Brazilian capital market governance segments: differences in the conditional conservatism in reported earnings
Antonio Carlos Dias Coelho
Departamento de Contabilidade, Faculdade de Economia, Administração, Atuária e Contabilidade Universidade Federal do Ceará, 60020-180- Fortaleza/CE, Brasil ([email protected]) Iran Siqueira Lima
Departamento de Contabilidade e Atuária, Faculdade de Economia e Administração Universidade de São Paulo, 05508-900- São Paulo/SP, Brasil
Abstract
Coelho, Antonio Carlos Dias; Lima, Iran Siqueira (2008): Brazilian capital market governance segments: differences in the conditional conservatism in reported earnings. Adv sci. appl. Account. 1(1), 1017-1031.
The research examines whether, by virtue of the assumed commitments relative to information disclosure, the public companies differentiation, carried out by the São Paulo Stock Exchange (Bovespa) according to distinct levels of corporate governance, pro- vokes distinction in the conditional conservatism degree (identified by the asymmetric anticipation of economic losses) of earnings reported in the respective accounting statements. The premise adopted by Bovespa is that the acceptance of differentiated informa- tion disclosure practices and ownership protection corporate rules would lead to accounting information of higher quality, with consequent: (i) risk reduction; and (ii) return increment for investors. The statements quality measurement is carried out employing measurement models of the conditional conservatism present in the accounting reports, based on the reversion of transitory compo- nents in profits and in the association of accruals with cash flows, assessed by regression using panel data. The research results confirm the raised hypothesis that there is not any differentiation in the conditional conservatism patterns of reported earnings, not evidencing timely asymmetric anticipation of economic losses in the balance sheets of public companies listed at Bovespa in any of the groups.
Indexation terms: conditional conservatism – corporate governance – earnings quality – accounting informational efficiency.
Received: 2007/10/25 Reviewed by peers: 2008/06/31
Reformulated: 2008/10/22 Recommended*: 2008/10/22, by Piotr Trzesniak Published: 2008/12/30
1. Introduction
1.1 The corporate governance levels at the São Paulo Stock Exchange
At the end of 2000, the São Paulo Stock Exchange (Bovespa) created specific listings (New market and Corporate governance Level 1 and Level 2) for firms that voluntarily adhered to commitments of respect to minority shareholders and of transparency in company information disclosure. The explanatory leaflets on the adherence of companies to these differ- entiated levels of governance and informational transparency (São Paulo Stock Exchange, 2000) clarify that the initiative is based on analog previous international experiences, highlighting the German Neuer Markt, established to receive high- technology companies in that country. However, despite the generic mantle of corporate governance best practices, the Brazilian experience displays an eminently institutional inspiration, as the commitments explicitly refer to measures di- rected towards reducing the probability of private benefits of control by majority shareholders or by company managers.
We point out:
These commitments refer to the provision of information that facilitate follow-up and fiscalization of acts by the Company managers and controllers, and to the adoption of corporate rules that better balance the rights of all shareholders, independently of their condition of controller or investor.
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Then, the promoters of the differentiated listings initiative expect that:
The quality improvement of the information provided by the Company and the corporate rights expansion re- duce uncertainties in the evaluation and investment process, and therefore reduce risk. The risk reduction also generates a better share pricing, which on its turn incentives new capital openings and new issuances, streng- thening the stock market as a company financing alternative.
The company option of adhering to the listings obligates it, in principle, to a higher commitment with its stake- holders, independently of the Brazilian institutional structure and legislation. It should be pointed out that the main com- mitment sought by Bovespa concerns the minority shareholders rights, because they are Bovespa’s target clientele as well as because the structure of absolute majority shareholders is predominant in Brazil.
The companies’ adherence to the governance differentiated levels implies accepting additional commitments to the existing legislation, substantiated in distinct patterns of:
a) corporate rules (only for the New Market and Level 2);
b) information disclosure, including making available financial statements prepared according to international account- ing principles; and
c) rules of public distribution and dispersion..
From the accounting figures disclosure standpoint, the Bovespa norms, when opting for the demand for statements assessed pursuant to the American or international accounting recommendations and principles, implicitly understand that such rules would end-up in reports with higher informational quality. Moreover, it is required the publication of the cash flow statement (not contemplated by the Brazilian legislation), recognizing the technical and behavioral difficulties of es- timating the aggregates derived from cash flow based on traditional accounting statements.
Bovespa, when proposing a self-regulation mechanism (the Market Arbitration Chamber), implicitly admits that there are difficulties in changing the legal environment, in the sense of imposing costs on the possible opportunism of managers, both in respect to avoiding private benefits of control and in relation to stimulating the provision of verifiable and quality accounting information.
1.2. Conditional conservatism and the research issue
On the other hand, Ball (2001) argues that the existence of quality in financial statements, as the contractual moni- toring support function, is evidenced by the existence of the conservatism attribute (anticipation of loss registrations and deferment of gain appropriations) in the assessment of earnings, and by its verifiability by the company contracting parties through external audit opinions. According to Watts (2003), such existence, on its turn, will be function of the demand by this attribute by accounting information users, which will be dictated by incentives faced by company managers; this would lead them to reduce the informational asymmetry between the latter and those users. Thus, the costs for publishing informationally efficient reports are associated to the economic sanctions that may be imposed on company managers; the companies will only incur costs for producing verifiable and quality financial statements if they be lower than: (i) the costs associated to litigations for agreement breach; and (ii) the capital cost reduction premiums derived from the lower informa- tional asymmetry.
According to Ball and Shivakumar (2005), the conservatism attribute lacks explicit characteristics to contribute to the informational asymmetry reduction, that is, its conditionality to the existence of current bad performance signs, for the registration of likely economic losses to be timely anticipated.
As from 2003 (see appendix A), the researchers stated to examine whether there would be evidences that the ad- herence of companies to the governance differentiated groups would produce differences in terms of: (i) return on the shares; (ii) negotiations liquidity; (iii) negotiated volume increase; (iv) lower risk exposure; (v) earnings management; and (vi) informational evidencing in the company communication. Then, it should also be investigated whether adherence im- plies higher conservatism in the reported earnings in relation to the group of companies that remain governed by the usual norms. A confirmation would mean that the mere adherence to the listings being commented would lead managers to offer informationally more efficient accounting reports.
