Complex Ownership Structures and Accounting Conservatism

50 Pages Posted: 25 Sep 2009 Last revised: 2 Mar 2012

See all articles by In-Mu Haw

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business

Simon S. M. Ho

Hong Kong Baptist University

Jamie Yixing Tong

University of Western Australia

Feida Zhang

University of Queensland - Accounting and Accountability

Date Written: February 2012

Abstract

This study examines the use of accounting conservatism in firms with multiple controlling owners. In particular, we investigate the association between dispersion of cash-flow rights among controlling shareholders and accounting conservatism as well as how ownership type differences among controlling shareholders, family ownership, and legal institutions influence this association. Using a comprehensive, firm-level ownership dataset for thirteen Western European countries to conduct the empirical analysis, we find that: (1) dispersion of cash-flow rights across multiple large owners is positively associated with accounting conservatism; (2) the positive association between dispersion of cash-flow rights and accounting conservatism is more pronounced when controlling shareholders are of different types; (3) family ownership strengthens the positive association between dispersion of cash-flow rights and accounting conservatism; (4) the positive association between dispersion of cash-flow rights and accounting conservatism is more pronounced in countries with stronger legal institutions. This study contributes to the literature in a number of ways. First, this study highlights the importance of the second largest controlling shareholder in affecting the level of accounting conservatism. Second, this paper reinforces the important role played by ownership type differences among controlling shareholders in influencing the association between dispersion of cash-flow rights and accounting conservatism. Third, this paper strengthens the importance of family ownership in affecting agency problems between majority and minority shareholders. Fourth, this paper stresses the importance of legal institutions in influencing the installation of firm-level corporate governance mechanisms. Finally, the findings of this study have important implications for accounting standard setters attempting to eliminate conservatism in financial reports.

Keywords: Accounting conservatism, Ownership Structure, Legal Institutions

JEL Classification: M41, G32

Suggested Citation

Haw, In-Mu and Ho, Simon S. M. and Tong, Jamie Yixing and Zhang, Feida, Complex Ownership Structures and Accounting Conservatism (February 2012). Available at SSRN: https://ssrn.com/abstract=1478641 or http://dx.doi.org/10.2139/ssrn.1478641

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States
817-921-7563 (Phone)
817-921-7227 (Fax)

Simon S. M. Ho

Hong Kong Baptist University ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Jamie Yixing Tong

University of Western Australia ( email )

Perth, Perth 6009
Australia

Feida Zhang (Contact Author)

University of Queensland - Accounting and Accountability ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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