Accounting Conservatism and Board Characteristics: Portuguese Evidence
For a sample of 26 non-financial listed Portuguese firms-year from 2002 to 2016, this study extends previous research by empirically examining how board structure affects the magnitude of accounting conservatism for companies listed in Portugal. Mainly, we focus on the main characteristics of the board structure that are highlighted by the Portuguese Securities Market Supervisory Authority’s recommendations: board size, board composition, board’s monitoring committees and number of board meeting. This study predicts and finds a non-linear relationship between board size and conservatism. Specifically, we find that as board size increases up to 8 members, the sample firms employ more conservatism, consistent with the idea that smaller boards can be more effective than larger boards in monitoring managerial behaviour. When board size reaches beyond 8 members, a negative relationship between board size and conservatism accounting occurs. We also find that both boards comprised of more non-executive members and high board meetings frequency lead firms to report more conservatively.
Ahmed, A. S., Billings, B. K., Morton, R. M., & Stanford-Harris, M. (2002). The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs. The Accounting Review, 77(4), 867-890. https://doi.org/10.2308/accr.2002.77.4.867
Ahmed, A. S., & Duellman, S. (2007). Accounting conservatism and board of director characteristics: An empirical analysis. Journal of Accounting and Economics, 46(2/3), 411-437. https://doi.org/10.1016/j.jacceco.2007.01.005
Ahmed, A. S., & Duellman, S. (2011). Evidence on the role of accounting conservatism in monitoring managers' investment decisions. Accounting & Finance, 51(3), 609-633. https://doi.org/10.1111/j.1467-629X.2010.00369.x
Ahmed, K., & Henry, D. (2012). Accounting conservatism and voluntary corporate governance mechanisms by Australian firms. Accounting and Finance, 52, 631-662. https://doi.org/10.1111/j.1467-629X.2011.00410.x
Ball, R., & Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2), 207-42. https://doi.org/10.1111/j.1475-679X.2006.00198.x
Beaver, W., & Ryan, S. (2000). Biases and lags in book value and their effects on the ability of the book-to-market ratio to predict book return on equity. Journal of Accounting Research, 38(1), 127-148. https://doi.org/10.2307/2672925
Beekes, W., Pope, P., & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: evidence from the UK. Corporate Governance: An International Review, 12(1), 47-59. https://doi.org/10.1111/j.1467-8683.2004.00342.x
Boussaid, N., Hamza, T., & Sougné, D. (2015). Corporate Board Attributes and Conditional Accounting Conservatism: Evidence from French Firms. The Journal of Applied Business Research, 31(3), 871-889. https://doi.org/10.19030/jabr.v31i3.9224
Brick, I. E., & Chidambaran, N. K. (2010). Board meetings, committee structure and firm value. Journal of Corporate Finance, 16(4), 533-553. https://doi.org/10.1016/j.jcorpfin.2010.06.003
Brooks, C. (2019). Introductory Econometrics for Finance (4th ed). Cambridge University Press. https://doi.org/10.1017/9781108524872
Caskey, J., & Laux, V. (2017). Corporate Governance, Accounting Conservatism, and Manipulation. Management Science, 63(2), 424-437. https://doi.org/10.1287/mnsc.2015.2341
Chen, T. (2015). Institutions, board structure, and corporate performance: Evidence from Chinese firms. Journal of Corporate Finance, 32, 217-237. https://doi.org/10.1016/j.jcorpfin.2014.10.009
CMVM. (2013). Corporate Governance Code (Recommendations). http://www.cmvm.pt/
Dechow, P. M., Sloan, R. G. & Sweeney, A. P. (1996). Causes and consequences of earnings manipulations: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13, 1-36. https://doi.org/10.1111/j.1911-3846.1996.tb00489.x
Dimitropoulos, P. E. & Asteriou, D. (2010). The effect of board composition on the informativeness and quality of annual earnings: Empirical evidence from Greece. Research in International Business and Finance, 24, 190-205. https://doi.org/10.1016/j.ribaf.2009.12.001
Elshandidy, T., & Hassanein, A. (2014). Do IFRS and board of directors' independence affect accounting conservatism? Applied Financial Economics, 24(16), 1091-1102. https://doi.org/10.1080/09603107.2014.924291
