Contrast of perspectives: The role of corporate governance structures on conservative behavior of Philippine publicly listed firms

• Main Authors: Hwang, Charles Reginald K., Leveriza, H. Luigino H., Samson, Ralph Edward C., Sy, Sharmaine F.
• Format: text
• Language: English
• Published: Animo Repository 2013
• Subjects: Self-actualization (Psychology); Corporate Governance; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/11309
• Institution: De La Salle University

Recent debates and controversies have led to a paradigm shift towards the role of reliable financial reporting in corporate governance. Despite empirical research on the association of corporate governance and accounting conservatism conducted in other countries, these studies remain inconclusive due to conflicting results and the lack of solid theoretical foundations. To our knowledge, we are the first to explore the relationship between corporate governance and conservatism in the Philippine setting. We extend the implications of such research by presenting economic theories (traditional agency and stewardship theory) to rationalize the two competing hypothesis, the substitutive and complementary relationship, respectively. Through a panel data regression analysis of secondary firm-level data on Philippine publicly listed corporations from 2002 to 2011, we find that corporate governance and accounting conservatism are viewed as substitutes rather than complements. Weak corporate governance causes higher demand for conservatism. This further corroborates the traditional agency theory as an overriding principle that drives management decisions. Moreover, firms affiliated with corporate family groups are found to be generally less conservative because of the lower verification requirements placed on accounting information. With such findings, we assert that significant caution must be placed on the use of accounting conservatism due to its unsustainability as a substitute for established corporate governance mechanisms because of its negative impact on financial reporting.