The performance of a survey in this sense in Brazil is mainly based on Black (2001), according to whom the exis- tence of an environment of protection to investors and of agency costs reduction can hardly be transplanted among coun- tries, due to cultural patterns and juridical structures associated to the origin of the law practiced in the country (common law or code law). Appendix B lists some foreign investigations linked to accounting conservatism.
Thus, the study objectives can be specified as follows:
a) to assess conservatism as an informational quality attribute, contained in the earnings reported by public companies listed at Bovespa;
b) to examine the differences in the conservatism degrees adopted by companies, in function of their adherence to the differentiated corporate governance levels;
c) to present a conceptual version of conservatism conditioned to the existence of signs of companies’ bad performance.
The informational efficiency measurement of financial statements will be given by the conditional conservatism existence in them, comparing this attribute in the reports of companies that adhered to the listing differentiated levels with the statements of the companies listed only in the traditional exchange of Bovespa. For this, the financial statements of all public companies listed at that stock exchange in the period from 1993 to 2005 were considered, in a total of 331 companies.
Based on these information, there were processed the reversion of transitory components in profits model (Basu, 1997) and the accrual-based model (Ball and Shivakumar, 2005).
Our research question, then, is split up in the following two parts:
a) do public companies practice the conditional conservatism in the assessment of the earnings in the reported financial statements?
b) are there significant differences in the practice of such conservatism between companies that adhered to the Bovespa corporate governance levels and those that remained listed pursuant to the legislation in force?
The hypothesis adopted in the survey assumes that there will be no differentiation in the conditional conservatism patterns of profits reported by the companies listed at Bovespa, independently of their adherence to the listing at differenti- ated corporate governance levels.
2. Theoretical referential
The accounting texts based on normative theories, as well as most accounting principle codes enacted worldwide, treat conservatism under the optics of launching values with parsimony, pessimistically, without establishing a purpose or a logic other than costume or tradition as justification for this procedure. Then, conservatism is traditionally translated by the historical and universal trend among accountants of following the informal rule of not anticipating profit registrations, but to consign in advance all losses (Bliss, 1924 apud Basu, 1997). The effect of the practice derived from such maxim is that as- sets will tend to be underappraised and liabilities overappraised, by any measurement accounting principle that be applied.
Examples of this focus can be found in Brazilian texts (Iudícibus, 2004) or in American official concepts (Finan- cial Accounting Standards Board, 1980, FACS no. 2), which expresses: [...] if two estimates of values receivable or pay- able are equally likely, the conservatism imposes the use of the less optimistic estimate (Basu, 1997). Its application occurs in practice: (i) by the historic cost utilization as value base; (ii) by the non-recognition of intangible assets; (iii) by not adopting the registration of growth options dictated by favorable investment conditions still not used; or also (iv) by the existence of quasi-income and of possible synergies associated to assets.
It is clear that the practice of conservatism in earnings assessments also leads to disclosure of smaller shareholders’
equity values, due to the accumulation of results that already anticipated possible future losses.
Basu (1997), however, under the hypothesis of differentiated motivations for firms and managers, defines conser- vatism as the accountants trend to require a higher verification to recognize positive perspectives (good news) than to regis- ter provable losses (bad news). Consequently, it is expected that the reported profits reflect economic losses more timely than economic gains, due to the asymmetry of treatment given to the verifiability required for the anticipated registration of the two types of phenomena.
Ball and Shivakumar (2005) adopt this same definition, separating the concepts of conditional conservatism, refer- ring to the phenomenon that emphasizes the association between the registration anticipation and the possibility of eco- nomic losses, from the process that unconditionally discloses low shareholders’ equity values, independently of signs of probable economic losses.
Discussing the economic motivation for the conditional conservatism phenomenon, Basu (1997) registers that it has already been detected in the 18th century, with references to the cost or market, the smallest rule, and discards its origin to be associated to income taxation, to investor litigations or accounting regulations, institutions posterior to that date. The author agrees with the contractual motivation as origin for the asymmetric recognition of economic losses, highlighting that taxes, litigation costs, political process and regulatory forces have influenced the conservatism level in accounting.
Watts (2003) extends the conservatism discussion, understood as the asymmetric need of higher verifiability for the economic gains registration anticipation, arguing the difficulty to register non-realized profits over which there are not any legal rights yet. The dependence of its occurrence will be completely exogenous to the company and dependent on custom- ers, competition and future economic rules. This author further argues that asymmetric verifiability is extremely relevant, because the use of accounting figures in judicially enforceable contracts will depend upon it, while the gains anticipation would favor only the managers or the majority shareholders. In this case, even the minority shareholders would opt for the conditional conservatism practice, inasmuch as such attribute would imply preserving their rights at the current moment.
The likely gains registration in the accounting figures would only make sense if it contributed for contractual ef- fects; however, its use would not be efficient, as it would not be possible to demonstrate in court the efficacy of gains still not received; it is not possible to guaranty income increments derived from product innovations, market conquests or tech- nologies introduction; however, it would credible the provisioning for probable losses derived from the entrance of com- petitors, it being desirable for contracting parties that this fact be anticipated by observable estimation methods.
Watts (2003) further explains the conditional conservatism under the optics of an efficient contractual instrument, emphasizing that such procedure reduces the probability that the net assets or accumulated profits value be overestimated at any moment in time, preventing, ceteris paribus, the probability of occurrence of earnings distributions that violate contracts or impact the company value. In the informational perspective, the author points out that conservative values of the company’s net assets orderly liquidation are relevant for share investors due to the option of abandoning the investment, either leaving the shareholding position or through the business orderly exit by means of specific asset sales or of company divisions.
In a nutshell, the accounting measurement attributes, related to the commented reason of accounting use as an ef- fective contracting mechanism, are:
a) timely anticipation in the economic impacts recognition in net asset values;
b) verifiability of these recognitions by independent instances;
c) asymmetry in the verifiability of gains and losses, with gains requiring a higher observability degree for their recognition.
