Abstract

The primary objective of this study is to examine the association between firm ownership structure, measured by the divergence between the ultimate owners' voting and cash flow rights, the directors affiliated with controlling owners, and the collateralized stock by controlling owner, and the extent to which firms adopt conservative accounting. Secondly, we also examine whether a company employing more conservative accounting is likely to have a higher credit rating. We Apply Givoly and Hayn's (2000) accrual basis model and Basu's (1997) asymmetric timelines of earnings model, respectively, finding that the greater divergence between the ultimate owners' voting and cash flow rights, the higher ratio of directors affiliated with the controlling owners, and the greater ratio of collateralized stock by the controlling owner the less conservative accounting employed, as predicted. Furthermore, we also find that credit ratings are positively associated with the extent to which firms use conservative accounting. Our findings provide strong support for the notion that firm ownership structure is a critical determinant of firm earnings quality in term of incorporating bad news on a timely basis, and accounting conservatism plays a major role in enhancing firm credit ratings.