The market for Corporate Control and Accounting Conservatism

This study explores the impact of state anti-takeover laws on the governance role of conditional accounting conservatism. Passage of these laws introduced an exogenous shock to the takeover threats faced by firms and constitutes a natural experiment for investigating the relation between financial reporting conservatism and governance. Employing a difference-in-differences methodology and accounting conservatism measures that are congruent with this methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover laws consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resu