The same author still displays the litigation costs around reported profits not realized in the future as an influencing factor of the management decision to adopt the losses asymmetric anticipation.
Ball (2001) connects the issue of reported profits quality, as public information made available to the economic agents, to the economic efficiency with which they promote the information asymmetry reduction between the companies managers and contracting parties (shareholders, investors, lenders, suppliers, customers and employees). He understands that the accounting statements quality is a function of the economy institutional perspective, as the information asymmetry reduction is necessary (although not sufficient) to promote the development of economically efficient public corporations and capitals markets. The main requirements for reported profits to be informationally efficient and with quality attributes refer to the motivation and economic incentives created for managers and auditors to manage the disclosed earnings in their benefit or in third parties’ benefit.
Continuing, the author defends that establishing new accounting standards or regulation alterations will not be ef- fective if they are not accompanied by effective incentives and fulfillment guaranties for managers, exemplifying with the institutionalization of clear litigation and legislation rights that protect the contracting parties’ rights. The simple risk of incurring effective costs for not reporting profits with transparency would motivate managers to do so. This assertion de- rives from the verification that accounting complements the institutional and economic systems of a country, and its im- plementation is a product of transformations in the institutional and legal system in force, conditions exogenous to the company and to the accounting bureaucratic apparatus.
The demand for public, independent and verifiable information, utilizable in litigations by parties assumedly im- paired, derives from the company characteristic of being a contractual intermediary between owners and consumers. This contractual structure determines the demand for public and reliable information: efficient contracting with the company by holders of residual rights interested in limiting their exposure to assets expropriation in assessing the other agents compen- sations. The company will agree to incur costs to provide such information, receiving in exchange better terms in the prices of its raw materials and in the evaluation of its products. Nonetheless, if this exchange is not advantageous for the com- pany, it will opt for supplying information privately just to a group of agents close to its management.
The country’s institutional social group will give the conditions for one or the other thing to occur. Structures fa- voring classes, subsidies and incentives, low enforcement, ownership concentration, a slow legal system and dependent only on the political sector favor the existence of private contracts.
Given this so heterogeneous demand, Ball (2001) proposed two criteria that would guaranty the usefulness and economic efficiency of transparent accounting information publication:
a) profit assessment with independence in relation to the manager;
b) timely incorporation of economic losses to the profit.
The perception of correctly assessed profits reduces risks for contracting parties, lenders and investors, and will on- ly occur if there be evidence that the results will be assessed independently in relation to the company groups of interest.
The incorporation of economic results that depend on the business knowledge by the manager puts its credibility at stake, unless for verification by independent auditors. The enforcement for such behavior of informational asymmetry reduction depends on efficient private (efficiently designed compensation plans) and public (legal system effectiveness to assure litigation rights) incentive systems.
A second criterion for the published accounting information efficiency concerning conservatism, in a certain way contrasts with the already discussed one, inasmuch as it, based on the managers experience, seeks to introduce asymmetric assessments of future impacts in the company’s cash flow in the reported figures. Ball (2001) argues that this procedure is aligned with the company contractual view and contributes for the efficiency of the contracts associated to; the contractual efficiency increment of such procedure derives from the informational asymmetry reduction between the managers and the other company contracting parties, as the recognition of the economic losses expectation will be intrinsically associated to judg- ments and assessments of the very manager, as they are observable only by him, given his proximity to the respective processes.
The interest of the suppliers of own capital in the economic losses asymmetric recognition has two roots, one in- formational and the other from corporate governance. The imposition of accounting procedures of recognition of economic losses expectations will be demanded as an efficient internal mechanism from the latter’s viewpoint, as it implies to appro- priate at the present moment the capitalized value of projects with negative net present value (NPV).
The expected benefits for the company and for the shareholders are associated to the creation of value for the latter, in function of the own capital cost reduction, as the shortening of the informational asymmetry between the management and the shareholders will reduce the company risk visualization.
The agency costs will be governed more efficiently in any of the discussed management styles with the use of the conservatism concept in the accounting profit assessment, as this practice approximates the concepts of accounting profit and economic profit.
A research line started by Bushman et al (2004) also suggests that the accounting practice reacts differently to di- verse contractual environments, with those environments being defined in terms of countries according to their legal sys- tem origin: code law or common law.
3. Methodology
The research objectives are aligned with those of the studies reported above, to wit, assessing the efficacy of the segmentation induced by Bovespa as to the quality of the earnings reported by public companies listed at this stock ex- change, in terms of the conditional conservatism attribute.
Understanding, however, that the accounting practices choice is inserted in the country’s institutional environment, the research question formulation arises, questioning whether just the creation of specific and extralegal schemes to estab- lish accounting and informational standards will be sufficient to generate the accounting figures disclosure with informa- tional efficiency.
The hypothesis to be investigated is based on the idea that it is the demand for data that induces the supply of informa- tion (reducing asymmetry between the company publics) by creating economic incentives for such purpose. In view of the com- pany listings creations, segmented by levels of best corporate governance practices, the following null hypothesis is tested:
H0: The profits reported by the public companies listed at Bovespa do not contain the conditional conservatism attribute, given by the timely asymmetric anticipation of economic losses, independently of their corporate governance level.
•
Tests will be performed through two models. First we will work with the transitory components in the profits (Ba- su, 1997), named model 1 and given by:
(1) Λt Λ Λt Λ Λt Λ Λt Λ Λt t
t t
t
t α α δ α δ α δ δ α δ α δ δ ε
δ α
α + + ∆ + ∆ + + + ∆ + ∆ +
=
∆ ∆ < − ∆ < − ∆ < − ∆ < −
−
−
−
− 0 2 1 3 0 1 4 notGC 5 notGC 0 6 notGC 1 7 notGC 0 1
1
0 1 1 1 1
wherein ∆Λt represents the profit variation in year t, compared to the previous year; the δ’s are binary variables, worth 1 when the conditions expressed in the subscript is true, and 0 when it is false; thus, δnotGC=1 for companies that did not
adhere to corporate governance, and 0 1
1< =
∆Λt−
δ in case the profit variation displayed by the company in the year (t-1) is negative. α1, α2,....α7 are the coefficients and εt is the model error term.
