Ownership Concentration and Accounting Conservatism: The Moderating Role of Board Independence
Abstract
The purpose of this study is to examine the moderating effect of board independence on the relationship between ownership concentration and accounting conservatism. Using fixed-effect regressions for a sample of 165 Vietnamese listed companies from 2007 to 2017, the results revealed that the proportion of outstanding shares owned by the largest shareholder is negatively associated with accounting conservatism and board independence plays a moderating role in this relationship. Our results are robust after applying alternative measures of the largest ownership and correcting for potential endogeneity using fixed-effects regression with instrumental variables. Overall, our evidence shows that firms with concentrated ownership should keep a high non-executive ratio to maintain accounting conservatism. In other words, increasing the number of non-executive directors on boards in firms with a substantial proportion of shares held by the largest shareholder is likely to strengthen the information environment, giving financial reporting more credibility.
JEL Classification: G30; G32.
Doi: 10.28991/ESJ-2023-07-01-07
Full Text: PDF
Keywords
References
Yimenu, K. A., & Surur, S. A. (2019). Earning Management: From Agency and Signalling Theory Perspective in Ethiopia. Journal of Economics, Management and Trade, 24(6), 1–12. doi:10.9734/jemt/2019/v24i630181.
Houston, J. F., Lin, C., & Xie, W. (2018). Shareholder protection and the cost of capital. Journal of Law and Economics, 61(4), 677–710. doi:10.1086/700269.
Ni, X., & Yin, S. (2018). Shareholder litigation rights and the cost of debt: Evidence from derivative lawsuits. Journal of Corporate Finance, 48, 169–186. doi:10.1016/j.jcorpfin.2017.10.008.
Cullinan, C. P., Wang, F., Wang, P., & Zhang, J. (2012). Ownership structure and accounting conservatism in China. Journal of International Accounting, Auditing and Taxation, 21(1), 1–16. doi:10.1016/j.intaccaudtax.2012.01.001.
Lafond, R., & Roychowdhury, S. (2008). Managerial ownership and accounting conservatism. Journal of Accounting Research, 46(1), 101–135. doi:10.1111/j.1475-679X.2008.00268.x.
Ramalingegowda, S., & Yu, Y. (2012). Institutional ownership and conservatism. Journal of Accounting and Economics, 53(1–2), 98–114. doi:10.1016/j.jacceco.2011.06.004.
Caskey, J., & Laux, V. (2017). Corporate governance, accounting conservatism, and manipulation. Management Science, 63(2), 424–437. doi:10.1287/mnsc.2015.2341.
Watts, R. L. (2003). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17(3), 207–221. doi:10.2308/acch.2003.17.3.207.
Mrad, M. (2022). Accounting conservatism and corporate cross- listing: The mediating effect of the corporate governance. Cogent Economics & Finance, 10(1), 2090662. doi:10.1080/23322039.2022.2090662.
Cheng, J., Cummins, J. D., & Lin, T. (2021). Earnings management surrounding forced CEO turnover: evidence from the U.S. property-casualty insurance industry. Review of Quantitative Finance and Accounting, 56(3), 819–847. doi:10.1007/s11156-020-00910-z.
Kumar, P., & Zattoni, A. (2014). Ownership, managerial entrenchment, and corporate performance. Corporate Governance: An International Review, 22(1), 1–3. doi:10.1111/corg.12053.
Dang, L.N., Nguyen, D.D., Taghizadeh-Hesary, F. (2021). State-Owned Enterprise Reform in Viet Nam: Progress and Challenges. Reforming State-Owned Enterprises in Asia. ADB Institute Series on Development Economics, Springer, Singapore. doi:10.1007/978-981-15-8574-6_12.
To, A. T., & Suzuki, Y. (2019). The change in board independence in the presence of firm risk and regulation. Contaduria y Administracion, 64(4), 5. doi:10.22201/FCA.24488410E.2020.2233.
Ahmed, A. S., & Duellman, S. (2007). Accounting conservatism and board of director characteristics: An empirical analysis. Journal of Accounting and Economics, 43(2–3), 411–437. doi:10.1016/j.jacceco.2007.01.005.
Ahmed, A. S., & Duellman, S. (2013). Managerial Overconfidence and Accounting Conservatism. Journal of Accounting Research, 51(1), 1–30. doi:10.1111/j.1475-679X.2012.00467.x.
Aier, J. K., Chen, L., & Pevzner, M. (2014). Debtholders’ demand for conservatism: Evidence from changes in directors’ fiduciary duties. Journal of Accounting Research, 52(5), 993–1027. doi:10.1111/1475-679X.12062.
Beatty, A., Weber, J., & Yu, J. J. (2008). Conservatism and Debt. Journal of Accounting and Economics, 45(2–3), 154–174. doi:10.1016/j.jacceco.2008.04.005.
Beekes, W., Pope, P., & Young, S. (2004). The Link between Earnings Timeliness, Earnings Conservatism and Board Composition: Evidence from the UK. Corporate Governance: An International Review, 12(1), 47–59. doi:10.1111/j.1467-8683.2004.00342.x.
García Lara, J. M., García Osma, B., & Penalva, F. (2007). Accounting conservatism and corporate governance. Review of Accounting Studies, 14(1), 161–201. doi:10.1007/s11142-007-9060-1.
Ball, R. (2001). Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting and Disclosure. Brookings-Wharton Papers on Financial Services, 2001(1), 127–169. doi:10.1353/pfs.2001.0002.
