Effects of Corporate Governance and Managerial Optimism on Accounting Conservatism and Manipulation

Judson Caskey, Volker Laux
2013 Social Science Research Network  
We develop a model to analyze how board governance a¤ects ...rms'...nancial reporting choices, and managers'incentives to manipulate accounting reports. In our setting, the board of directors relies on accounting information to make project approval decisions, and will reject the project absent information supporting its profitability. We consider a setting where, ceteris paribus, conservative accounting is desirable because it allows the board to better oversee the ...rm's investments. This
more » ... nvestments. This feature of conservatism, however, causes the manager to manipulate the accounting system to mislead the board and distort its decisions. E¤ective reporting oversight curtails managers'ability to manipulate, which increases the bene...ts of conservative accounting and simultaneously reduces its costs. Our model predicts that stronger reporting oversight leads to greater accounting conservatism, manipulation, and investment e¢ ciency.
doi:10.2139/ssrn.2251378 fatcat:2atpl6g5ybeevjbhzl4mjrdydm