Strengthening the Corporate Governance System through Financial Reporting Quality: Evidence from Accounting Conservatism in an Emerging Market

This article investigates the role of financial reporting quality as a mechanism for strengthening corporate governance in emerging markets. While most governance studies emphasize internal structures—particularly the board of directors—this research highlights the external disciplinary function of accounting conservatism as shaped by the firm's institutional environment. Drawing on the methodology developed by Khan & Watts (2009), we construct two firm-year-level scores that capture opposing reporting strategies: timely loss recognition (C_SCORE) and aggressive accounting (G_SCORE). Using a sample of 38 non-financial firms listed on the Casablanca Stock Exchange over the 2011–2021 period, the study explores how structural characteristics— grouped under the Investment Opportunity Set (IOS)—influence firms' accounting behaviors. Empirical estimations are conducted using Fama-MacBeth regressions, Pooled OLS, and FGLS methods to ensure robustness. The findings reveal that two IOS variables—the market-to-book ratio and financial leverage—are significantly associated with conservative reporting practices. Firms with high growth opportunities and elevated debt levels tend to adopt more prudent accounting strategies, characterized by faster loss recognition and limited anticipation of gains. In contrast, firm size does not appear to be a relevant determinant in the Moroccan context. Additionally, the analysis shows a marked improvement in financial reporting quality after 2017, coinciding with regulatory reforms, including the establishment of the Moroccan Capital Market Authority (AMMC) and the adoption of Circular No. 03/19. The study contributes to the literature by emphasizing financial reporting quality as a governance mechanism shaped by institutional forces. It also demonstrates the relevance of the Khan & Watts model in an emerging market context and underlines the active role regulators can play in enhancing accounting discipline. Finally, the paper opens new avenues for cross-country comparisons and extensions into non-financial reporting domains.