Here, it is expected that the coefficients associated to negative variations of the precedent profits have negative signs, indicating reversion of this signaling in the contemporary profit, as the negative component will have been given by the timely anticipation of economic losses. On the contrary, in profits positive variations sign reversions are not expected, as economic gains are not anticipated. Then, the coefficients of these variables must have positive signs.
Chart 1 describes the expected behavior and the interpretation of the coefficients relative to the independent vari- ables of this model. It should be noticed that there are parameters referring to the differentiation between the profits varia- tions signs and between the different groups of companies.
Chart 1: model 1 parameters description, transitory components in the profits.
Parameter Association between variables Independent variable state Expected result α2 Persistency in the profits
temporal series
Positive variations in the previous profit in companies with corporate governance.
Positive association, indicating persistence α3 Differentiation derived from
the profit variation type
Negative variations in the previous profit in
companies with corporate governance. Coefficient < 0 α2+α3 Reversion of transitory com-
ponents in profits
Complete effect in negative variations in companies with corporate governance.
Negative association, indicating reversion α6 Differentiation due to the
company listing condition
Positive variations in the previous profit in
companies listed at Bovespa. Coefficient < 0 α2+α6 Persistency in the profits
temporal series
Complete effect for profit positive varia-
tions in companies listed at Bovespa. Coefficient < α2 α7 Differentiation due to the
company listing condition
Negative variations in the previous profit in
companies listed at Bovespa. Coefficient > 0 α2+α3+α6+α7 Reversion of transitory com-
ponents in profits
Complete effect for profit negative varia-
tions in companies listed at Bovespa. Coefficient > (α2+α3) The model will be applied to the concepts of net income, operational income and comprehensive income, the latter being calculated according to equation 2:
(2) Λab,t =πt −πt−1+Pt −It
wherein Λab,t is the comprehensive income, π is the shareholders’ equity, P are the declared dividends and I is the paid-in capital, all of them referred to year t.
The second model to be employed, named model 2, will be the accrual-based model At with cash flows Φt, both re- ferred to the same year t (Ball and Shivakumar, 2005), given by:
(3) At =β0+β1δΦt<0+β2Φt +β3ΦtδΦt<0+β4δnotGC +β5δnotGCδΦt<0+β6ΦtδnotGC+β7ΦtδnotGCδΦt<0+νt
The δ’s are binary variables, with the previously explained behavior; there is the new δΦt<0 =1 in case the opera- tional cash flow Φt referring to year t be negative. β1, β2,...β7 are the coefficients and νt is the model error term.
This model seeks to show the conditional conservatism existence in case there be a positive correlation between cash flows with negative signs and the corresponding accounting appropriations; this would indicate that, in the presence of negative cash flows, managers anticipate likely losses in the future, suggested by the contemporary behavior. On the contrary, with current positive cash flows likely gains in the future are not anticipated, which would imply negative coeffi- cients between accruals and cash flows.
Chart 2 summarizes the expected coefficient behaviors for model 2. The negative association captures the effects of accruals carried out with the purpose of offsetting non-realized cash flows, and the positive association implies that a anticipation of future economic results was made; it is considered that only the complementation of negative cash flows has an efficient informational content. Also here, parameters that indicate increments derived from changes in the signs nature or in the companies state are specified, according to their listing group.
The cash flow Φt and accruals At variables were calculated according to equations 4 and 5, applying the model for the accruals concept considering only adjustments by the competence regime in current capital accounts and taking into account
adjustments in the long-term entries (provisions and differed assets), with the generic designation of outstanding assets.
The described calculation is necessary, inasmuch as the cash flow statement publication is not legally required in Brazil.
(4) Φt =Λabr.t −Rnop.t−Tt+(Dt −∆Cgirop.t)=Λabr.t −Rnop.t−Tt−At (5) At =∆Cgirop.t −Dt =Λabr.t −Rnop.t −Tt −Φt
In these equations, Λabr,t corresponds to profit before the financial result and direct taxes; Dt is the depreciation;
Rnop,t is the non-operational result; and Tt are the direct taxes, all of them referring to year t. ∆Cgirop,t is the operational work- ing capital variation between t and (t-1).
Chart 2: model 2 parameters description, accounting appropriations with cash flows.
Parameter Association between variables Independent variable state Expected result β2 Flow offsetting through accruals Positive cash flows in companies
with governance Negative association β3 Increment due to the cash flow
negative condition
Negative cash flows in companies
with governance Coefficient > 0 β2+β3 Losses anticipation through ac-
cruals
Effect for negative cash flows in
companies with governance Positive association β6 Increment due to the company
listing condition
Positive cash flows in companies
listed at Bovespa Coefficient > 0 β2+β6 Flow offsetting through accruals Effect for positive flows in compa-
nies listed at Bovespa Coefficient > β2 β7 Increment due to the company
listing condition
Negative cash flows in companies
listed at Bovespa Coefficient < 0 β2+β3+β6+β7 Losses anticipation through ac-
cruals
Effect for negative flows in compa-
nies listed at Bovespa Coefficient < β2+β3 The sample considered for the tests utilized the entire target population, that is, that of public companies listed in Bovespa with information in the Economatica1 database, which were scaled by the previous period total assets. The final samples had the composition expressed in table 1, totaling 331 companies and encompassing the period from 1993 to 2005.
The availability of verifiable accounting data in the consulted base gives a first measurement of the existence of a non- contemplated demand for public information, inasmuch as just about 40% of the companies have complete data series for the 10 years surveyed; for this reason, the models were processed for the total sample, through data in an unbalanced panel.
Considering that the companies adherence to the differentiated listing levels began in 2001 (on June 26th, 2001 there were 15 companies in level 1, and in June 2002, just 7 more; still in 2001, just the company Sabesp appeared listed in the new market), the models with data only from 2001 up were processed too; the results were similar to those reported, but with less explanatory power. The results are similar too, and there is also a great reduction of the explanatory power, when the model calculations are made just for one of the segments (either new market, or level 1, or level 2). On the other hand, the option of considering the governance segments jointly is supported by the fact that the specific accounting transparency and disclosure requirements are identical for the three levels.
