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The Role of Accounting Conservatism in a well-functioning Corporate Governance System

Listed author(s):
  • Supreena Narayanan

    (Madras School of Economics)

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    This paper analyses accounting related to corporate governance and is organized as follows. The first section deals with understanding the concept of accounting conservatism. In the second section we analyzed the Relevance of Accounting Conservatism in Corporate Governance to the modern corporate world. The third section includes a Case Study on Ericsson, a Swedish Telecommunications company and conservatism in strong governance firms versus weak governance firms. The fourth part is devoted to the conclusion of our research efforts. From this study, we conclude that there are several reasons to use accounting conservatism in corporate governance and that current empirical evidence indicates that conservatism has increased in the last decades. The value of beta3 in Table 1 indicates that there is a positive significant level of conservatism in accounting practices followed by Ericsson. When the dependent variable is earnings (X), the asymmetric timeliness of earnings coefficient beta3 in Table 2 provides an estimate of the level of conservatism. We observe that strong governance firms are more conservative than weak governance firms (0.13 versus 0.04). We expect and hypothesize that strong governance structures will tend to favour accounting conservatism more than weak governance structures. However, excessive dependencies on old structures show poor growth that has been since the oil crisis.

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    Paper provided by EconWPA in its series Finance with number 0506011.

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    Length: 15 pages
    Date of creation: 20 Jun 2005
    Handle: RePEc:wpa:wuwpfi:0506011
    Note: Type of Document - pdf; pages: 15
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    1. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    2. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
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