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Article
Publication date: 18 April 2022

Quyen Le, Alireza Vafaei, Kamran Ahmed and Shawgat Kutubi

This paper aims to examine the association between busy directors on corporate boards and accounting conservatism.

Abstract

Purpose

This paper aims to examine the association between busy directors on corporate boards and accounting conservatism.

Design/methodology/approach

The authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues.

Findings

The presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings.

Practical implications

This paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties.

Originality/value

This research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.

Details

Meditari Accountancy Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2049-372X

Keywords

Book part
Publication date: 31 October 2014

Robert B. Smith

This essay studies disconnections between the macrolevel societal problems of a state and more microlevel political alignments.

Abstract

Purpose

This essay studies disconnections between the macrolevel societal problems of a state and more microlevel political alignments.

Design/methodology/approach

Using a dataset composed of macrolevel measures of state problems and microlevel responses to a 2008 election survey, this essay applies multilevel statistical models to explain the state-to-state variance between the states on anti-abortion and pro-gun sentiments. This analysis uncovers the macro- and microlevel factors that disconnect a state’s neglect-of-children indicators from its citizens’ sentiments about abortion, and the factors that disconnect a state’s crime indicators from its citizens’ sentiments about guns.

Findings

The initial associations between a state’s indicators of neglect of children and anti-abortion sentiments are explained by the state’s lower human development (HD) and social attributes, especially religious beliefs, which predict social conservatism. The initial associations between a state’s indicators of crime and incarcerations are also explained by a state’s lower HD and the social attributes, especially religious beliefs, which predict social conservatism. Considering both abortion and guns as key indicators of social conservatism, the voters’ political choices exhibit a moralistic axiological rationality rather than a more pragmatic instrumental rationality.

Originality/value

The moral absolutism associated with sentiments about abortion and guns suggests that social conservatism and authoritarianism are intertwined but separate conceptions, which have similar consequences and determinants. Both may be influenced by the same changes in social and educational policies, especially the quality of education.

Details

Mediations of Social Life in the 21st Century
Type: Book
ISBN: 978-1-78441-222-7

Keywords

Article
Publication date: 4 January 2022

Khairul Anuar Kamarudin, Ainul Islam, Ahsan Habib and Wan Adibah Wan Ismail

This paper aims to investigate the effect of auditor switching and lowballing on conditional conservatism, particularly how different types of auditor switching, namely…

Abstract

Purpose

This paper aims to investigate the effect of auditor switching and lowballing on conditional conservatism, particularly how different types of auditor switching, namely, upward, downward and lateral switching to/from Big 4 and industry specialists, affect earnings quality in the following selected Asian countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand.

Design/methodology/approach

Using conditional conservatism as a proxy for earnings quality, this study hypothesises that upward switching from non-Big 4 to Big 4 auditors, or from non-specialist to specialist auditors, would result in high conditional conservatism, while downward switching would lead to low conditional conservatism. The study further tests whether lowballing provides a viable explanation for reduced earnings conservatism in firms that switch from Big 4 to non-Big 4 auditors, or from specialist to non-specialist auditors.

Findings

The analysis, on a sample of 28,073 firm-year observations from 2007 to 2016, shows that the decision to downgrade auditors leads to lower conditional conservatism in the year of switching, compared with other firms and the pre-switching year. The evidence further shows that, when firms downgrade their auditors, lowballing contributes to a decrease in conditional conservatism in the first year of audit switching. Further, this research finds that switching to specialist auditors will result in increased conditional conservatism, while switching from specialist auditors to non-specialist auditors will result in reduced conditional conservatism.

Practical implications

The findings of this study are useful to investors who are looking to diversify their investment portfolio in developing markets, as evidence about auditor switching and quality of financial reporting may be an important factor in their investment decisions. Downward auditor switches and lowballing could act as red flags to investors in the sense that these events could signal a decrease in conditional conservatism and, hence, quality of earnings.

