524 Int. J. Critical Accounting, Vol. 9, Nos.

5/6, 2017

The role of accounting conservatism in the

relationship between ownership structure and firm
performance

Allam Mohammed Mousa Hamdan

Accounting and Economics Department,
Ahlia University, Bahrain
Email: allamh3@hotmail.com

Abstract: The study aims to investigate the moderating role of accounting

conservatism in the relation between ownership structure and firm performance
of Gulf Cooperation Council (GCC) firms. The sample of the study consisted
of 215 firms from six GCC countries during the period 2013–2015. Ownership
structure was determined through three dimensions: ownership concentration,
managerial ownership, and institutional ownership. As for performance, it was
measured by two variables: return on assets (ROA) and Tobin’s Q. The study
used A panel regression and concluded that accounting conservatism plays a
positive role in reducing the negative impact of ownership concentration on
firm performance and consolidate the positive role of managerial and
institutional ownerships in firm performance. The increase of accounting
conservatism in the financial reports of GCC firms reduced asymmetrical
information and the intensity of agency problems, besides providing credibility
to investors in financial reports.

Keywords: ownership structure; firm performance; accounting conservatism;

agency theory; Gulf Cooperation Council; GCC; countries.

Reference to this paper should be made as follows: Hamdan, A.M.M. (2017)

‘The role of accounting conservatism in the relationship between ownership
structure and firm performance’, Int. J. Critical Accounting, Vol. 9, Nos. 5/6,
pp.524–539.

Biographical notes: Allam Mohammed Mousa Hamdan is an Associate

Professor and Chairperson in Accounting and Economics Department at Ahlia
University. He has many papers published in regional and international journals
that discussed several accounting, financial and economic issues concerning the
Arab world. In addition, he has interests in educational related issues in the
Arab world universities like educational governance, investment in education
and its relation with economic growth. He was awarded the First Prize of
Al-Owais Creative Award, UAE, 2017; the Second Prize of Rashid bin Humaid
Award for Culture and Science, UAE, 2016; the Third Prize of Arab Prize for
the Social Sciences and Humanities, Qatar, 2015, and the First Prize of ‘Durrat
Watan’, UAE, 2013.

Copyright © 2017 Inderscience Enterprises Ltd.

 The role of accounting conservatism in the relationship 525

1 Introduction

The separation of ownership and management led to the emergence of agency costs, in
addition to information asymmetry (Fama and Jensen, 1983; Jensen and Meckling, 1976).
As a result of this separation, managers could have a control over the corporate processes
and revenues, consequently, shareholders who do not have daily presence in the firm
could not have the same amount of information, as managers do (Cullinan et al., 2012).
Thus, the basic source of information for shareholders and outside interested is the
financial reporting lists prepared by managers and that adds up to the doubt regarding the
credibility of those reports and to their being a representation of shareholders’ interests.
Parallel to the dominance of management over accounting information, a research on the
mechanism which supports shareholders’ interests was conducted. One of which is
corporate governance whose most important element is ownership structure.
Corporate governance has become a manifestation, creating interplays of political,
private, academic, cultural, and economic consequences (Tinker, 2005; Afolabi and Sy,
2016). Generally speaking, it is anticipated that compliance with corporate governance
principles decreases capital costs, has a positive impact on the company’s economic
activities and that such results are reflected on stock returns with the provision of
efficient market conditions (Akdogan and Boyacioglu, 2014). The ownership structure is
considered to be a basic variable of governance variables. A study by Berle and Means
(1932) indicated that the dispersion of ownership in US firms led to managerial
dominance and aggravation of agency problems that contrasted with no-Anglo-American
firms which distinguished by ownership which is concentrated in the hands of a few
number of shareholders. This provides them with power and authority over managers
(Aslan and Kumar, 2014; Kumar and Zattoni, 2014a). But, the strong concentration of
ownership might lead to the loss of minority rights in the company despite constricting
the opportunist managers (Kumar and Zattoni, 2014b). Because GCC financial markets
have become recently aware of the principles of governance which reduce agency
problem between managers and shareholders, we need a supportive mechanism that
contributes to the decrease of dispute intensity, provides a highly credible accounting
information which serve all interested and enhances ownership variables of which is
accounting conservatism.
Accounting conservatism may help reduce information asymmetry between managers
and shareholders which eventually reduces agency costs and better secures the interests
of shareholders (LaFond and Roychowdhury, 2008; Lara et al., 2009). One characteristic
of higher quality accounting information is accounting conservatism, which has been a
characteristic of accounting information for over five hundred years (Basu, 1997). In fact,
accounting conservatism functions as a governance mechanism which serves
management when the behaviour of information asymmetry appears and as a mechanism
to prevent this behaviour (Cullinan et al., 2012).
526 A.M.M. Hamdan

