Accounting Conservatism and Board Efficiency
City University of Hong Kong - College of Business
University of Graz
July 31, 2012
AAA 2013 Management Accounting Section (MAS) Meeting Paper
This paper establishes a positive relation between board efficiency and conservative accounting. With that, it provides a theoretical underpinning for empirical studies that find a positive association between strong corporate governance and conservatism. Our model includes a board that has a monitoring task and decides to retain or replace the incumbent manager, both based on the same accounting information. The optimal decisions trade off the cost of monitoring and the cost of replacing the manager. Conservatism is desirable because it makes monitoring more effective, but only if the board can monitor efficiently. We also find more earnings management if the board is efficient and it tends to reduce the benefit of conservative accounting. We derive empirical predictions and consider several extensions of the model.
Number of Pages in PDF File: 48
Keywords: conservative accounting, corporate governance, board of directors, monitoring, management retention
JEL Classification: M41, G34, D82working papers series
Date posted: August 12, 2012 ; Last revised: October 24, 2013
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