Corporate Governance, Accounting Conservatism, and Manipulation

Judson Caskey and Volker Laux ()
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Volker Laux: McCombs School of Business, University of Texas at Austin, Austin, Texas 78712

Management Science, 2017, vol. 63, issue 2, 424-437

Abstract: We develop a model to analyze how board governance affects firms’ financial reporting choices and managers’ incentives to manipulate accounting reports. In our setting, ceteris paribus, conservative accounting is desirable because it allows the board of directors to better oversee the firm’s investment decisions. This feature of conservatism, however, causes the manager to manipulate the accounting system to mislead the board and distort its decisions. Effective reporting oversight curtails managers’ ability to manipulate, which increases the benefits of conservative accounting and simultaneously reduces its costs. Our model predicts that stronger reporting oversight leads to greater accounting conservatism, manipulation, and investment efficiency. This paper was accepted by Mary Barth, accounting .

Keywords: corporate governance; conservatism; manipulation; investment decisions (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:2:p:424-437

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