Table 1: quantity of cases in the samples.
Target population Final sample Periods 1993/2005 1993/2005 1996/2005 1995/2005 Segments Total With exclusion2 Model 1 Model 2
Traditional 258 233 106 64
Corporate governance 73 67 37 19
Total 331 300 143 83
1 Address: http://www.economatica.com/, active on September 06th, 2008.
2 For the model 2 estimates, the finance, insurance and funds sectors were excluded.
The association coefficients of the two models were estimated using panel data analysis. It was used the method that combines all data in crossing and in time series to estimate the models using ordinary least squares. This method is considered suitable when different companies compose the sample (Gujarati, 2006). Moreover, the influence of non- observable variables was also tested, either by fixed effects or by random effects, using the most suitable statistic relation for the final analysis, according to the appropriate results of the Breusch-Pagan, Chow and Hausman tests (Silva; Cruz Jr., 2004), assessed through the software Stata, used for all tests herein reported.
The survey hypothetical-deductive character is evidenced, as the presented hypotheses will be statistically tested in regressions encompassing global data, in order to deduct about the individualized behavior of the managers of the compa- nies considered in the sample.
4. Result analysis
Table 2 presents the data method selection in a more appropriate panel, according to the specific test results com- mented above. The tests demonstrated that, for all models, there are effects of non-observable variables, using methods that reduce the endogeny issues present in the processed models.
Table 2: econometric adjustment measurements
Transitory components in the profit Adjusted R2 Applied method Net profit 8.26 random effects Operational profit 23.79 fixed effects Comprehensive profit 10.54 fixed effects Association between accruals and cash flows Adjusted R2 Applied method
Working capital variations 12.26 random effects Outstanding assets variations 14.09 fixed effects
The regression determination coefficients behave according to an identical study held in England (Ball and Shivaku- mar, 2005); from the data adherence standpoint, the determination coefficients are statistically different from zero; the model of transitory components in the profits displays higher levels than those found in the mentioned international study, while the asso- ciation regression between accruals and cash flows present quite a lower explanatory power than those seen in the same work.
As to the consistency and regression efficiency assumptions, the tests guarantee the absence of serial self- correlation, and moreover the processing was carried out with White´s robust correction, assuring control of the heterosce- dasticity problems; the residues normalcy can be assumed, as, due to the sample size, it is guarantied by the central limit theorem that its distribution will tend to normalcy.
Tables 3 and 4 present the processed regression coefficients and the probability that they be statistically equal to zero (p-value in percentage) for the concepts of profit and accruals considered; in the analysis carried out afterwards, the 5% significance level is adopted for the hypothesis acceptance.
Table 3: model 1 (transitory components in the profits).
Table 4: model 2 (association between accruals and cash flows).
Net income
Operational income
Comprehensive income
Working capital variations
Outstanding as- sets variations Coeffi-
cient
Value p Value p Value p
Coeffi- cient
Value p Value p
α0 0.00 67.27 0.01 5.27 -0.00 86.14 β0 0.01 51.91 0.02 15.12
α 1 -0.02 6.93 -0.02 5.33 -0.02 33.98 β1 0.03 26.16 0.03 16.24
α 2 0.05 53.60 0.04 66.49 -0.18 0.08 β2 -0.21 6.68 -0.36 0.18
α 3 -1.07 0.00 -0.92 0.02 -0.47 1.05 β3 -0.37 19.51 -0.22 36.21
α 4 -0.02 22.94 -0.03 0.08 -0.05 0.78 β4 -0.08 0.00 -0.11 0.00
α 5 0.04 12.99 0.00 94.16 0.08 0.90 β5 0.09 0.17 0.13 0.00
α 6 -0.03 86.62 0.18 17.63 0.14 20.26 β6 0.21 6.07 0.36 0.18
α 7 0.58 11.33 -0.38 37.36 0.05 78.60 β7 0.36 21.42 0.22 37.01
The inferences relative to the test of the hypothesis raised in the survey will be made based on the coefficients ex- pected behaviors, in the form defined in charts 1 and 2; as to the conclusions concerning the differences between negative and positive values and between the two blocks of companies, the parameters referring to the interaction variables will be assessed in such aspects. As to the verification relative to the asymmetric losses anticipation and to the conditional conser- vatism, the parameters addition effects will be analyzed for one of the groups under analysis. Such data are exposed in tables 5 and 6.
Table 5: analysis of the timely asymmetric anticipation existence.
Net income Operational income Comprehensive income Parameters
of interest Statistic Analysis Statistic Analysis Statistic Analysis α 2 0.05 Not significant 0.04 Not significant -0.18 Reversion not expected α 3 -1.07 Expected effect -0.92 Expected effect -0.47 Expected effect α 2+ α 3 -1.02 Expected effect -0.88 Expected effect -0.65 Expected effect α 6 -0.03 Not significant 0.18 Not significant 0.14 Not significant α 2+ α 6 0.02 Expected effect 0.22 Expected effect -0.04 Expected effect
α 7 0.58 Not significant -0.38 Not significant 0.05 Not significant α 2+ α 3+ α 6+ α 7 -0.47 Expected effect -1.08 Higher reversion
in listed -0.46 Expected effect
Table 5 analyzes the relevant effects of the coefficients as explainers of the existence of losses asymmetric antici- pation, which characterize the conditional conservatism attribute. The verifications of such analysis can be summarized in the following points:
a) the companies that did not adhere to corporate governance levels practice the economic losses asymmetric anticipa- tion (α 2+α 3+α 6+α7<0), highlighting the operational income concept; the meaning is that the economic losses regis- tration is evidenced in the income operational accounts, giving to understand that such effects are partially offset in the non-operational entries and in the shareholders’ equity direct appropriations;
b) the same effect is perceived in companies participating in the differentiated governance listing program (α 2+ α 3<0) with less emphasis in the comprehensive income concept; probably the persistency of profit components in terms of shareholders’ equity variation is due to the assets reappraisal concept directly accounted in that equity, a practice dis- seminated in the Brazilian reality;
c) no behavior difference is detected between the two groups of companies in the three concepts of income, both as to the persistency of the profit components in case of their current positive variations (coefficient α 6), and as to the ex- pected reversion of transitory components upon occurrence of profit negative variations (coefficient α 7);
d) the transitory components reversion in the times in which the previous profit variation is positive (coefficient α 2) only happens in the concept of comprehensive income, following the behavior already dealt with in letter b above;
e) finally, economic losses asymmetric anticipation is detected, as the coefficient α 3, referring to the variable of interac- tion about the sign of the profit variations in companies of special listing, has a negative sign and is significant in the three concepts of income.
