An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Juan Manuel García Lara
Universidad Carlos III De Madrid

Beatriz García Osma
Universidad Autónoma De Madrid

Fernando Penalva
IESE Business School

Abstract: We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external governance characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of both conditional and unconditional accounting conservatism. The results are robust to controlling for economic determinants of corporate governance. We also study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong governance firms appear to use discretionary accruals to inform investors about bad news in a timely manner. Our evidence is consistent with governance and conservatism being complements, not substitutes.

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