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Abstract:
Using three different measures of conservatism, we document that (i) the percentage of inside directors is negatively related to conservatism, and (ii) the percentage of outside directors' shareholdings is positively related to conservatism. Our results hold after controlling for industry, firm size, leverage, growth opportunities, institutional ownership, inside director ownership, and unobservable firm characteristics that are stable over time. Overall, the evidence is consistent with accounting conservatism assisting directors in reducing agency costs of firms.

Accounting Conservatism, Board Independence, Outside Directors, Corporate Governance, Agency Costs

Abstract:
Using three different measures of conservatism, we document that (i) the percentage of inside directors is negatively related to conservatism, and (ii) the percentage of outside directors' shareholdings is positively related to conservatism. Our results hold after controlling for industry, firm size, leverage, growth opportunities, institutional ownership, inside director ownership, and unobservable firm characteristics that are stable over time. Overall, the evidence is consistent with accounting conservatism assisting directors in reducing agency costs of firms.

Accounting Conservatism, Board Independence, Outside Directors, Corporate Governance, Agency Costs

Abstract:
We provide evidence on the relation between office-level client importance and abnormal accruals in a pre-SOX period and a post-SOX period. We find that in the pre-SOX period the relation is not significant for the overall sample. However, it is significantly positive for the sub-sample of firms with relatively weak governance mechanisms. More importantly, we find that for this sub-sample the positive relation between client importance and abnormal accruals remains statistically significant even in the post SOX period. Our results suggest that (i) auditor independence was not widely compromised in pre-SOX periods as presumed by the proponents of SOX, (ii) strong governance mechanisms mitigate the potentially adverse effects of client importance on auditor independence, and (iii) SOX has not been successful in mitigating the adverse effects of client importance on auditor independence for firms with weak governance.

Sarbanes-Oxley, Auditor Independence, Corporate Governance, Accounting Accruals

Abstract:
Watts (2003) and others argue that conservatism helps in corporate governance (specifically in monitoring firms' investment policies). We hypothesize that if conservatism reduces managers' ex ante incentives to take on negative NPV projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. We find that firms with more conservative accounting have (i) higher future cash flows and gross margins, and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting. Our results hold after controlling for industry, firm size, leverage, growth opportunities, prior special items charges, and stock returns. These findings are (i) consistent with conservatism mitigating agency problems associated with managers' investment decisions as predicted by Watts (2003) and Ball and Shivakumar (2005), and (ii) inconsistent with standard setters' view that conservatism is not a desirable characteristic in financial reporting.

accounting conservatism, corporate governance, agency costs