انگیزه های گزارش مالی برای ارائه حسابداری محافظه کارانه: تاثیر نهادهای قانونی و سیاسی

This paper explores financial reporting incentives created by an economy's institutional structure. The underlying premise of our analysis is that a country's legal/judicial system, securities laws, and political economy create incentives that influence the behavior of corporate executives, investors, regulators and other market participants. Further, such incentives ultimately shape the properties of reported accounting numbers. We empirically analyze relations between key characteristics of country-level institutions and the asymmetric recognition of economic gains and losses into earnings (i.e., conditional conservatism). We also provide evidence on channels through which specific institutions manifest their influence on observed conservatism.

In this paper, we explore how reported accounting numbers are shaped by the institutional structure of the country in which firms are domiciled. We seek deeper understanding into the nature of financial reporting incentives created by an economy's institutional structure. We focus on financial reporting incentives related to accounting conservatism. To this end, we empirically analyze relations between key characteristics of economy-level institutions and one dimension of accounting conservatism, the asymmetric recognition of economic gains and losses into earnings, and provide evidence on channels through which specific institutions manifest their influence on observed conservatism.1 Channels investigated include the use of accounting numbers in designing debt and compensation contracts, in supporting securities-related litigation, in motivating the behavior of public-sector regulators, and in mediating the relations between politicians and private sector business firms. The underlying premise of our analysis is that a country's legal/judicial system, securities laws, political economy, and tax regime create incentives that influence the behavior of corporate executives, investors, regulators and other market participants. Such incentives shape the properties of reported accounting numbers through a complex interplay of accounting standards, legal, market, regulatory, and political pressures, and reporting discretion exercised by managers. Thus, a complete understanding of the realized properties of accounting numbers, including conservatism, must incorporate the influence of financial reporting incentives generated by existing institutions. The persistent influence of conservatism on accounting practice suggests that it confers benefits to economic agents who use, prepare or regulate financial reports.2 To investigate the sources of these economic costs and benefits, we extend earlier cross-country research (e.g., Ball et al. (2000) and Ball et al. (2003)) examining the association between country-level institutions and conservative accounting practices. Following Holthausen (2003), we take a more quantitative approach towards classifying the countries used in these comparisons. With respect to countries’ legal/judicial systems, we find that investor protections embodied in corporate law and the efficiency and impartiality of the judicial system play a significant role in creating incentives for timely loss recognition. Firms in countries with strong investor protections and high quality judicial systems reflect bad news in reported earnings numbers in a more timely fashion than firms in countries characterized by weak investor protections and low quality judicial systems. Further, we examine the impact of securities law on conservatism, disaggregating securities law into two distinct dimensions: public enforcement and private enforcement aspects.3 We find that firms in countries with strong public enforcement characterized by an independent, powerful, public enforcer slow the recognition of good news in reported earnings numbers relative to firms in countries with weak public enforcement. This result is consistent with the hypothesis put forth in Watts (2003a) that self-interested regulators are penalized more for overstated accounting numbers than understated numbers. In contrast, private enforcement aspects of securities law as embodied in disclosure requirements and burden of proof requirements of the liability regime have no impact on conservative financial reporting. A novel feature of the paper is our analysis of the influence of political economy on incentives for conservative reporting. We find that in countries characterized by high state involvement in the economy firms speed recognition of good news and slow recognition of bad news in reported earnings relative to firms in countries with less state involvement.4 This is consistent with a scenario where a “benevolent” government intervenes in poorly performing firms, and firms seek to avoid such interference by exploiting reporting discretion to portray an optimistic outlook. It is also consistent with publicly traded firms with partial state ownership being pressured by the state to upwardly tilt their reporting decisions. In further analysis, we address whether the implications of political involvement differs fundamentally in countries with weak investor protections relative to those with strong investor protections. We document that in common law countries, high state involvement leads firms to speed recognition of good news and slow recognition of bad news relative to firms in countries with less state involvement. In contrast, in civil law countries, high state involvement leads firms to slow