The actual contribution of this paper lies in showing how accounting conservatism
can play a significant role in creating equilibrium between shareholders and managers in
emerging markets where governance is low. The paper also argues that accounting
conservatism enhances the role ownership structure plays in improving firm performance.
GCC countries were taken as a sample, these countries have a great extent similar social
milieu, in addition to having a similar economic model and organisational and legal
environments which controlling economic life. Our findings might contribute to: a better
understanding of the mechanism by which GCC firms are run, developing governance,
specifically, as the GCC goes through economic openness for foreign investments and
that exposes firms to a challenge to meet governance principles to secure investors trust.
The remainder of this paper is organised as follows. First, we present the background
literature and develop our research hypotheses. We then discuss the methodology
including data gathering, empirical proxies and models employed. The results of our
analyses are then presented. The paper closes with the implications of our findings and
conclusions.

2 Hypotheses development

Information asymmetry leads to managers switching firm’s wealth to their personal

interest through the daily operative behaviour (Cullinan et al., 2012). Several studies
investigated the suitable mechanisms which reduce agency costs and protect shareholders
wealth such as the mechanisms of corporate governance and financial reports (Shleifer
and Vishny, 1986). Ownership structure is considered one of the basic variables in firm
governance, as it determines who is finally the person to take decisions (Zattoni, 2011).
Ownership structure is receiving much attention due to its correlation with agency
theory and corporate governance. The mixed results may be justified because of the
different dimensions found in ownership. The most important dimensions that will be
focused on are ownership concentration and managerial ownership. This relation was
discussed early when Berle and Means (1932) discussed the role of management and
majority versus minority shareholders in the performance of a company. Traditional
agency theory emphasises the potential conflict between unmonitored management and
widely dispersed shareholders. The vast majority of studies conducted in the USA
focused on this conflict. However, in other market environments, like the European
market and some emerging economies, ownership is much more concentrated which
creates majority and minority shareholders creating a potential conflict that may affect
the company performance, especially in the absence of laws and legislation that protect
minority shareholders.
Recently, the debate moved from the USA to other markets around the world to
identify how ownership structure affects firm performance under the different market
circumstances found outside the Anglo-Saxon markets. This study is concerned with
exploring that relation in an emerging market in the GCC countries. Few studies have
been undertaken on that issue in the GCC markets in particular. This study aims to cover
this gap by providing evidence from that contributes to the current ongoing debate on the
relation between ownership and firm performance and the role of accounting
conservatism. Kumar and Zattoni (2014b) sees that ownership structure is not only an
important variable, but also a multi-dimension one that enables analysis in various
 The role of accounting conservatism in the relationship 527

dimensions. In this study, we will analyse the following dimensions of ownership

structure: ownership concentration, managerial ownership and institutional ownership.
The mechanisms of governance including ownership structure may indirectly affect
performance through investments in R&D (Zhang et al., 2014). The results of Sy et al.
(2017) study indicate that the ownership structure and the quality of financial information
have an important role in determining the characteristics of the cost of debt, also cost of
debt is related positively with factors from the boards of directors, to the size of the
listing firms and negatively to the institutional participation on the capital of firm.
Scholars of governance consider institutional ownership to be the best who care for
firm’s interests. They prompt management to achieve the best performance for the firm in
contrast with the other types of ownerships who work to achieve personal interests, but
there are some who suspect the ability of institutional ownership to improve the firm
value (Tilba and McNulty, 2013). On the other side, they ascertain that firms controlled
by families can achieve performance better than the companies controlled by institutions
(Van Essen et al., 2015).

