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Managerial Ownership and Accounting Conservatism
Author(s) -
LAFOND RYAN,
ROYCHOWDHURY SUGATA
Publication year - 2008
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2008.00268.x
Subject(s) - conservatism , shareholder , earnings , agency cost , agency (philosophy) , principal–agent problem , business , accounting , control (management) , monetary economics , finance , economics , corporate governance , philosophy , management , epistemology , politics , political science , law
In this paper we examine the effect of managerial ownership on financial reporting conservatism. Separation of ownership and control gives rise to agency problems between managers and shareholders. Financial reporting conservatism is one potential mechanism to address these agency problems. We hypothesize that, as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism. Consistent with our hypothesis, we find that conservatism as measured by the asymmetric timeliness of earnings declines with managerial ownership. The negative association between managerial ownership and asymmetric timeliness of earnings is robust to various controls, in particular, for the investment opportunity set. We thus provide evidence of a demand for conservatism from the firm's shareholders.