Separation of corporate ownership and control and accounting conservatism: evidence from Korea

Abstract

This study analyzes how the separation of corporate ownership and control affects financial reporting conservatism using unique data on Korean chaebol-affiliated firms. The presence of severe agency problems generated by the wedge between ownership and control may increase the demand for conservatism, while the greater managerial motivation and latitude in making accounting choices borne by the entrenchment problems can adversely affect the degree of financial reporting conservatism. We find that the ownership-control wedge is negatively associated with various proxies for conservatism, consistent with the entrenchment argument. Additional analyses reveal that a wide divergence between ownership and control adversely affects the corporate governance of a firm. Further, we find that the negative effects of the ownership-control wedge on conservatism are particularly strong for firms with weak corporate governance. Overall, we provide evidence that controlling shareholders act as a mechanism to mitigate the role of corporate governance, thus reducing implementation of conservatism.