recognition of good news and speed recognition of bad news relative to firms in countries with less state involvement. Thus, managers appear to adjust their financial reporting in response to the nature of the State's involvement. Finally, we find mixed results with respect to the influence of tax regimes on conservatism. Our emphasis on institutional incentives both complements and extends the arguments of Watts, 2003a and Watts, 2003b. Watts (2003a) explicates four distinct channels that may influence equilibrium levels of conservatism: (1) contracting; (2) shareholder litigation; (3) regulation; and (4) taxation. Our primary research design cannot directly test the validity of these individual explanations, because it is not possible to construct a one-to-one mapping from institutional influences to explanations. Thus, while we will relate institutional influences to the contracting, litigation, regulatory and tax explanations, our institutional-level tests do not claim to be directly testing these alternating theories. We extend our institutional analysis to investigate channels through which specific institutions could manifest their influence on observed conservatism. This analysis illustrates that the relative impact of a given channel on the equilibrium level of conservatism is a function of the institutional structure of the country. For example, the prevalence of explicit contracts that use accounting information is dependent on the existence of a legal/judicial regime that facilitates efficient enforcement of contracts written on verifiable information signals. If the use of accounting information for contracting purposes is a channel that creates demand for conservative reports, then conservatism should be greater in countries with both a strong legal/judicial regime and a high prevalence of contract use. We find that the speed of good news recognition is slower and speed of incremental bad news recognition is faster in countries with both high quality judicial regimes and high relative usage of private bonds, and in countries with both high quality judicial regimes and more diffuse ownership structures. In contrast, absent a high quality judicial regime, a relation between the prevalence of contracting activities and conservatism does not exist, suggesting that contract usage alone, without a means of enforcing accounting-based contracts, is insufficient to generate a demand for conservative accounting reports. Our paper extends and complements a vibrant literature using cross-country data to investigate relations between conservatism and institutions. Raonic et al. (2004) examine the impact of country-level disclosure regimes, legal enforcement and importance of equity markets on conservatism. They focus on set of European firms with equity traded on multiple exchanges, and provide limited evidence that bad news earnings sensitivity increases in legal enforcement, and good news earnings sensitivity decreases in disclosure. Lang et al. (2003) document that loss recognition increases upon U.S. cross-listing, while Huijgen and Lubberink (2003) find that U.K. firms choosing to cross-list in the U.S. display more timely loss recognition. Both results are consistent with the incentives arising from the U.S.'s stronger legal and regulatory institutions. Finally, Ball and Shivakumar (2004) examine reporting practices of public versus private U.K. companies, and Buijink et al. (2004) examine reporting practices of public versus private firms across EU countries. Our paper is closely related to Ball et al. (2000) and Ball et al. (2003) (see also Pope and Walker, 1999). Ball et al., 2000 and Ball et al., 2000 investigate how differences in the demand for accounting income in different institutional contexts cause its properties to vary across a wide range of countries. Ball et al. (2003) focus their analysis on four East Asian economies. In these papers, the authors offer a rich, qualitative discussion of how the institutional framework of a country can impact the extent of accounting conservatism realized in firms’ public financial reports. However, empirically, the only institutional characteristic directly incorporated into the formal analysis in these studies is whether the country has a common law or civil law legal origin.5 We find that after controlling for legal origin, conservatism is significantly related to a variety of other country-level institutions. Finally, our paper relates to prior research into cross-country determinants of financial reporting activities. Prior research includes papers on cross-country variation in the value-relevance of earnings (e.g., Alford et al., 1993; Ali and Hwang, 2000; Fan and Wong, 2002; Francis et al., 2003, Guenther and Young, 2000; Land and Lang, 2002, corporate transparency (Bushman et al., 2004), earnings management (Burgstahler et al., 2004; Leuz, et al., 2003; Bhattacharya et al., 2003), disclosure regulation and enforcement (Frost, 1999), and disclosure intensity (Jaggi and Low, 2000; Francis et al., 2003). The rest of the paper is organized as follows. Section 2 describes the conceptual framework of the paper, including a discussion of alternative explanations for conservatism, our empirical institutional measures, and the conceptual justification for including them. Section 3 describes our data and research design and Section 4 presents our empirical results. Section 5 discusses empirical extensions and robustness tests. Section 6 summarizes the paper. Appendix A includes a descriptions of all empirical variables and their sources.

