The Market for Corporate Control and Accounting Conservatism

58 Pages Posted: 20 Mar 2014

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Yuyan Guan

Nanyang Business School, Nanyang Technological University

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

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Date Written: March 19, 2014

Abstract

This study explores the impact of state anti-takeover laws on the governance role of conditional accounting conservatism. Passage of these laws introduced an exogenous shock to the takeover threats faced by firms and constitutes a natural experiment for investigating the relation between financial reporting conservatism and governance. Employing a difference-in-differences methodology and accounting conservatism measures that are congruent with this methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover laws 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 better performance, and firms with lower institutional ownership. This study provides a more comprehensive understanding of the overall effect of state anti-takeover laws and contributes to the long standing debate about the impact of anti-takeover legislation on corporate control and governance.

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

JEL Classification: K22, M41

Suggested Citation

Callen, Jeffrey L. and Guan, Yuyan and Qiu, Jiaping, The Market for Corporate Control and Accounting Conservatism (March 19, 2014). Available at SSRN: https://ssrn.com/abstract=2411368 or http://dx.doi.org/10.2139/ssrn.2411368

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

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Jiaping Qiu

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

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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