An Empirical Research On The Influence Of Independent Directors' Supervision Efficiency On The Earning Conservatism

Earning conservatism is the asymmetrical verification requirements for gains and losses, which means the recognition of losses is more adequate and timely than that of gains. In firm, compared with managers, shareholders gets less information to grasp the company's specific business situation and financial situation, so do small investors compared with major shareholders. So shareholders and small investors judge their firms'business and financial situation by using the information of earnings disclosed in the financial reports. As an internal governance mechanism to solve agent problem and promote firm value, independent directors have received widespread concern from theorists and practitioners in the world. In corprorate governance, independent directors have two main functions:one is to supervise managers and major shareholders and balance the conduct of all participants, the other is to improve company performances by using their own resources to participate in making management decisions. If the supervision function of independent directors can work effectively, it will reduce the manipulation of accounting figures and inflation of accounting earnings by management and major shareholders, and the accounting earnings of the firm will be much more conservative.Based on this thesis, we use a sample of Chinese A share manufacturing listed firms for the period of 2005-2008, and empirically test the impact of supervision of independent directors on earnings conservatism. Based on the Basu's Model, we construct a new testing model and conduct multivariate linear regression and find that among the five factors of supervision of independent directors (1) the increase of the proportion and accounting competency of independent directors has obviously strengthened earning conservatism, (2) independent directors'working experiences have certain relationship with earning conservatism as the result shows that independent directors from academic institutions and other firms apparently strengthened earning conservatism, (3) independent directors'allowance received from the firm and the total number of independent directors they occupy have a inverse U shape relationship with earning conservatism, (4) the increase of the proportion of the largest shareholders of the firms decreased earning conservatism. Earning conservatism decreases when the firm's board director is also the firm's CEO.The principal innovation of this paper includes:(1)We take working experience factors into the measurement system of independent directors'supervision power and test their influences on earning conservatism;(2)We test the curvilinear relationship between independent directors' allowances and earning conservatism and the curvilinear relationship between the number of part-time independent directors and earning conservatism for the first time.(3)We add the the product of multiplication of environmental variables and supervison variables of independent directors, and find that when the largest shareholder's rate of share held increases, the firm's earning conservatism decreases; when the firm's board director is also CEO, the firm's earning conservatism decreases.