The analysis of the economic losses asymmetric anticipation degree estimated by the model of transitory compo- nents in the profits leads to the survey’s null hypothesis, as it is verified the existence of economic losses asymmetric an- ticipation in a linear way in the two groups of companies surveyed.
However, this model does not consider the fact that the profit contents encompasses movements of cash flow and of strict accruals, which is tantamount to say that the results may be derived from increases and decreases derived only from alterations in the activity level of the companies under examination. Thus, it is sought to confirm the first model in- ferences by the strict analysis of the correlation between the accruals and the contemporary cash flows, by virtue of the certainty that the registration of possible economic losses will be made through the concept of accruals; the negative corre- lations will occur by the account of the accounting regime, while the positive correlations will be due to anticipated economic registrations.
Table 6: analysis of the conditional conservatism existence.
Parameters of interest
Working capital variations
Outstanding
assets variations Analysis Comments
β2 -0.21 -0.36 Without statistic
significance
Positive cash flows are only offset
β3 -0.37 -0.22 Without statistic
significance
There are not any anticipation differences for positive and negative cash flows
β2+β3 -0.58 -0.58 - Negative cash flows are
only offset too
β6 0.21 0.36 Without statistic
significance
Companies that did not adhere offset positive flows less
β2+β6 0.00 0.00 - Companies that did not adhere do not
offset positive flows
β7 0.36 0.22 Without statistic
significance
Companies that did not adhere anticipate economic losses more β2+β3+β6+β7 -0.01 0.00 - Companies that did not adhere
do not anticipate losses either
Table 6 summarizes the findings of the analysis of this second model, and the following inferences can be made, based on the estimated parameters behavior:
a) the basic correlation between accounting appropriations and contemporary cash flows (coefficient β2) do not contain statistically significant information;
b) the interaction variable coefficients (β3), differentiators of the correlation between the observations with positive or negative cash flow, did not present statistic significance, indicating that the accruals react similarly to positive or negative cash flow occurrences; in the presence of the latter; therefore, economic losses asymmetric anticipations are not verified;
c) the other interaction variables (coefficients β6 and β7), which capture differences in the two groups of companies be- havior – corporate governance and traditional levels – did not present disparities neither between the segments, nor for the correlation between accruals and cash flow, due to a nonexistent statistic significance for the estimated coefficients.
Although without statistic significance, the observed relations should be established and commented, given their in- formational relevance:
a) the companies that did not adhere to corporate governance levels seem to anticipate the economic losses registration more (coefficient β7>0), showing however the same behavior in the economic gains registration (coefficient β6>0);
b) from the informational standpoint, it can be commented that such companies demonstrate a correction either of er- ratic character or determined by phenomena not observable in the model, inasmuch as the coefficients associated to the relation between the accruals and the cash flows are null (β2+β6;β2+β3+β6+β7);
c) it should be pointed out that the divergence between the two groups of companies occurs as to the accruals function;
the companies participating in the corporate governance differentiated levels seem to use the accruals only for the functions associated to the accounting competence regime (coefficients β2 and β2+β3).
According to this latter model, the proposed hypothesis cannot be rejected, as the regression results do not author- ize the inference of economic losses asymmetric anticipation or the existence of differences in the use of this accounting practice between the corporate governance and traditional governance segments at the companies listed at Bovespa.
5. Conclusions
The survey premise resides on the concept that the financial statements informational efficiency, in their function of contractual monitoring, is given by the quality of reported earnings, if they contain observable and verifiable data and conditional conservatism attributes, measured by the timely economic losses asymmetric anticipation. In this sense, it ques- tions the effectiveness of Bovespa’s initiative of creating listing segments with companies that voluntarily adhere to certain corporate governance parameters, with the purpose of reducing the risk associated to such companies by the implicit pro- tection to minority shareholders.
The rules to be followed by such companies also refer to the assessment and disclosure of their financial situation in financial statements with transparency upon economic and equity events disclosure; implicitly, such measure aims at reducing the informational asymmetry between managers and the external publics of the companies, particularly the minor- ity shareholders.
In this investigation, it is tested whether there are differences in the informational quality of accounting statements of (i) the companies that adhered to the governance rules in relation to the statements and (ii) those that did not adhere to such rules. The quality measurement will be the timely asymmetric anticipation of economic losses according to the mod- els of Basu (1997) and Ball and Shivakumar (2005). The survey findings, however, are not conclusive, and it cannot be stated that the firms’ adherence to the differentiated levels of good corporate governance practices at Bovespa led such companies to report earnings containing the conditional conservatism attribute, a measurement used to assess the accounting statements informational quality, in the optics that accounting be used for contractual monitoring.
Considering the proposition that the adoption of measures reducing the informational asymmetry between the companies managers and financers will depend on economic incentives that overcome the costs associated to preparing informationally efficient accounting reports, it is inferred that the initiative of Bovespa did not produce the referred incen- tives. The reasons subjacent to this assertion derived from specific characteristics of the Brazilian institutional environment, in which the capital cost is not linked to public information quality, and in which the probability that managers incur eco- nomic costs due to information elision is negligible.
As there is not, on the other hand, an investor protection environment or mechanisms capable of forcing the effi- cient and timely legislation compliance and the accounting standardization, there are not any incentives for the stake- holders (including the minority shareholders) develop a demand for quality public accounting information; their decision making is based, then, on competing information sources, mainly of private character. It is important to say that the costs of producing information reducing the informational asymmetry between companies contracting parties and managers are more relevant than the costs of omitting economic information to the companies’ stakeholders, independently of their clas- sification as to corporate governance levels.
