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The Role of Accounting Conservatism, Contracting, and Monitoring in Mitigating Agency Problems: A Simultaneous Equations Approach
Xinrong Qiang,
University of Wyoming
ABSTRACT. This paper examines relationships among levels of accounting conservatism, contracting on accounting numbers, and monitoring. I hypothesize that these variables are simultaneously determined in mitigating agency problems, as follows: (1) higher usage of contracting induces lower conservatism; (2) stronger monitoring imposes greater conservatism; (3) greater conservatism fosters higher usage of contracting; and (4) higher usage of contracting allows for weaker monitoring. The results using a simultaneous equations approach are consistent with these hypotheses, except for hypothesis (3) when applied to debt contracting. The results suggest that conservatism, contracting, and monitoring all play an important role in mitigating agency problems, and have the implication that researchers should consider the simultaneity among these variables when testing the determinants/consequences of each variable.
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