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The predictive ability of “conservatism” and “governance” variables in corporate financial disclosures

Author

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  • Malcolm Smith
  • Yun Ren
  • Yinan Dong

Abstract

Purpose - The purpose of this paper is to examine the extent to which “corporate governance” and “conservatism” variables can contribute to the predictive ability of corporate financial disclosures. Design/methodology/approach - Multiple discriminant analysis is used to differentiate between good and poor companies in Australian manufacturing industry on the basis of their 2009 performance. A classification model including size, governance and conservatism variables, together with financial ratio data is constructed based on 2008 data, and used to predict 2009 performance. Findings - A model with conservatism, total debt/total assets, company size, and “percentage of shareholdings held by non‐executive directors” (representing corporate governance) as its independent variables, has a classification accuracy of 80.6 percent, and a predictive accuracy of 62.2 percent. Research limitations/implications - The relatively small sample size, for Australian manufacturing companies, limits both the predictive ability of the model and its generalisability elsewhere. Practical implications - The findings of the paper demonstrate the importance of both “conservatism” and “corporate governance” measures in determining corporate financial performance. Originality/value - The paper uses familiar discriminant methods in an unfamiliar context – focusing on surviving companies exhibiting extremes of financial performance.

Suggested Citation

  • Malcolm Smith & Yun Ren & Yinan Dong, 2011. "The predictive ability of “conservatism” and “governance” variables in corporate financial disclosures," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 19(2), pages 171-185, July.
    • Handle: RePEc:eme:arapps:v:19:y:2011:i:2:p:171-185
    DOI: 10.1108/13217341111181096
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    References listed on IDEAS

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