Date of Award


Degree Type


Degree Name

Doctor of Philosophy


School of Business


Business and Law

First Advisor

Dr Zubaidah Ismail

Second Advisor

Associate Professor Hadrian Djadjadikerta


This thesis examines the effect of the board of directors and supervisory board on conservatism and firm performance, respectively, and the benefits of conservatism on performance. In addition, this thesis investigates whether the effectiveness of firms’ governance on conservatism and firm performance is influenced by ownership concentration and state ownership. The extant literature has shown that conservatism reduced agency conflict and was beneficial for corporate governance in developed countries; however, little evidence has been provided for emerging countries such as China.

Sample companies are selected from the Shanghai and Shenzhen stock exchanges for the period from 2007 to 2010. Archival data from companies’ annual reports are used and the information relating to conservatism is collected from Datastream. Panel data methodology is employed to test the developed hypotheses developed.

Two popular methods are used to measure conservatism: asymmetric timeliness developed by Basu (1997) and accrual-based method produced by Givoly and Hayn (2000). Two accounting-based performance measures (return on equity and net profit margin), and a market-based indicator (market to book ratio) are used in this study to measure firm performance. For corporate governance variables, five characteristics of the board of directors and four characteristics of the supervisory board are examined. They are board independence, board size, board meetings, CEO duality, top management turnover, supervisory board independence, supervisory board size, supervisory board meetings and supervisory board qualification. Ownership structure is identified by ownership concentration and state ownership. Ownership concentration is measured by the largest shareholdings and state ownership is measured as the number of shares controlled by the state divided by the total number of shares.

In terms of the effect of corporate governance on conservatism, the initial results show that as predicted, higher proportion of independent directors, top management turnover, smaller supervisory boards and more supervisors with professional knowledge or work experience lead to more conservatism. Except for supervisory board independence and supervisory board meetings, the predicted effects of the other characteristics of the board of directors and supervisory board on firm performance are supported. In addition, firms that employ more conservatism are shown to have better firm performance. The results on the moderating effect indicate that state ownership does influence the effectiveness of corporate governance on conservatism and firm performance.

In addition to the linear relationship between corporate governance, conservatism and firm performance, this thesis finds that some corporate governance mechanisms have a nonlinear U-shaped effect on conservatism or firm performance. Board size is found to have a Ushaped effect on conservatism and supervisory board independence is shown to have a Ushaped effect on firm performance. The frequency of supervisory board meetings has a Ushaped effect on firm performance measured by profit margin while it has an inverted Ushaped effect when market to book ratio is used to measure performance. For the moderating effect of ownership structure, this thesis finds that ownership concentration has an inverted U-shaped moderating effect on the effectiveness of firms’ governance on firm performance. State ownership has an inverted U-shaped influence on the relationship between firms’ governance and conservatism while it has a U-shaped influence on the effectiveness of firms’ governance on firm performance.

The findings of this thesis contribute to the corporate governance and conservatism literature in the context of emerging economies. This study also provides some meaningful implications for policy makers, accounting practice, researchers and users of financial statements in China.


Paper Location