2.1 Ownership concentration

The corporate governance literature typically hypothesises a U-shaped relationship
between ownership concentration and firm performance, i.e., it assumes management
expropriation for low concentration levels and effective monitoring for high
concentration levels (Hu and Izumida, 2008). Traditional agency theory claims that more
concentrated ownership would enhance the ability of shareholders to monitor
management of the company, preventing it from taking self-serving decisions affecting
the performance of the company negatively. This claim may be true in market
environments where laws and legislation protecting minority shareholders are strong like
the USA. Concentrated ownership creates majority shareholders and minority
shareholders with diverging interests and objectives. In a market environment where laws
protecting minority shareholders are absent or weak, a situation of majority shareholders
controlling the company will be created and the performance of the company would be
affected negatively. Theoretically, it may be said that an increase in ownership
concentration should lead to a reduction in the costs of separation of ownership and
control benefiting company performance eventually. However, the larger shareholders
may benefit from that improvement privately at the expense of smaller shareholders
(Khamis et al., 2015a). The firm can be regarded as a conjunction of a set of contracts,
and the interests of all parties referred to in these contracts are reflected in the firm’s
financial statements. These financial statements are thus an important information source
for shareholders, potential investors and the government (Cullinan et al., 2012). Financial
statements reflect accounting conservatism, which is designed to protect users’ interests
relative to those of management, and therefore the level and trend of conservatism are
relevant to the financial statement users. If the largest shareholder’s behaviour results in
wealth transfers from minority shareholders, this behaviour would decrease the firm’s
operating efficiency and do harm to firm value (Claessens et al., 2002; Classens and Fan,
2002). To prevent other shareholders from discovering their expropriating behaviour, the
largest shareholders may induce managers to produce more favourable financial reports
by presenting ‘good news’ in a timelier manner than ‘bad news’. This means that
accounting conservatism may play a significant role in affecting the relation between
528 A.M.M. Hamdan

ownership concentration and firms’ performance through lowering opportunities

behaviour of greater shareholders. Thus, we are able to build the first study hypothesis
which assumes that accounting conservatism will have an effect on decreasing the
negative impact of ownership concentration on firms’ performance as follows:
H1 Accounting conservatism plays a significant role in reducing the negative impact of
ownership concentration in firms’ performance.

2.2 Managerial ownership

In literature, it was acknowledged that increasing managerial ownership will reduces
agency costs and improves its performance in general (Lafond and Roychowdhury,
2008), though another tendency in governance literature sees that increasing internal
ownership will strengthen managers front to utilise the firm for their own benefits
(Khamis et al., 2015b). The literature has also considered the possibility that high
managerial ownership stakes signify greater managerial entrenchment. In other words, it
is possible that managers with high ownership stakes are less likely to be disciplined
when they engage in actions that serve their own interests but conflict with those of
shareholders. In that case, the relation between managerial ownership and alignment of
managerial interests with those of shareholders is more ambiguous. However, the
empirical evidence on whether firms with high managerial ownership underperform with
respect to those with low managerial ownership is very mixed (Lafond and
Roychowdhury, 2008). But, the logical relation in GCC financial markets assures that
there is a positive relationship between internal ownership and firm performance, due to
the control of family ownership over these firms as the families attempt to improve firm
performance and care for their development (Hussain and Mallin, 2013). Based on this,
we must take into consideration that the identity of high rank managers in the company is
among the founders or members of the family establishing firm (Lafond and
Roychowdhury, 2008). However, accounting conservatism which functions as
governance mechanism inside the firm (Hamdan et al., 2012) may consolidate the role of
managerial ownership in improving performance which the second hypothesis attempts to
examine.
H2 Accounting conservatism plays a significant role in consolidate the positive impact
of managerial ownership in firm performance

2.3 Institutional ownership

The prior research (e.g., Gaspar et al., 2005; Chen et al., 2007) suggests that institutions
that have long investment horizons, concentrated share holdings, and independence from
management are most likely to monitor managers. Thus, the expected relation between
institutional ownership and performance is positive. The institutional investors favour
accounting conservatism as a means of governance and firm control, for there is a
relation between accounting conservatism and institutional ownership (Hamdan and
Sartawi, 2013). Contrary to individual investors institutional counterparts had a long-term
relation with the firm and this relation qualifies them to understand nature of the firm and
have more control over management behaviour which serves the firm interest (Brickley
et al., 1988; Bushee, 1998; Hartzell and Starks, 2003; Chen et al., 2007). Within the set of
monitoring institutions, investee firm characteristics that constrain the extent of direct
 The role of accounting conservatism in the relationship 529

monitoring possible are likely to boost the demand for conservatism as part of
institutions’ monitoring efforts. It is difficult to directly monitor firms that have more
growth options and higher information asymmetry. Smith and Watts (1992) point out that
when firms have more growth options, it is more difficult for shareholders to observe
managers’ actions and the full set of growth options from which managers choose
(Ramalingegowda and Yu, 2012). Such an argument leads us to the third hypothesis of
the study:
H3 Accounting conservatism plays a significant role in enhancing the positive impact of
institutional ownership on firm performance.