This paper explores how reported accounting numbers are shaped by the institutional structure of the country in which firms are domiciled. Our main objective is to gain deeper understanding into the nature of financial reporting incentives created by an economy's institutional structure with respect to accounting conservatism. In this paper, we focus on one dimension of revealed accounting conservatism—the asymmetric recognition of economic gains and losses into reported earnings (i.e., conditional conservatism). The underlying premise of our analysis is that a country's legal/judicial system, securities laws, political economy, and tax regime create incentives that influence the behavior of corporate executives, investors, regulators and other market participants. While we attempt to relate these institutional influences to the contracting, shareholder litigation, regulatory, and tax explanations posited by Watts (2003a), we cannot and do not claim to be directly testing these alternative theories with our research design. Instead, our paper builds on Holthausen's (2003) discussion of Ball et al. (2003) by exploiting cross-country variation in institutions to investigate financial reporting incentives for conservative accounting. The result is the first systematic study attempting to link a broad array of country-level institutions to observed conservative accounting practices. And, although we can neither ultimately reject nor confirm a given explanation, the identification of institutions is an important first-step because these institutional structures ultimately create the set of incentives underlying most of the explanations for conservative accounting practices. Summarizing, we find that firms in countries with high quality judicial systems reflect bad news in reported earnings faster than firms in countries with low quality judicial systems, after controlling for legal origin. Moreover, we find that strong public enforcement aspects of securities law slows recognition of good news in earnings relative to firms in countries with weak public enforcement aspects. In contrast, the private enforcement aspects of securities law have no impact on conservatism. In terms of political institutions, we find that firms in countries with political economies characterized by high risk of expropriation of assets by the state and high state ownership of enterprises both speed the recognition of good news and slow the recognition of bad news in earnings relative to firms in countries with less political involvement in the economy. In further analysis, we address whether the implications of political involvement in the economy differs fundamentally in countries with weak investor protections relative to those with strong investor protections. We document that, in common law countries, firms facing high state involvement in the economy tend to speed the recognition of good news and slow the recognition of bad news relative to firms in countries with less state involvement. In contrast, in civil law countries, high state involvement leads firms to slow the recognition of good news and speed the recognition of bad news relative to firms in countries with less state involvement. Thus, managers appear to adjust their financial reporting in response to the nature of the State's involvement. Finally, we find mixed and inconclusive results with respect to the influence of financial architecture and tax regimes. Interestingly, several of the institutions correlated with conservative accounting practices have also been previously shown to lead to widespread equity ownership and larger and broader capital markets. Given that diffuse equity ownership, which separates the ownership of capital from management of capital, leads to a contracting and monitoring demand for credible accounting information, the rise of conservative accounting practices in the presence of these institutions is consistent with the contracting explanation for conservatism as discussed in Watts (2003a). Moreover, the influence of the state on financial reporting practices harkens back to the political cost arguments made in Watts and Zimmerman, 1978 and Watts and Zimmerman, 1986. Our evidence suggests that cross-country variation in these political costs should be considered as an additional explanation for accounting conservatism. We also investigate several channels through which specific institutions could manifest their influence on observed conservatism. The main contributions of this analysis are to provide more direct evidence on the individual explanations for conservatism and to illustrate that the relative impact of a given channel on observed financial reporting is a function of the institutional structure of the country. We find support for the hypothesis that in countries with high quality judicial systems, contracting is an important channel through which the level of conservatism is influenced. Specifically, we find that speed of good news recognition is slower and the incremental speed of bad news recognition is faster in countries with both high quality judicial regimes and high relative usage of private bonds, and in countries with both high quality judicial regimes and more diffuse ownership structures. In contrast, absent a high quality judicial regime, these relations do not exist, suggesting that contract usage alone, without a means of enforcing accounting-based contracts, is insufficient to generate a demand for conservative accounting reports.