Originality/value

This research offers new evidence to support the view that management decisions to switch to lower-quality auditors will force newly appointed auditors to acquiesce to clients’ demands for reporting low-quality earnings.

Details

Managerial Auditing Journal, vol. 37 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

Book part
Publication date: 15 August 2014

Meghann Cefaratti, Jack W. Dorminey, Hui Lin and Tracy Reed

This chapter provides evidence that legislation affecting litigation risk has an influence on the financial reporting behavior of corporate management, we address the…

Abstract

This chapter provides evidence that legislation affecting litigation risk has an influence on the financial reporting behavior of corporate management, we address the following research questions: (1) Do firms react to changes in litigation risk that result from the passage of new legislation at the federal level by adjusting their level of conservatism with regard to reporting earnings? (2) How do firms’ levels of conservatism react to changes in litigation risk over time? We analyze the level and trend in conditional conservatism to evaluate the efficacy of legislation in altering managerial reporting choice. Our examination takes place in the context of two distinct pieces of legislation intended to alter the legal environment faced by corporate managers: (1) the PSLRA (1995), and (2) Sarbanes–Oxley Act of 2002. Our findings indicate that the passage of legislation that increases litigation risk is associated with increased timeliness (conservatism) in financial reporting by managers. The increased timeliness, however, begins to subside shortly after the initial effect. While the initial effect of a reduction in litigation risk is negligible, subsequent periods exhibit declining timeliness (conservatism) in financial reporting. Our results indicate that legislative actions can be successful in altering management reporting choice through changes in legal regime. However, our results also demonstrate that the desired influence of these legislative policies may be transient.

Details

Managing Reality: Accountability and the Miasma of Private and Public Domains
Type: Book
ISBN: 978-1-78052-618-8

Keywords

Article
Publication date: 12 January 2022

Tri Tri Nguyen, Chau Minh Duong and Nguyet Thi Minh Nguyen

In this paper, the authors examine the association between conditional conservatism and deviations of the first digits of financial statement items from what are expected…

Abstract

Purpose

In this paper, the authors examine the association between conditional conservatism and deviations of the first digits of financial statement items from what are expected by Benford's Law.

Design/methodology/approach

This research uses data of companies listed on the London Stock Exchange. The authors measure deviations of first digits from Benford's Law following Amiram et al. (2015) and firm-year conditional conservatism following previous studies (Basu, 1997; Khan and Watts, 2009; García Lara et al., 2016). The authors use multiple regressions to provide evidence for their hypothesis.

Findings

The results show that conditional conservatism is positively associated with deviations from Benford's Law. The findings are robust across different measures of deviations and conditional conservatism. Also, the authors find that the relationship between deviations from Benford's Law and conditional conservatism is more pronounced for firms with debt issuance, and for leveraged firms facing financial distress. Next, the authors’ analyses confirm previous evidence by showing that the first digits of financial statement items of UK listed companies conform to Benford's Law at the firm-specific level and the market level, and deviations of income statements are larger than those of balance sheets and cash flow statements.

Research limitations/implications

The research makes significant contributions to the literature. First, this is the first study that provides empirical evidence suggesting that conditional conservatism may be a source of deviations from Benford’s Law. Second, the authors provide evidence confirming previous US findings (e.g. Amiram et al., 2015) showing that the distributions of first digits of financial statement items of UK listed companies also conform to Benford's Law.

Practical implications

The authors’ findings have implications for auditors. Auditors should be aware of “false positive” for material misstatements when using Benford's Law as a risk assessment procedure. While both conditional conservatism and earnings management are related to deviations from Benford's Law, conservatism-related biases could indicate less audit risks.

Originality/value

The authors provide new and original evidence suggesting that conditional conservatism is related to deviations from Benford's Law.

Details

Journal of Applied Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 30 November 2021

Ben Le and Paula Hearn Moore

The purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on accounting conservatism, considering the different levels of foreign…

Abstract

Purpose

The purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on accounting conservatism, considering the different levels of foreign ownership in the context of Vietnam.