Fama, E. F. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy, 88(2), 288-307. https://doi.org/10.1086/260866
Fama, E. F., & Jensen, M. C. (1983). Separation of Ownership and Control. The Journal of Law and Economics, 2(26), 301-325. https://doi.org/10.1086/467037
Firth, M., Fung, P. M. Y., & Rui, O. M. (2007). Ownership, two-tier board structure, and the informativeness of earnings - Evidence from China. Journal of Accounting and Public Policy, 26(4), 463-496. https://doi.org/10.1016/j.jaccpubpol.2007.05.004
García Lara, J. M., García Osma, B., & Penalva, F. (2007). Board of Directors' Characteristics and Conditional Accounting Conservatism: Spanish Evidence. European Accounting Review, 16(4), 727-755. https://doi.org/10.1080/09638180701706922
García Lara, J. M., García Osma, B., & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies, 14, 161-201. https://doi.org/10.1007/s11142-007-9060-1
Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?. Journal of Accounting and Economics, 29(3), 287-320. https://doi.org/10.1016/S0165-4101(00)00024-0
Jensen, M. C. (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. The Journal of Finance, 3(48), 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency and Ownership Structure. Journal of Financial Economics, 4(3), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jeong, K., & Kim, H. (2013). Equity-Based Compensation to Outside Directors and Accounting Conservatism. The Journal of Applied Business Research, 29(3), 885-900. https://doi.org/10.19030/jabr.v29i3.7789
Klein, A. (1998). Firm performance and board committee structure. Journal of Law and Economics, 41, 275-303. https://doi.org/10.1086/467391
Lipton, M., & Lorsch, J. W. (1992). A Modest Proposal for Improved Corporate Governance. The Business Lawyer, 48(1), 59-77.
Loderer, C., & Peyer, U. (2002). Board Overlap, Seat Accumulation and Share Prices. European Financial Management, 8(2), 165-192. https://doi.org/10.1111/1468-036X.00183
Majeed, M. A., Zhang, X.-Z., & Wang, Z. (2017). Product market competition, regulatory changes, ownership structure, and accounting conservatism. Chinese Management Studies, 11(4), 658-688. https://doi.org/10.1108/CMS-12-2016-0248
Nasr, M. A., & Ntim, C. G. (2018). Corporate governance mechanisms and accounting conservatism: evidence from Egypt. Corporate Governance: The International Journal of Business in Society, 18(3), 386-407. https://doi.org/10.1108/CG-05-2017-0108
Peasnell, K. V., Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: Do outside directors influence abnormal accruals?. Journal of Business Finance & Accounting, 32(7-8), 1311-1346. https://doi.org/10.1111/j.0306-686X.2005.00630.x
Rediker, K. J., & Seth, A. (1995). Boards of directors and substitution effects of alternative governance mechanisms. Strategic Governance Journal, 16(2), 85-99. https://doi.org/10.1002/smj.4250160202
Suleiman, S. (2014). Corporate Governance Mechanisms and Accounting Conservatism. Journal of Management Policies and Practices, 2(2), 113-127.
Sultana, N. (2015). Audit Committee Characteristics and Accounting Conservatism. International Journal of Auditing, 19(2), 88-102. https://doi.org/10.1111/ijau.12034
Sun, J., & Liu, G. (2011). The effect of analyst coverage on accounting conservatism. Managerial Finance, 37(1), 5-20. https://doi.org/10.1108/03074351111092111
Vafeas, N. (1999). Board Meeting Frequency and Firm Performance. Journal of Financial Economics, 53(1), 113-142. https://doi.org/10.1016/S0304-405X(99)00018-5
Watts, R. L. (2003). Conservatism in accounting part I: Explanations and Implications. Accounting Horizons, 17(3), 207-221. https://doi.org/10.2308/acch.2003.17.3.207
Wistawan, M. A. P., Subroto, B., & Ghofar, A. (2015). The Characteristics Board of Directors, Family Ownership and Accounting Conservatism: Evidence from Family Public Firms in Indonesia. Research Journal of Finance and Accounting, 6(22), 113-121.
Xie, B., Davidson, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9, 295-316. https://doi.org/10.1016/S0929-1199(02)00006-8
Copyright (c) 2021 Sandra Alves
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.