Financial Crisis, Accounting Conservatism and Corporate Ownership Structure

Title
Financial Crisis, Accounting Conservatism and Corporate Ownership Structure
Authors
김명인
Keywords
ownership-control wedge, conditional conservatism, crisis
Issue Date
2014-06
Publisher
회계저널
Series/Report no.
회계저널 ; 23권 3호 pp 119~160
Abstract
In this paper, we examine how controlling shareholders` expropriation incentives affect the level of conservatism during crisis and non-crisis periods. While previous studies have extensively investigated the link between corporate governance and firmvalue during crisis, not much attention has been given to the link between corporate governance and conservatism during crisis. Extending the recent study which documents a negative relation between the ownership-control wedge and conservatism, we further examine the channel through which controlling shareholders pursue self-interested behaviors at the expense of minority shareholders by using the crisis setting in Korea. A set of literature on the effect of economic crisis shows that firms with weaker corporate governance suffer more during crisis because the controlling shareholders` incentives to expropriate minority shareholders go up as the expected return on investment falls during the crisis period. This exacerbating-effect argument implies that the negative effect of the ownership-control wedge on conservatism should be more pronounced during the crisis period, relative to non-crisis period. However, it is possible that the crisis unravels problems related to corporate governance in a firm and promotes greater investor awareness about such problems. The prediction is that the expropriation activities by controlling shareholders will be limited during crisis due to higher monitoring by investors, which we call the mitigating-effect argument. Given these conflicting arguments, it is an empirical question whether the negative effect of the wedge on conservatism will be exacerbated or mitigated during crisis. Our empirical results show that firms with large wedges between control and ownership exhibit lower level of conservatism, confirming the findings in prior studies. More importantly, we find that the negative effect of the wedges on conservatism is pronounced during the crisis period, relative to non-crisis period. These results remain significant after using alternative measure of the wedge and after separating the wedge variable into voting and cash flow rights. Overall, the findings of this paper suggest that controlling shareholders` incentives to expropriate minority shareholders are a key factor that bridges a link between corporate governance and conservatism during crisis.
URI
http://dspace.inha.ac.kr/handle/10505/39428
ISSN
1229-327X
Appears in Collections:
College of Business Administration (경영대학) > Business Administration (경영학) > Local Access Journal, Report (경영학 논문, 보고서)

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