Francis, J. R., & Martin, X. (2010). Acquisition profitability and timely loss recognition. Journal of Accounting and Economics, 49(1–2), 161–178. doi:10.1016/j.jacceco.2009.09.003.
Guay, W., & Verrecchia, R. (2006). Discussion of an economic framework for conservative accounting and Bushman and Piotroski (2006). Journal of Accounting and Economics, 42(1–2), 149–165. doi:10.1016/j.jacceco.2006.03.003.
Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83–128. doi:10.1016/j.jacceco.2004.04.001.
Dlugosz, J., Fahlenbrach, R., Gompers, P., & Metrick, A. (2006). Large blocks of stock: Prevalence, size, and measurement. Journal of Corporate Finance, 12(3), 594–618. doi:10.1016/j.jcorpfin.2005.04.002.
Leech, D., & Leahy, J. (1991). Ownership Structure, Control Type Classifications and the Performance of Large British Companies. The Economic Journal, 101(409), 1418. doi:10.2307/2234893.
Claessens, S., & Fan, J. P. H. (2002). Corporate Governance in Asia: A Survey. International Review of Finance, 3(2), 71–103. doi:10.1111/1468-2443.00034.
Andres, P. de, & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking and Finance, 32(12), 2570–2580. doi:10.1016/j.jbankfin.2008.05.008.
Chen, C. J. P., Chen, S., & Su, X. (2001). Is accounting information value-relevant in the emerging Chinese stock market? Journal of International Accounting, Auditing and Taxation, 10(1), 1–22. doi:10.1016/S1061-9518(01)00033-7.
Lin, Z. J., & Liu, M. (2009). The impact of corporate governance on auditor choice: Evidence from China. Journal of International Accounting, Auditing and Taxation, 18(1), 44–59. doi:10.1016/j.intaccaudtax.2008.12.005.
Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57(6), 2741–2771. doi:10.1111/1540-6261.00511.
Zhao, D. W., Zeng, L., & Tan, L. C. (2008). Supervision of independent directors and earnings conservatism: an empirical study based on Chinese listed firms. Accounting Research, 9, 55-63.
Chen, S., & Wei, M. (2007). Board independence earnings conservatism and investor protection. Journal of Sun Yatsen University, Social Science Edition, 2, 96-102.
Bushman, R., Chen, Q., Engel, E., & Smith, A. (2004). Financial accounting information, organizational complexity and corporate governance systems. Journal of Accounting and Economics, 37(2), 167–201. doi:10.1016/j.jacceco.2003.09.005.
Admati, A. R., & Pfleiderer, P. (2009). The “wall Street Walk” and shareholder activism: Exit as a form of voice. Review of Financial Studies, 22(7), 2645–2685. doi:10.1093/rfs/hhp037.
Edmans, A., & Manso, G. (2011). Governance through trading and intervention: A theory of multiple blockholders. Review of Financial Studies, 24(7), 2395–2428. doi:10.1093/rfs/hhq145.
Berger, P. G., & Ofek, E. (1999). Causes and effects of corporate refocusing programs. Review of Financial Studies, 12(2), 311–345. doi:10.1093/rfs/12.2.311.
Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting and Economics, 29(3), 287–320. doi:10.1016/S0165-4101(00)00024-0.
Nguyen, T. T., Duong, C. M., Nguyen, N. T. M., & Bui, H. Q. (2020). Accounting conservatism and banking expertise on board of directors. Review of Quantitative Finance and Accounting, 55(2), 501–539. doi:10.1007/s11156-019-00851-2.
Roychowdhury, S., & Watts, R. L. (2007). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting and Economics, 44(1–2), 2–31. doi:10.1016/j.jacceco.2006.12.003.
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581–606. doi:10.1016/j.jfineco.2012.03.005.
Correia, S. (2018). IVREGHDFE: Stata module for extended instrumental variable regressions with multiple levels of fixed effects. Boston College Department of Economics, Massachusetts, United States.
Apadore, K., & Mohd Noor, M. (2013). Determinants of Audit Report Lag and Corporate Governance in Malaysia. International Journal of Business and Management, 8(15), 151. doi:10.5539/ijbm.v8n15p151.
Astami, E. W., & Tower, G. (2006). Accounting-policy choice and firm characteristics in the Asia Pacific region: An international empirical test of Costly Contracting Theory. International Journal of Accounting, 41(1), 1–21. doi:10.1016/j.intacc.2005.12.004.
Wu, Y. (2011). Research on the relationship between controlling shareholder and accounting conservatism in China. Applied Mechanics and Materials, 65, 579–584. doi:10.4028/www.scientific.net/AMM.65.579.
Nasr, M. A., & Ntim, C. G. (2018). Corporate governance mechanisms and accounting conservatism: evidence from Egypt. Corporate Governance: The International Journal of Business in Society, 18(3), 386–407. doi:10.1108/cg-05-2017-0108.
Lin, W., Fan, X., & Cheng, X. (2011). Board Independence and Accounting Conservatism: Evidence Based on Listed Companies in China. 2011 International Conference on Management and Service Science. doi:10.1109/icmss.2011.5998441.
Ahmed, K., & Henry, D. (2012). Accounting conservatism and voluntary corporate governance mechanisms by Australian firms. Accounting & Finance, 52(3), 631–662. doi:10.1111/j.1467-629X.2011.00410.x.
DOI: 10.28991/ESJ-2023-07-01-07
Refbacks
- There are currently no refbacks.
Copyright (c) 2022 Thi Minh Hang Nguyen, Anh Tho To, Thi Huyen Phan, Nhat Phuong Diem Ngo, Thi Thu Hong Ho