The study limitations are tautological, in the sense that the main obstacle is the availability of accounting informa- tion in public databanks and the difficulty to calculate accounting aggregates, such as accruals; on the other hand, it should be considered that the quality definition is not supported by a generic conceptual model, it being more specifically used within parameters associated to contracts monitoring.
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Ball, Ray J.; Shivakumar, L. (2005): Earnings quality in UK private firms: comparative loss recognition timeliness [Qualidade dos resultados em empresas privadas no Reino Unido: comparativo da tempestividade do reconhecimento de perdas]. Journal of accounting and economics 39, 83-128.
Basu, Sudipta (1997): The conservatism principle and the asymmetric timeliness of earnings [O princípio do conservadorismo e a assimetria na tempestividade de resultados]. Journal of accounting and economics 24 (1), 3-37.
Black, Bernard S. (2001): Strengthening Brazil’s securities markets [Fortalecendo os mercados brasileiros de valores mobiliários]
(online). <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=247673>, 14/04/2006.
Bolsa de Valores de São Paulo (2000): Governança corporativa [Corporate governance] (online). São Paulo/SP: Bovespa.
<http://www.bovespa.com.br/Empresas/GovernancaCorporativa.asp> (por),
<http://www.bovespa.com.br/Companies/CorporateGovernance. asp> (eng), 17/12/2006
Bushman, Robert M.; Piotroski, Joseph D.; Smith, A. J. (2004): What determines corporate transparency? [O que determina a transparência corporativa?]. Journal of accounting research 42 (2/May).
Financial Accounting Standards Board (1980): Statement of financial accounting concepts nº. 2: Qualitative characteristics of accounting information [Declaração dos conceitos de contabilidade financeira nº. 2: características qualitativas da informação contábil]. Norwalk/Conn: FASB. http://72.3.243.42/pdf/con2.pdf, 20/12/2008.
Gujarati, Damodar N. (2006): Econometria básica [Basic econometry] (4a. ed.). Rio de Janeiro: Campus/Elsevier.
Iudícibus, Sérgio de (2004): Teoria da contabilidade [Theory of accounting] (7ª. ed.). São Paulo/SP: Atlas.
Lopes, Alexsandro Broedel; Martins, Eliseu (2005): Teoria da contabilidade: uma nova abordagem [Theory of accounting:
A new approach] (1ª. ed.). São Paulo/SP: Atlas.
Silva, Orlando Monteiro da; Cruz Jr., José César (2004): Dados em painel: uma análise do modelo estático [Panel data: an analysis of the static model], in: Santos, Maurinho Luis dos; Vieira, Wilson da Cruz (org.). Métodos quantitativos em economia [Quantitative methods in economics]. Viçosa/MG: Imprensa Universitária.
Watts, R. L. (2003): Conservatism in accounting. Part I: Explanations and implications [Conservadorismo em contabilidade.
Parte I: explicações e implicações]. Accounting horizons 17 (3), 207-221.
Appendix A: surveys about governance levels at Bovespa
The surveys carried out about the adoption of the measures of Bovespa to protect minority investors and to reduce the managers informational asymmetry, presented in the chart, compare the companies that adhered to the new institutional design and those that remained faithful to the institutional parameters in force.
Autor Objective/Hypothesis Results
Carvalho (2003)
To assess the effect of the adherence to the best governance practices under three aspects: price, liquidity and volatility.
Detection that the migration had an impact over the shares valuation (positive abnormal returns);
it increased the negotiation volume and liquidity and reduced price variability.
Aguiar; Cor- rar; Batistella (2004)
To analyze the migration to segments of the São Paulo Stock Exchange New Market as to the shares return.
Positive abnormal returns are not statistically higher than the negative abnormal returns; there was not a higher valorization of the companies that adopted differentiated practices.
Rogers;
Ribeiro;
Sousa (2005)
Comparative analysis of the IGV and IBovespa indexes behavior. Good corporate governance practices make businesses safer and less exposed to external risks.
Inconclusive in respect of the adoption of gov- ernance good practices to reduce external risks and the exposure to macroeconomic factors.
Lameira;
Ness; Motta (2005)
To check whether the corporate governance practice has already promoted an impact on the company risk perception observed by the market.
The governance practices improvement has already provoked some impact on the national open companies’ βs.
Camargos;
Barbosa (2006)
Analyze the impact of the adherence to the DLCG over the shares behavior in the market as to abnormal stock return and as to liquidity.
Verified that the adherence to the DLCG did not result in the creation of wealth for the shareholders in the period, but resulted in the shares liquidity increase.
Cardoso; Aqui- no; Almeida;
Neves (2006)
To investigate whether there is any difference in the intensity of discretionary accumulations between certi- fied companies (corporate governance) and the others.
No statistically significant intensity difference of discretionary accumulations between the groups.
Gallon; Beu-
ren (2006a) To evaluate the disclosure in the administration reports of the companies participating in the governance levels of Bovespa.
Companies disclose more sentences of the “de- clarative” type (the work raises questions about the reasons for the prevalence of this type of sen- tences).
Gallon; Beu- ren (2006b)
To analyze the relation between the disclosure degree in the administration reports and the governance level in which the new market companies are and of the differentiated levels.
It confirms the presupposition that those compa- nies display improvements in the provision of information to the market, considering the re- spective differentiated governance levels.
Kitagawa;
Ribeiro (2006)
The companies listed in the Bovespa segments work in conformity with the governance principles recom- mended by OECD for Latin America.
Verifies a good level of compliance with the OECD recommendations, qualifying the Brazil- ian market to the international standard of the recommended corporate governance norms.
Macedo; Mel- lo; Tavares Filho (2006)
To investigate whether there are significant variations in the companies shares risks in function of the adher- ence to Level 1 of Corporate Governance of Bovespa.
There are not any statistically significant evidences to accept the hypothesis that adherence to L1CG alters the companies risk perception by investors.
Macedo;
Siqueira (2006)
To verify whether the companies in the Bovespa Dif- ferentiated Levels displayed higher valorization or price variability reduction.
The governance impacts can bring return advances, but does not present relevant reflexes in terms of risk reduction yet.