Design/methodology/approach

The paper uses ordinary least squares regressions and a data set of 405 firms covering the period 2007 to 2019. The manuscript uses three measures of accounting conservatism: Basu’s 1997 timeliness of earnings, Basu’s 1997 earnings persistence and the book-to-market ratio.

Findings

State-owned enterprises (SOEs) adopt less accounting conservatism than non-SOEs; however, the result is only robust in firms with foreign ownership being lower than the foreign ownership median. Firms increase accounting conservatism in the year immediately prior to the year that the tax rate cuts become effective. An SOE possesses an unusual conflict both as a taxpayer and in having its controlling interest held by the government, which is both a tax creator and a tax collector. Interestingly, the increase in accounting conservatism prior to the year of the tax rate cuts is more pronounced for non-SOEs than SOEs.

Practical implications

This research is beneficial to investors and policymakers where the government is both the taxpayer and tax collector and in emerging markets where foreign investment is local firms’ important financing.

Originality/value

To the best knowledge, this study is the first in examining the joint effects of state control and tax rate cuts on accounting conservatism.

Details

Pacific Accounting Review, vol. 34 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 21 October 2021

Olga Fullana, Mariano González and David Toscano

In this paper we analyse the effect on unconditional conservatism of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European listed…

Abstract

Purpose

In this paper we analyse the effect on unconditional conservatism of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European listed firms in January 2005. Under the hypothesis that accounting regulation influences the accounting conservatism, we use a non-market-based measure of unconditional conservatism – the accrual-based measure proposed by Givoly and Hayn (2000) – to test this effect, controlling for the other determinants of the unconditional conservatism found in the accounting literature.

Design/methodology/approach

We use a panel data of 10 years and 96 non-financial listed firms in the Spanish stock market in which the differences between local GAAP and IFRS are more important. A pre-estimation analysis of the data reveals that GLS with random effects is the correct estimation procedure. However, to try to deal with the likely endogeneity in the set of variables, the authors perform an estimate with a dynamic estimator for panels with few periods and many individuals where the independent variables are not strictly exogenous.

Findings

As expected, results show evidence that support a significant reduction on the unconditional conservatism of firms in the sample due to the adoption of IFRS. This evidence is relevant to equity market, debt market and corporate governance users of the financial information, and also for the policymakers who can assess the effects of their mandate.

Research limitations/implications

Results shown in this paper have all the limitations of system-, country-, sample- and event-specific studies but, along with many others drawn in alternative contexts, may help to correctly understand both the time-evolution and cross-sectional country differences of firms’ unconditional conservatism.

Originality/value

The study represents the first analysis of the effect of the adoption of IFRS on unconditional conservatism of the European listed companies using a non-market accrual-based measure. Results are not influenced by the dynamics of the stock market and, by comparison, allow us to analyse this influence in results provided by using market-based measures of the unconditional accounting conservatism provided by previous literature.

Details

International Journal of Accounting & Information Management, vol. 29 no. 5
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 2 August 2021

Ismaanzira Ismail, Rohami Shafie and Ku Nor Izah Ku Ismail

This paper aims to examine whether conditional conservatism is affected by chief financial officer (CFO) attributes as this issue is understudied in Malaysia. Given that…

Abstract

Purpose

This paper aims to examine whether conditional conservatism is affected by chief financial officer (CFO) attributes as this issue is understudied in Malaysia. Given that CFOs have a direct responsibility for financial reporting, therefore, their individual attributes are important in influencing conservatism in financial reporting.

Design/methodology/approach

This study uses non-financial listed firms in the Main Market of Bursa Malaysia from the years 2016 until 2019.

Findings

The results show that CFOs’ attributes, namely, gender, age, education level and ethnicity, affect earnings conservatism. To test for robustness, the authors use difference-in-difference, propensity score-matching and unconditional conservatism, namely, market-to-book ratio and the authors find the results hold with an exception for age and education level. Further, the effect of these attributes is more profound in non-Big4 audited firms, suggesting that CFO attributes act as a substitute mechanism for lower audit quality.

