Corporate Governance, Accounting Conservatism, and Manipulation

Management Science, Forthcoming

Posted: 23 Aug 2015

See all articles by Judson Caskey

Judson Caskey

University of California, Los Angeles (UCLA) - Accounting Area

Volker Laux

University of Texas at Austin - McCombs School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 21, 2015

Abstract

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, conservative accounting, earnings manipulation, investment

JEL Classification: G31, M41

Suggested Citation

Caskey, Judson and Laux, Volker, Corporate Governance, Accounting Conservatism, and Manipulation (August 21, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2649158

Judson Caskey

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://sites.google.com/site/judsoncaskey/

Volker Laux (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX 78712
United States

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