Accounting Conservatism and Board Efficiency
City University of Hong Kong - College of Business
University of Graz
AAA 2013 Management Accounting Section (MAS) Meeting Paper
This paper establishes a positive relation between board efficiency and conservative accounting. This result 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 and an advising role and decides to retain or replace the incumbent manager based on accounting information. The optimal decisions trade off the expected cost of monitoring and of replacing the manager. Conservatism is desirable because it makes monitoring more effective, provided the board is an efficient monitor. Earnings management tends to undo the benefit of conservative accounting, implying a negative relation between conservatism and earnings management. We also examine the interaction between board composition and conservatism.
Number of Pages in PDF File: 48
Keywords: conservative accounting, corporate governance, board of directors, monitoring, management retention
JEL Classification: M41, G34, D82
Date posted: August 12, 2012 ; Last revised: March 24, 2014
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