Ultimate Ownership and Earnings Conservatism

In this paper we analyze whether the extent of timely recognition of unrealized losses into earnings shown by firms with a controlling owner depends on (1) the ownership share of the controlling owner and (2) the divergence between the controlling owner's voting and cash flow rights. Our results document a negative relation between both aspects of the ultimate ownership structure and timely loss recognition. Our results are consistent with two possible explanations. First, as the controlling owner's stake in the company increases, a smaller portion of the firm's financing needs will be provided by minority shareholders. Minority shareholders do not have access to the company's private information, but demand timely recognition of losses into earnings to protect their claim. Reducing the role of minority shareholders implies also lower demand for timely loss recognition. Second, the results are consistent with an increase in the ownership stake of the controlling owner or in the divergence between the controlling owner's voting and cash flow rights leading to an increase in managerial incentives to share information with the controlling shareholder, reducing the demand for timely loss recognition for monitoring purposes.