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The Market for Corporate Control and Accounting Conservatism

40 Pages Posted: 27 Jun 2010  

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Yuyan Guan

City University of Hong Kong - Department of Accountancy

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: June 20, 2010

Abstract

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. The passage of these anti-takeover laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems.

Keywords: conditional conservatism, corporate governance, state anti-takeover legislation, difference-in-differences

JEL Classification: M41

Suggested Citation

Callen, Jeffrey L. and Guan, Yuyan and Qiu, Jiaping, The Market for Corporate Control and Accounting Conservatism (June 20, 2010). Available at SSRN: https://ssrn.com/abstract=1630377 or http://dx.doi.org/10.2139/ssrn.1630377

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Yuyan Guan

City University of Hong Kong - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-34427136 (Phone)

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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