Martins; Silva;
Nardi (2006)
To verify whether there was alteration in the shares liquidity of companies that migrated from the tradi- tional level to any of the DLCG.
Verifies that there are strong indications that the migration has impact on the shares’ liquidity.
Autor Objective/Hypothesis Results Nardi; Nakao
(2006)
To understand what is the effect on the company image, perceived by shareholders and stakeholders, when it begins to participate in governance levels.
An improvement in the way the company is perceived by shareholders, and also by by stake- holders, in second instance.
Pedreira;
Santos (2006)
To calculate the return of the pulp and paper segment shares before and after adherence to corporate governance Level 1 and confront IBovespa and ICG indexes performance.
The shares value underwent a significant valori- zation after migration to Level 1.
The indexes behavior along the period was simi- lar, with a high degree of positive correlation.
Ramos;
Martinez (2006)
To investigate whether good Corporate Governance practices minimize the accounting results management.
An indication that the New market companies, levels 1 and 2, display a lower variability in dis- cretionary appropriations when compared to companies that did not adhere to the program.
Aguiar, A. B; Corrar, L. J.; Batistella, F. D. (2004): Adoção de práticas de governança corporativa e o comportamento das ações na Bovespa: evidências empíricas [The adoption of corporate governance practices and the behaviour of stocks at Bovespa: empiri- cal evidences]. Revista de administração 39 (4/out-dez), 338-347.
Camargos, M. A. de; Barbosa, F. V. (2006): Evidência empírica do impacto da adesão aos níveis diferenciados de governança corpora- tiva sobre o comportamento das ações na Bovespa [Empirical evidence of the impact on stocks´ behavior at Bovespa of the adhe- rence to differential levels of corporate governance]. XXX Encontro Nacional da Anpad (Anais...). Rio de Janeiro/RJ: Associa- ção Nacional de Pós-graduação e Pesquisa em Administração.
Cardoso, R. L.; Aquino, A. C. B.; Almeida, J. E. F.; Neves, A. J. B. (2006): Acumulações discricionárias, liquidez e governança corpo- rativa divulgada no Brasil [Discretionary accumulation, liquidity, and corporate governace reported in Brazil]. XXX Encontro Nacional da Anpad (Anais...). Rio de Janeiro/RJ: Associação Nacional de Pós-graduação e Pesquisa em Administração.
Carvalho, A. G. de (2003): Efeitos da migração para os níveis de governança da Bovespa [Effects of migration to the Bovespa gover- nance levels] (cd-rom). 3º Encontro Brasileiro de Finanças (Anais...). São Paulo/SP: Sociedade Brasileira de Finanças.
Gallon, Alessandra V.; Beuren, Ilse M. (2006): Análise do conteúdo da evidenciação nos relatórios da administração das empresas participantes dos níveis de governança da Bovespa [Content analysis of disclosure in the administration reports of the firms par- ticipating in Bovespa´s corporate governance levels]. 6º Congresso USP de Controladoria e Contabilidade (Anais...). São Pau- lo/SP: Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo.
Gallon, Alessandra V.; Beuren, Ilse M. (2006): Análise da relação entre evidenciação nos relatórios da administração e o nível de go- vernança das empresas na Bovespa [Analysis of the relation between diclosure in administration reports and governance level in firms at Bovespa]. XXX Encontro Nacional da Anpad (Anais...). Rio de Janeiro/RJ: Associação Nacional de Pós-graduação e Pesquisa em Administração.
Kitagawa, C. H.; Ribeiro, M. de S. (2006): Estudo comparativo das práticas de Governança Corporativa recomendados pela OECD para a América Latina às empresas listadas nos segmentos especiais da Bovespa – Níveis 1, 2 e Novo Mercado [A comparative study of the corporate governance practices recomended to Latin-America by the OECD and the firms listed in Bovespa´s special segments – levels 1 and 2, and new market]. 6º Congresso USP de Controladoria e Contabilidade (Anais...). São Paulo/SP: Fa- culdade de Economia, Administração e Contabilidade da Universidade de São Paulo.
Lameira, Valdir de J.; Ness Junior, Walter L.; Motta, Luiz Felipe J. da (2005): Governança corporativa: existem evidências empíricas de impactos no ß e D-ß? [Corporate governance: is there empirical evidence of impacts in ß and in downside ß?] (cd-rom). 5º.
Encontro Brasileiro de Finanças (Anais...). São Paulo/SP: Sociedade Brasileira de Finanças.
Macedo, F. de Q.; Mello, G. R. de; Tavares Filho, F. (2006): Adesão ao nível 1 de governança corporativa da Bovespa e a percepção de risco e retorno das ações pelo mercado [Adherence to the level 1 corporate governance at Bovespa and the market perception of the risk and return of stocks]. 6º Congresso USP de Controladoria e Contabilidade (Anais...). São Paulo/SP: Faculdade de Eco- nomia, Administração e Contabilidade da Universidade de São Paulo.
Macedo, M. Á. da S.; Siqueira, B. de S. (2006): Estudo da governança corporativa no Brasil através de uma análise comparativa do IGC e do IBovespa no período de 2002 a 2005 [A study of corporate governance in Brazil through a comparative analysis of the GC and Bovespa indexes in the period 2002-2005]. 6º Congresso USP de Controladoria e Contabilidade (Anais...). São Pau- lo/SP: Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo.
Martins, V. A.; Silva, R. L. M. da; Nardi, P. C. C. (2006): Governança corporativa e liquidez das ações [Corporate governance and stocks liquidity]. XXX Encontro Nacional da Anpad (Anais...). Rio de Janeiro/RJ: Associação Nacional de Pós-graduação e Pes- quisa em Administração.
Nardi, P. C. C.; Nakao, S. H. (2006): Impacto da entrada nos níveis diferenciados de governança corporativa sobre a imagem institu- cional da empresa [Impact of the adherence to the differential corporate governance levels on the institutional image of the firm].
6º Congresso USP de Controladoria e Contabilidade (Anais...). São Paulo/SP: Faculdade de Economia, Administração e Conta- bilidade da Universidade de São Paulo.
