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Accounting Conservatism and Board Monitoring

47 Pages Posted: 12 Aug 2012 Last revised: 8 Aug 2016

Yanmin Gao

City University of Hong Kong - College of Business

Alfred Wagenhofer

University of Graz

Date Written: August 1, 2016

Abstract

This paper provides a theoretical foundation for findings in empirical studies that document a positive association between conservatism and strong corporate governance through the board’s monitoring efficiency. We construct a model with a board that decides whether to replace the incumbent manager based on accounting information and the outcome of its monitoring strategy, which also depends on the accounting information. If accounting is used only for the replacement decision, conservatism is harmful. However, conservatism is beneficial if accounting is relevant to the monitoring decision because it enhances the net benefit of monitoring. The net benefit of conservatism increases if the board becomes more efficient in monitoring. We also discuss earnings management and specific empirical implications.

Keywords: conservative accounting; corporate governance; board of directors; board monitoring; management retention

JEL Classification: M41, G34, D82

Suggested Citation

Gao, Yanmin and Wagenhofer, Alfred, Accounting Conservatism and Board Monitoring (August 1, 2016). AAA 2013 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2128226 or http://dx.doi.org/10.2139/ssrn.2128226

Yanmin Gao

City University of Hong Kong - College of Business ( email )

Hong Kong
Hong Kong

Alfred Wagenhofer (Contact Author)

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

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