LEVELS OF CONSERVATISM: AN EMPIRICAL STUDY ON FAMILY FIRMS IN SINGAPORE

Abstract

This paper investigates the relationship between degrees of family control in firms and the levels of accounting conservatism. Separation of ownership and control gives rise to agency problems between managers and owners. Family firms despite being owner‐managed still face agency costs. Conservatism is still useful, as an efficient contracting mechanism, in reducing agency costs between the stakeholders of the firm. The research hypothesises that as the degree of family control weakens, the level of conservatism should rise. The paper utilises two measures of conservatism – the asymmetric timeliness measure and the accruals measure to obtain the overall level of conservatism in a firm. Examining 318 firms listed on the Singapore Stock Exchange, the study shows that there is a trend for the levels of conservatism among different type of family firms and finds evidence supporting that the alignment effect is dominating the entrenchment effect in determining levels of conservatism in family firms. The implications of this research for policy makers are to consider the benefits of conservatism before implementing their move towards neutral and fair value accounting. Practitioners can also utilise levels of conservatism as a potential tool for their overall business strategy. The paper proposes that future research should further investigate on the benefits of conservatism as well as corporate governance structures and develop appropriate models that can properly capture its effects.