Financial Conservatism of Private Firms

Legal Origins and the Financial Conservatism of Private Firms

International Journal of Economics and Finance ◽

10.5539/ijef.v11n5p103 ◽

2019 ◽

Vol 11 (5) ◽

pp. 103

Author(s):

Hongzhong Fan ◽

Mirza Nouman Ali Talib ◽

Pan Chen

Keyword(s):

Financial Crises ◽

Common Law ◽

Civil Law ◽

Private Firms ◽

Law And Finance ◽

Minority Shareholders ◽

Legal Origins ◽

Tax Shields ◽

The Difference ◽

Financial Conservatism

Following the literature of corporate law and finance, our study emphasizes on differences of legal origins and their laws influencing the capital structures of the private firms following suboptimal conservative policies. The countries considered in each legal origin represents common law countries (UK, Australia, India, Pakistan and Thailand) and Roman backed civil law countries (Japan, South Korea, Germany) respectively. The time series considered for the study is 2000-2017. The findings provide that the conservative private firms are smaller in size with less investments but are positively related with profitability in both legal origins. However, the dividend payouts and non-debt tax shields have significant positive relation with conservative policies in civil law countries. It shows that the presence of minority shareholders’ protection law in civil law countries directs the firms to pay more dividends which may also help them in reducing agency costs. We further exhibit that, before financial crises of 2008, the conservative firms in both legal origins are less directed towards dividends, especially in common law countries. Nevertheless, private conservative firms of civil law countries are more inclined towards dividend payouts after financial crises. The study implicates that the difference of laws in legal origins affect the capital structures of the conservative private firms. It further provides that because of the less effective credit markets, private firms may also be forced to adopt conservative policies in civil law countries but may also have less agency problems due to high probability of having dividend payouts.

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Financial conservatism of private firms

Journal of Business Research ◽

10.1016/j.jbusres.2014.02.009 ◽

2014 ◽

Vol 67 (11) ◽

pp. 2419-2427 ◽

Cited By ~ 8

Author(s):

Marco Bigelli ◽

Juan Francisco Martín-Ugedo ◽

F. Javier Sánchez-Vidal

Keyword(s):

Private Firms ◽

Financial Conservatism

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Discretionary Accruals in Italian Private Firms and Non-Linear Bank Loan Granting

FINANCIAL REPORTING ◽

10.3280/fr2017-001004 ◽

2017 ◽

pp. 83-99

Author(s):

Elisabetta Mafrolla ◽

Viola Nobili

Keyword(s):

Financial Reporting ◽

Banking System ◽

Regulatory System ◽

Discretionary Accruals ◽

Bank Loans ◽

Bank Loan ◽

Banking Union ◽

Private Firms ◽

European Banking Union

This paper investigates whether and at what extent private firms reduce the quality of their accruals in order to signal a better portrait to the bank and obtain new or larger bank loans. We measure earnings discretionary accruals of a sample of Italian private firms, testing whether new and larger bank loans are associated with a higher (lower) quality of earnings in borrowers' financial reporting. We study bank loan levels and changes and how they impact discretionary accruals and found that, surprisingly, private firms' discretionary accruals are systematically positively affected by an increase in bank loans, although they are negatively affected by the credit worthiness rating assigned to the borrowers. We find that the monitoring role of the banking system with regard to the adoption of discretionary accruals is effective only when the loan is very large. This paper may have implications for policy-makers as it contributes to the understanding of the shortcomings of the banking regulatory system. This is an extremely relevant issue since the excessive amount of non-performing loans held by Italian banks recently threatened the stability of the European Banking Union as a whole.

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