Accounting Conservatism: Effect of Contract Incompleteness, Moral Hazard and Board Gender Diversity

Prior literature on accounting conservatism examines the effect of contracting and corporate governance structure on conservatism. The results from the prior literature show that the demand for conservatism arises from contracting costs and that conservatism is more likely to be employed by firms to facilitate monitoring and thereby improve their governance (Watts 2003a). In this study, I extend previous studies by examining two specific aspects of its association with contracting and corporate governance structure that affects accounting conservatism.;I first examine the contracting-based demand for conservatism and hypothesize that it arises from the joint effect of contract incompleteness and moral hazard. The empirical results in this thesis show that the degree of conservatism increases with the level of contract incompleteness. The results also show that firms with both a high (low) degree of contract incompleteness and a more (less) severe moral hazard problem adopt more (less) conservative accounting practices. Furthermore, the results reveal that the positive association between moral hazard and conservatism ( Lafond and Roychowdhury 2008) is more significant when contracts are more incomplete. Likewise, the results also show that the positive relationship between contract incompleteness and accounting conservatism is more pronounced when moral hazard problem is more acute.;I then explicitly investigate the effect of board gender diversity on. I hypothesize that financial reports in firms with gender-diverse boards are more conservative, because female directors are likely to be more sensitive to ethical issues and exhibit more risk-aversion. In effect, the boards with female directors are likely to be more effective in monitoring managers. I compare the extent of conservatism for firms that transit from an all-male board to a gender-diverse board. The empirical results show that firms in this cohort adopt more conservative financial reporting standards after appointing female directors on board (audit committee).;Finally, I perform an exploratory analysis on interaction effect of contract incompleteness and board gender diversity on conservatism. The results show that the effect of board gender diversity on conservatism is more pronounced in the low contract incompleteness group, suggesting a substitution between these two aspects in driving conservatism.