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Article
Publication date: 26 February 2021

Mahdi Salehi, Ebrahim Ghanbari and Saleh Orfizadeh

This study aims to assess the relationship between managerial entrenchment and accounting conservatism in Iran.

Abstract

Purpose

This study aims to assess the relationship between managerial entrenchment and accounting conservatism in Iran.

Design/methodology/approach

To test hypotheses, all listed companies on the Tehran Stock Exchange during 2013–2018 (six years) that qualified were selected. Given the defined limitations of the study, a total of 120 firms with 720 year-observations was selected. After collecting data and figures, they were analyzed using EViews software. Having presented the inferential model tests, the panel data with fixed effects model is chosen.

Findings

The study results indicate a positive and significant relationship between managerial entrenchment and unconditional conservatism presented in the income statement. Moreover, the authors find a meaningful relationship between managerial entrenchment and unconditional conservatism about the balance sheet.

Practical implications

Managers will be more aware of the positive consequences of employment optimal corporate governance such as conservative accounting. Such corporate governance is likely to serve their interest in the long run by providing positive signals to the equity owners and board of directors.

Originality/value

By assessing conservatism’s literature in Iran, we observe many studies on this concept. Still, no investigation is carried out on the relationship between conservatism in accounting and managerial entrenchment. The present study is innovative because it evaluates the relationship between managerial entrenchment and two types of conservatism, namely, balance sheet and income statement conservatism, which have never been investigated by prior studies, notably in emerging markets.

Details

Journal of Facilities Management , vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1472-5967

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Article
Publication date: 4 February 2021

Carlos E. Jiménez-Angueira, Emeka Nwaeze and Sung-Jin Park

Prior studies document a positive relation between stock prices and tax-related contingent liability, unrecognized tax benefits (UTBs) and interpret the finding as…

Abstract

Purpose

Prior studies document a positive relation between stock prices and tax-related contingent liability, unrecognized tax benefits (UTBs) and interpret the finding as evidence that investors reward tax aggressiveness. The purpose of this paper is to explore the nature of this puzzle finding by considering a link between UTBs and financial reporting strategy and propose that financial reporting conservatism may explain the positive association between UTBs and stock prices.

Design/methodology/approach

To estimate the incremental valuation weights on UTBs, the authors employ the Ohlson (1995) valuation model and regress stock prices on UTBs and its interactions with the proxies for financial reporting conservatism and tax aggressiveness. Further, the authors adopt a UTB estimation model to decompose its balance into the predicted and unpredicted components.

Findings

The authors find that the reporting conservatism has a positive effect on the market valuation of UTBs. The authors also find some evidence that tax aggressiveness increases the valuation weight of UTBs. When UTBs are decomposed into predicted and unpredicted components, the authors find that the effect of financial reporting conservatism is more pronounced for the market valuation of predicted UTBs. Collectively, the evidence suggests that conservative financial reporting is a major driver of the positive valuation of UTBs and that tax aggressiveness plays a less significant role in investors' valuation decisions.

Originality/value

While prior studies focus on how UTBs are associated with stock prices, this paper is the first attempt to explain why UTBs are positively valued by investors.

Details

Asian Review of Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 10 August 2020

Xixi Shen, Kung-Cheng Ho, Lu Yang and Leonard Fong-Sheng Wang

Non-financial information disclosure may reflect the quality of corporate financial reports or disclosure policy choices. The authors examine the relationship between…

Abstract

Purpose

Non-financial information disclosure may reflect the quality of corporate financial reports or disclosure policy choices. The authors examine the relationship between corporate social responsibility (CSR) and accounting conservatism and also investigate channels through which such effects are transmitted. The purpose of this paper is to explore how CSR, as non-financial information that has received widespread attention, affects choices regarding corporate financial policy.

Design/methodology/approach

Using ordinary least squares regression, the authors analyze China CSR Score data for 2010–2018. They control certain influencing variables related to the nature and characteristics of enterprises and discover that CSR can effectively increase accounting conservatism. Then, they extract the components of market reactions to CSR and study the market reaction path of CSR as it affects financial policy. They also conduct a robustness test to ensure that the results are not accidental in a complex environment.

