Assessment of Earnings Conservatism in Government-Linked Companies

We examine the level of earnings conservatism in government-linked companies, where significant ownership and control lies in the hands of federal or state government. We assess conservative practice using the asymmetric timeliness of earnings model introduced by Basu (1997). The sample in this study includes 234 govemment-linked companies and 1122 widely held companies listed on Bursa Malaysia over the period 2005 to 2010. Our results show that, in contrast to widely held companies, government-linked companies are not conservative when preparing their financial statements. Further analysis that divides government-linked companies into companies under federal government control and those under state government control shows that the conservatism level between the two groups varies. Unlike federal-government-controlled companies, state-controlled companies recognised bad news in a more timely way than they recognised good news. Our findings are in line with the claims that managers in government-linked companies practice agressive financial reporting due to weak governance, a high incentive to maximize compensation and greater agency problems. Conservative reporting found in state-controlled companies suggests that managers in these companies might have a lower incentive to inflate earnings because their opportunity for better job prospects is limited to the state level. (C) 2012 Published by Elsevier Ltd.