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Managerial Ownership and Accounting Conservatism: Empirical Evidence from Japan

Akinobu Shuto () and Tomomi Takada
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Tomomi Takada: Graduate School of Business Administration, Kobe University, Japan

No 227, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We examine the effect of managerial ownership on the demand for accounting conservatism as measured by the asymmetric timeliness of earnings (Basu, 1997). The separation of ownership and control as reflected by the levels of managerial ownership induce two agency problems between managers and shareholders: the incentive alignment effect and the management entrenchment effect. Since accounting conservatism is expected to mitigate agency problems between managers and shareholders, we predict that these agency problems increase the demand for accounting conservatism. We empirically test the relationship between managerial ownership and the asymmetric timeliness of earnings using a cubic form model for Japanese firms. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. Our results hold after controlling the market-to-book ratio, leverage, firm size, and year. These evidences support our prediction and suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders.

Keywords: Managerial ownership; Accounting conservatism; Alignment effect; Entrenchment effect (search for similar items in EconPapers)
JEL-codes: G32 M41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-08
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn and nep-cta
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