Findings

The results reveal the influence of non-financial information on firms’ financial policy. In addition, the results confirm the attraction of liquidity and investor attention as the major market reaction channels by which CSR significantly promotes accounting conservatism. Additionally, other critical paths of influence deserve further exploration. The results remain robust for alternate measures of accounting conservatism, different components of CSR, other proxies on CSR, endogenous testing and alternate estimation methods.

Originality/value

The study represents the first analysis of the influence of CSR information disclosure on accounting conservatism in emerging markets, and it undertakes a preliminary exploration to clarify the mechanism of CSRs’ role in accounting conservatism. The results also provide a policy reference for external supervision and internal governance of enterprises. Thus, the results can help company managers maintain a favorable corporate image and establish a high-level investor protection mechanism.

Details

Kybernetes, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0368-492X

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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

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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

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Content available
Article
Publication date: 8 June 2020

Shayan Farhangdoust and Lida Sayadi

The present study seeks to shed further light on the effectiveness of Basu (1997) and Khan and Watts' (2009) differential timeliness metrics in detecting predictable…

Abstract

Purpose

The present study seeks to shed further light on the effectiveness of Basu (1997) and Khan and Watts' (2009) differential timeliness metrics in detecting predictable differences in conservatism following corrections of restated earnings.

Design/methodology/approach

Using cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period.

Findings

Using cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period. In contrast, our findings are indicative of higher conservatism among these restating firms during the years of restatements. Moreover, the time-series approach captures a higher conservatism for the restating firms during restatement years than prerestatement periods. Overall, these results provide insight into the usefulness of the metrics used in the restatement setting.

Originality/value

Similar to recent papers, the present study seeks to shed further light on the ability of Basu-based coupled with Khan–Watts-based measures of conservatism to detect situations in which companies' earnings are known to be significantly restated.

Details

Asian Journal of Accounting Research, vol. 5 no. 1
Type: Research Article
ISSN: 2443-4175

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Article
Publication date: 10 June 2020

Afsheena P. and Shijin Santhakumar

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This…

Abstract

Purpose

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This study aims to explore cash flow-return association, which provides insight into the accruals’ contribution that traverses through conservatism-earnings persistence liaison and its associated effects on stock returns.

Design/methodology/approach

The study used asymmetric timeliness (AT) model and two firm-year measures, namely, C-Score and conservatism ratio, to capture conservatism. The firm-year measures of conservatism, in addition to the AT measure, facilitate a better understanding of the persistence of reported earnings that branch out the study from the existing literature. Further, the study used panel regression analysis to evaluate the timeliness and persistence of earnings under the conservative approach with a sample of Indian corporate data from 2000 to 2017.

Findings

The findings of the study reveal that conservative earnings are less persistent and the accruals recognize bad news timelier than good news. The unfavorable change in earnings shows a lower earnings response coefficient in contrast to favorable earnings variations. However, the appropriate loss recognition nature of conservative reporting has little or no influence on stock returns in an emerging market such as India.

Research limitations/implications

Accounting conservatism is a captivating feature accounting information, especially pertinent to many decision-makers. Thus, the study has implications for the investors while evaluating the adverse and positive changes in accounting earnings; also, the results are helpful for the standard setters in ongoing debate related to accounting conservatism vs fair evaluation. The present study focuses exclusively on ex-post conservatism, while the ex post and ex ante conservatism are having a significant role in accounting practices. Future research on the differential effects of ex post and ex ante conservatism on accounting information in an emerging market, is worth promising.

Originality/value

The study reveals the first Indian evidence on accounting conservatism and earnings persistence relationship, which would bring a different dimension to investors’ perception in evaluating the characteristic variations of reported earnings. The findings add value to the accounting standard setters concerning the asymmetric verification as Indian Accounting standards are on the verge of convergence with International Financial Reporting Standards (IFRS).

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 3
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 2 January 2020

Mahdi Salehi, Mahmoud Lari DashtBayaz, Somayeh Hassanpour and Hossein Tarighi

This study aims to investigate the effects of managerial overconfidence on conditional conservatism and real earnings management among companies listed on the Tehran Stock…

Abstract

Purpose

This study aims to investigate the effects of managerial overconfidence on conditional conservatism and real earnings management among companies listed on the Tehran Stock Exchange (TSE).