3 Methodology: data, empirical proxies and models

3.1 Samples and time series across GCC countries

This paper used the panel data of 215 firms from all GCC countries: Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) for years from
2013–2015. Firms were selected according to the following criteria: data is available in
the period of 3 years (2013 to 2015). Firms have not been closed or merged with any
other company during the study period. We start the sample collection process with all
the listed firms on the GCC markets. Four hundred fifty-five firms were excluded from
the sample, which left us with 215 firms representing 32.1% of the original sample as
presented in Table 1.
Table 1 Sample selection

GCC countries Listed firms Sample

Bahrain 43 35
Kuwait 180 25
Oman 114 63
Qatar 45 17
Saudi Arabia 171 43
UAE 117 32
Total 670 215

3.2 Measurement of variables

The selection of variables is based on an examination of previous empirical studies,
Table 2 shows the dependent variable, the independent, moderation variable and the
control variables employed for all estimated models of the study.

3.3 Models construction

Our study tries to find the moderating role of conservatism on the relationship between
ownership dimensions and firm performance. Thus, ownership concentration, managerial
ownership, and institutional ownership are considered as independent variables and firm
performance is considered as the dependent variable. The study also uses two different
530 A.M.M. Hamdan

measurement tools to measure the firm performance. The first one is return on assets
(ROA) and the second one is simple Tobin’s Q.
The modelling and testing of the impact of the moderator variable on the relation
between ownership dimensions and firm performance pass through the following
procedures:
Initially, the impact of ownership dimensions, in addition to other control variables, is
tested without taking conservatism into consideration in model (1).
FirmPerfitg E 0  E1Concitg  E 2 Managitg  E3 Instititg  E 4 Sizeitg
(1)
 E 5 Leverageitg  E 6 Ageitg  E 7 Industryitg  E8 Countryitg  H itg
Interactive variables between ownership dimensions and accounting conservatism are
created and added to model (2) as follows.
FirmPerfitg E 0  E1 (Conc * Conser )itg  E 2 ( Manag * Conser )itg
 E3 ( Instit * Conser )itg  E 4 Sizeitg  E5 Leverageitg (2)
 E 6 Ageitg  E 7 Industryitg  E8 Countryitg  H itg

If the interactive variables (Conc * Conser, Manag * Conser and Instit * Conser) shows a
statistical significant and the adjusted R2 in model two increases, this is an indication of
the influence of moderator variable on the relation between the dependent variable and
the independent one.
Table 2 Empirical proxies
Variable Definition and measurement
Firm performance:
Return on assets The ratio of the net income to the total assets
Simple Tobin’s Q Is the (Market value of equity + Book value of short-term
liabilities) ÷Book value of total assets
Ownership dimensions:
Ownership concentration The ratio of total percentage of shareholding by the largest
shareholder (top1) divided by the sum of shareholdings of largest
five shareholders in the company
Managerial ownership Fraction of shares owned by the executive directors
Institutional ownership Fraction of shares owned by the Institutional investors
Moderation variable:
Accounting conservatism Ratio of total accruals to gross profit; calculated by dividing total
accruals on gross profit, the total accruals are calculated according
to cash flow techniques as net income minus operating cash flow
Control variables:
Firm size Logarithm of the company’s total assets
Financial leverage Total debt divided by total assets
Firm age The natural log of the number of years that a firm is listed on an
exchange
Industrial dummy Dummy variable that equals one for industrial firms, otherwise
zero
Country dummy Dummy variable that equals one for particular country firms,
otherwise zero
 The role of accounting conservatism in the relationship 531

