Monitoring Accounting Changes: empirical evidence from the Netherlands

This empirical paper investigates the relationship between the corporate governance structure of the firm and the probability of voluntary accounting changes in the Netherlands during the period 1990–1998. The paper reports the results of a sample of 194 voluntary accounting changes. The empirical results show that the presence of large outside shareholders significantly decreases the probability of voluntary accounting changes that have a positive effect on reported net income. This result supports the monitoring hypothesis, which indicates that large outside shareholders will monitor voluntary accounting changes more effectively than small shareholders, and will restrict the opportunistic behaviour of managers bent on increasing reported net income. We find that management shareholdings decrease the probability of voluntary accounting changes. These findings are consistent with the alignment hypothesis, which suggests that managers who hold a stake in the firm will be more aligned with outside shareholders. Agency problems may be reduced through management shareholdings. We find no support for the monitoring role of outside members of the supervisory board. Finally, our results show that firm size affects the probability of negative accounting changes, which may support the political cost hypothesis.