The effect of managerial ownership on the demand for conservatism.

Abstract: In this paper the relation between managerial ownership and conservatism is examined. Managerial ownership decreases agency problems caused by the separation of ownership and control. Managerial ownership increases the time horizon of managers and decreases expropriating behaviour. Conservatism is hypothesized to have the same effect on managers due to the asymmetric timeliness of earnings. This suggest that in firms with lower managerial ownership a demand for conservatism arises to substitute for the alignment function of managerial ownership. This paper test this with two approaches. The first replicates the methodology of previous literature. The findings provide no evidence for substitution between managerial ownership and conservatism. Because the estimators of the first methodology are biased a second method is used applying fixed effects. Consistent with the first approach no supporting evidence is found. However, it finds that firms in the sample have conservative accounting. The main implication of this paper is that rewarding managers with shares is not decreasing their conservative behaviour.