Accounting Conservatism and Corporate Governance

Posted: 7 Nov 2007

See all articles by Juan M. García Lara

Juan M. García Lara

Universidad Carlos III de Madrid - Department of Business Administration

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Fernando Penalva

IESE Business School - University of Navarra

Abstract

We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust using several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.

Keywords: Conditional conservatism, corporate governance, managerial discretion

JEL Classification: G34, M41, M43, M44

Suggested Citation

García Lara, Juan Manuel and Garcia Osma, Beatriz and Penalva, Fernando, Accounting Conservatism and Corporate Governance. Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1027711

Juan Manuel García Lara

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Fernando Penalva (Contact Author)

IESE Business School - University of Navarra ( email )

Ave. Pearson 21
Barcelona, Barcelona 08034
Spain
932534200 (Phone)
932534343 (Fax)

HOME PAGE: http://www.iese.edu

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