Managerial Ownership and Accounting Conservatism: Empirical Evidence from Japan
AbstractWe examine the effect of managerial ownership on the demand for accounting conservatism as measured by the asymmetric timeliness of earnings (Basu, 1997). The separation of ownership and control as reflected by the levels of managerial ownership induce two agency problems between managers and shareholders: the incentive alignment effect and the management entrenchment effect. Since accounting conservatism is expected to mitigate agency problems between managers and shareholders, we predict that these agency problems increase the demand for accounting conservatism. We empirically test the relationship between managerial ownership and the asymmetric timeliness of earnings using a cubic form model for Japanese firms. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. Our results hold after controlling the market-to-book ratio, leverage, firm size, and year. These evidences support our prediction and suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders.
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Bibliographic InfoPaper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 227.
Length: 34 pages
Date of creation: Aug 2008
Date of revision:
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Managerial ownership; Accounting conservatism; Alignment effect; Entrenchment effect;
Find related papers by JEL classification:
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-09-13 (Accounting & Auditing)
- NEP-ALL-2008-09-13 (All new papers)
- NEP-BEC-2008-09-13 (Business Economics)
- NEP-CFN-2008-09-13 (Corporate Finance)
- NEP-CTA-2008-09-13 (Contract Theory & Applications)
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- Casta, Jean-François & Ramond, Olivier, 2010. "De la construction du résultat comme mécanisme de gouvernance. Quelques pistes de recherche," Economics Papers from University Paris Dauphine 123456789/4415, Paris Dauphine University.
- Jean-François Casta & Olivier Ramond, 2010. "De la construction du résultat comme mécanisme de gouvernance : quelques pistes de recherche," Post-Print halshs-00681206, HAL.
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