Corporate Governance and Accounting Conservatism: Evidence from the Banking Industry

Manuscript Type Empirical Research Question/Issue In this paper, we empirically investigate whether US listed commercial banks with effective corporate governance structures engage in higher levels of conservative financial accounting and reporting. Research Findings/Insights Using both market- and accrual-based measures of conservatism and both composite and disaggregated governance indices, we document convincing evidence that well-governed banks engage in significantly higher levels of conditional conservatism in their financial reporting practices. For example, we find that banks with effective governance structures, particularly those with effective board and audit governance structures, recognize loan loss provisions that are larger relative to changes in nonperforming loans compared to their counterparts with ineffective governance structures. Theoretical/Academic Implications We contribute to the extant literature on the relationship between corporate governance and quality of accounting information by providing evidence that banks with effective governance structures practice higher levels of accounting conservatism. Practitioner/Policy Implications The findings of this study would be useful to US bank regulators/supervisors in improving the existing regulatory framework by focusing on accounting conservatism as a complement to corporate governance in mitigating the opaqueness and intense information asymmetry that plague banks.