The Market for Corporate Control and Accounting Conservatism

44 Pages Posted: 11 Jan 2011

See all articles by Yuyan Guan

Yuyan Guan

City University of Hong Kong - College of Business

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: October 6, 2010

Abstract

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. Passage of these laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems.

Keywords: conditional conservatism, corporate governance, state anti-takeover legislation, difference-in-differences

JEL Classification: M41

Suggested Citation

Guan, Yuyan and Callen, Jeffrey L. and Qiu, Jiaping, The Market for Corporate Control and Accounting Conservatism (October 6, 2010). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1738207 or http://dx.doi.org/10.2139/ssrn.1738207

Yuyan Guan (Contact Author)

City University of Hong Kong - College of Business ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-34427136 (Phone)

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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