decisions. However, thefigures in financial statements can easily mislead investors if they have no idea about accountingconservatism level of those statements. The sad truth here is that it’s almost impossible forinvestors to tell the degree of accounting conservatism only based on the statements. If there issome relationship between a company’s corporate governance structure and the accountingconservatism level, investors therefore could determine the accounting conservatism level offinancial statements from studying the company’s corporate governance structure and then makewiser investments choices.This paper focuses on the impact of the corporate governance structure on accountingconservatism level. C-Score, introduced by Khan and Watts (2007) is adopted here toquantitatively measure the accounting conservatism level of financial statements. After that, theempirical analysis with C-Score values and corporate governance structure variables and controlvariables shows that state-controlled companies and companies with only one shareholder whoowns significant high proportion of company stocks tend to have higher level of accountingconservatism while companies which are largely owned by institutions are more likely to havelower level of accounting conservatism. Meanwhile, the empirical analysis also indicates asignificant negative correlation between accounting conservatism level and control variablesnatural logarithm of total assets and the standard deviation of rate of return on net assets andstock weeks yield. In addition, there is a significant positive correlation between accountingconservatism level and control variables book value and leverage ratio. Besides, theimplementation of new accounting standards also lowers the level of accounting conservatism.