Originality/value

This study complements existing studies by documenting the first evidence on the significant effects of CFOs’ attributes in influencing accounting conservatism in an emerging country, namely, Malaysia. This is the first paper, to the humble knowledge, that examines CFOs’ attributes on accounting conservatism in Malaysia.

Details

Pacific Accounting Review, vol. 33 no. 4
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 7 July 2021

Francesco Paolone, Mohammad Albahloul and Riccardo Tiscini

The purpose of this paper is to identify the application of the fundamental principle of accounting conservatism within the EU food and drink industry. Furthermore, the…

Abstract

Purpose

The purpose of this paper is to identify the application of the fundamental principle of accounting conservatism within the EU food and drink industry. Furthermore, the authors would also investigate in-depth the above relationship in two different subsamples (income smoothers and non-income smoothers).

Design/methodology/approach

All EU-listed companies of the food and drink industry were identified covering the year 2019. Eckel's model was used to classify listed companies as smoothing or non-smoothing, and Basu's model was adopted to test the degree of conditional conservatism.

Findings

The results indicate that conservatism is strongly present in food and drink industry and also in its subindustries. We also showed that non-smoothing firms had higher levels of conditional conservatism in terms of more opportunity to recognize future economic losses because the market could use the stock return data to anticipate future losses contained in the information regarding profits.

Research limitations/implications

One limitation of this work is the small size of the investigated companies. The authors demonstrate that the likely increased use of conservatism produces better credibility in the EU markets. Practical implications indicate a higher degree of monitoring of the accounting practices adopted by firms. Regulators have to set accounting policies to enhance the quality of the informational environment, investors and shareholders might exercise control over executives' decisions, and lenders might impose contractual clauses requiring the timely disclosure of “bad news.”

Originality/value

This industry is “belted” from any external speculations. This research made it possible also to observe theoretical relationships between the financial information provided by the EU food and drink industry that contributes to the market distinction between smoothers and non-smoothers.

Details

British Food Journal, vol. 124 no. 1
Type: Research Article
ISSN: 0007-070X

Keywords

Article
Publication date: 6 September 2021

Saeid Aliahmadi

The main purpose of this study is to investigate the effect of investor sentiment on accounting conservatism in listed companies in the Tehran Stock Exchange (TSE).

Abstract

Purpose

The main purpose of this study is to investigate the effect of investor sentiment on accounting conservatism in listed companies in the Tehran Stock Exchange (TSE).

Design/methodology/approach

In this paper, two models of Ball and Shivakumar (2006) and Basu (1997) have been used for measuring conditional conservatism in accounting. To measure investor sentiment, the author uses the Baker and Wurgler (2006, 2007) index. The research sample consists of 1,820 observations and 182 firms listed on TSE over a ten-year period between 2011 and 2020. This study uses panel data and multivariate regression analysis to test it hypotheses.

Findings

Consistent with this hypothesis that accounting conservatism will increase with investor sentiment, the results showed that Iranian firms recognize economic losses and bad news in a more timely manner during high sentiment periods than during low sentiment periods. This implies that Iranian managers recognize economic losses and bad news in earnings in a more timely manner during periods of high investor sentiment.

Practical implications

This finding provides significant evidence for investors and financial reporting standard-setters in Iran because by removing accounting conservatism from the conceptual framework, managers are not able to present conservative financial reports, and this can intensify the negative impact of investors sentiment in the Iranian capital market. Managers of Iranian companies can reduce information asymmetry and increase capital market efficiency by accelerating the disclosure of bad news. Thus, managers can strategically recognize losses and prevent investors from making emotional decisions that reduce their wealth.

Originality/value

To the best of the authors’ knowledge, this is the first study to empirically examine the impact of investor sentiment on accounting conservatism in a developing market called Iran. This study contributes to the corporate disclosure literature. Also, the result of this study contributes to standard-setters of accounting standards to improve the mandatory disclosure literature on more conservative accounting earnings.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

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