Design/methodology/approach

In this paper, the authors used the model of Ball and Shivakumar (2006) for measuring the effect of moderating overconfident management on conditional conservatism in accounting; moreover, the model of Roychowdhury (2006) is used for evaluating the relationship between managerial overconfidence and real earnings management. The study population consists of 1,144 observations and 143 firms listed on TSE over an eight-year period between 2008 and 2015. The statistical model used in this paper is a multivariate regression model; besides, the statistical technique used to test the hypotheses is panel data.

Findings

Consistent with the expectations, the results showed that there is a negative relationship between managerial overconfidence and conditional conservatism. Furthermore, the findings suggest that managerial overconfidence is negatively connected with real earnings management. This implies that when Iranian managers have many financial problems, they do not engage in real earnings management, as the real earnings management does not increase the value of the companies in the long run and even it cause damage to them.

Originality/value

This is one of the most important research that simultaneously surveys the impact of managerial overconfidence on conditional conservatism and real earnings management in a developing market called Iran. What really sets this study apart from other papers is that most Iranian firms between 2008 and 2015 because of economic sanctions faced severe financial problems. From this perspective, this study contributes to the research literature by expanding the knowledge of conservatism in the emerging economies.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 3
Type: Research Article
ISSN: 1759-0817

Keywords

Content available
Article
Publication date: 7 October 2019

Cyrus Isaboke and Yan Chen

This study sought to evaluate the relationship between value relevance of financial information and conditional conservatism of non-financial companies listed in China.

Abstract

Purpose

This study sought to evaluate the relationship between value relevance of financial information and conditional conservatism of non-financial companies listed in China.

Design/methodology/approach

Using panel data comprising of 28,723 firm years, the authors determine the value relevance of financial information before and after mandatory International Financial Reporting Standards (IFRS) adoption while incorporating the relationship with conditional conservatism. The authors further examined how this relationship varies between state and non-state owned companies.

Findings

Conditional conservatism is positively (negatively) related to value relevance prior (post) to mandatory IFRS adoption while it makes no difference as to whether a company is state or non-state owned, as IFRS has a positive and significant effect on value relevance. Conservatism, on the other hand, has a negative and insignificant relationship with market value of both state and non-state owned firms during the pre- and post-IFRS period.

Originality/value

By exploring an emerging economy, the authors provide evidence on the variations in value relevance amongst state and non-state owned firms. In particular, the authors establish the positive effect of IFRS on the value relevance of non-state firms as compared to state-owned institutions.

Details

International Journal of Accounting & Information Management, vol. 27 no. 4
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 6 December 2019

Hui Li, Darren Henry and Xiaohui Wu

The purpose of this paper is to identify means of better associating executive remuneration with managerial decision making and firm performance.

Abstract

Purpose

The purpose of this paper is to identify means of better associating executive remuneration with managerial decision making and firm performance.

Design/methodology/approach

The authors evaluate the influence of conditional accounting conservatism on CEO compensation. The authors focus particularly on the ex ante pay-for-performance sensitivity (PPS) of CEO stock option grants. The empirical method used is panel data regression.

Findings

The authors find that accounting conservatism is positively related to the PPS of CEO option-based compensation. The effects of accounting conservatism on the PPS of options are more significant for firms with relatively weaker corporate governance and for the period before the introduction of FAS 123R. The findings suggest that directors reward CEOs for adopting accounting conservatism, both in general terms and incrementally, and that rewards are channelled through incentive-linked compensation. The results are also consistent with the view that accounting conservatism compliments other mechanisms, such as corporate governance, in reducing information asymmetry and agency problems between managers and shareholders and other stakeholders.

Originality/value

This paper provides a number of important contributions to the literature. It is the first to identify a relationship between accounting conservatism and option-based CEO compensation, which has important potential contracting and enforcement implications due to the incomplete nature of option contracts and the reward and risk attributes of CEOs. This paper is also the first to analyse the association between conditional accounting conservatism and CEO compensation at the firm–year level, by employing the firm–year conservatism score approach proposed by Khan and Watts (2009). This provides for greater insight regarding the interaction between accounting conservatism and other firm-specific elements than is otherwise obtainable from an overall firm or year interpretations derived from the traditional Basu (1997) asymmetric timeliness model approach. Furthermore, this paper also provides a comparison of the relative association of accounting conservatism on both explicit and implicit forms of CEO compensation for the same firm sample. This allows for the assessment of whether accounting conservatism relates differently to incentive-based CEO remuneration relative to ex post CEO compensation outcomes.

Details

International Journal of Managerial Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1743-9132

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