Corporate Governance, Accounting Conservatism, and Manipulation
41 Pages Posted: 17 Apr 2013 Last revised: 21 Aug 2015
Date Written: August 4, 2015
We develop a model to analyze how board governance affects firms' financial reporting choices, and managers' incentives to manipulate accounting reports. In our setting, ceteris paribus, conservative accounting is desirable because it allows the board of directors to better oversee the firm's investment decisions. This feature of conservatism, however, causes the manager to manipulate the accounting system to mislead the board and distort its decisions. Effective reporting oversight curtails managers' ability to manipulate, which increases the benefits of conservative accounting and simultaneously reduces its costs. Our model predicts that stronger reporting oversight leads to greater accounting conservatism, manipulation, and investment efficiency.
Keywords: Governance, optimism, conservative accounting, earnings manipulation, earnings management
JEL Classification: G31, M41
Suggested Citation: Suggested Citation