4 Primary results

This part of the study aims to provide advanced descriptive analysis. We do not need to
repeat what past studies had come up to regarding ownership structure and performance
of GCC firms (e.g., Khamis et al., 2015b) or describe levels of conservatism in the
financial report of such firms (e.g., Hamdan et al., 2012), but aim to provide an advanced
analysis of the relation of ownership structure to the performance of GCC firms.
Table 3 Path analysis between ownership structure and firm performance
Ownership structure
Statistics of performance Ownership Ownership Ownership
concentration institutional managerial
Return on assets
Mean of high level 0.447 1.796 3.898
Mean of low level 3.110 1.320 1.184
Difference in mean –2.663 0.476 2.714
t-statistic 5.503*** 0.831 3.303***
p-value 0.000 0.407 0.001
Tobin’s Q
Mean of high level 2.132 1.848 1.462
Mean of low level 1.188 1.479 1.697
Difference in mean 0.944 0.369 -0.235
t-statistic 6.862*** 2.582** –1.131*
p-value 0.000 0.010 0.085
Notes: The t-statistic is based on parametric test two-independent sample t-test. The
difference significance at: *10%; **5% and ***1% levels.
In Table 3, the firms are divided into firms with high ownership concentration,
managerial and institutional ownership, and firms with low ownership concentration,
managerial and Institutional ownership based on the median. The mean of performance
was calculated for both categories of firms. To assure the significance in the variance
between the means of the two samples, the parametric two-independent sample t-test was
performed.
From Table 3, we notice that firms with high ownership concentration, the ROA were
0.447%, while firms with low ownership concentration have achieved an ROA 3.11%.
This difference was of statistical significant at 1%. It is clear that ownership
concentration may result in low ROA for GCC firms, due to the intensity of disputes
between owners and management as the firm is run in a way to secure the interests of a
few numbers of owners. Tobin’s Q result often differs from the ROA. Thus, we notice
that firms with high concentration of ownership achieve better Tobin’s Q than those of
low concentration. The Tobin’s Q measurement reflects for investors, the status of the
firm in the market. Ownership concentration in the hands of a few may positively reflect
the situation of the firm in the market. Those who have a control over the firm are mostly
greater businessmen from well-known families of trade as that endows ownership the
trust of investors in the financial market.
As for the institutional ownership, from Table 3 we notice that GCC firms controlled
by institutional ownership have achieved a high level of performance compared to other
532 A.M.M. Hamdan

firms with low institutional ownership. The effect of the institutional ownership is better
demonstrated in the market performance and in the firm name in the financial market
than its actual performance seen in the ROA. This might be referred back to the trust
investors have in institutions that play a role in improving firm governance and in
decreasing conflict of interest because of the experience they have in the field.
Institutions are distinguished for caring about the firm to last and for profitability in the
long run, contrary to the individual investors who only are after profits without any
regard for firm interests and stability. A group of true social-scientific or behavioural
professionals should be inside the corporate organisation propounding an ethic based on
values higher than the economic ones of the corporation (Tinker et al., 2016).
Results presented in Table 3 reflect the mistrust the GCC financial community has in
managerial ownership. It is clear that firms with high managerial ownership have
achieved low performance, according to Tobin’s Q, though such firms with high
managerial ownership achieved satisfactory results according to ROA measurement but
excelled firms with low managerial ownership.

5 Empirical results

5.1 Models validity

At the onset, we have to examine the validity of study models. For the purpose, we used
the normal distribution test, Multicollinearity test, Autocorrelation test, and
Homoskedasticity test. The validity of the study models representing the correlation
between ownership structure and firm performance was secured. Thus, we can say that
the study models in the equations (1) and (2) are accurate. All the variables on the
right-side express non-random variables excluding the last one εi,1; εi,2. As for the
variables (ROAitg; Tobin’s Qitg) they are dependent in the four models and have the same
probability random error εi,1; εi,2 and the average is:
E 0  E1 .A Concitg  E 2 .A Managitg  E3 .A Instititg
 E 4 .A Sizeitg  E5 .A Leverageitg  E 6 .A Age itg (3)
 E 7 .A Industry itg  E8 .A Countryitg  0
Accordingly, we can rely on study data and their models in testing hypotheses.

5.2 Hausman test

When time-series and cross-sectional data are merged, we get the panel data that gives
more data information with more disparity, less internal correlation between variables,
more degrees of freedom, and more efficiency (Gujarat, 2015). Panel regression models
are divided into fixed-effect (FE) approach and random-effect (RE) approach.
The null hypothesis of Hausman test assumes that capabilities of FE approach and
REs approach are same, but if a null hypothesis is rejected, then this indicates that RE
approach is inappropriate, and it is therefore preferable to use FE approach. The
Hausman Chi2 of ROA models shown in Table 4 are significant and not statistically
significant for Tobin’s Q model as shown in Table 5. This means that capabilities of FEs
approach is best representing the ROA model, and REs approach is best representing the
Tobin’s Q model.
 The role of accounting conservatism in the relationship 533

Table 4 Fixed-effect panel regression of ROA models

ROA models
Moderated model by
Variables Non-moderated model
conservatism
E t-statistic E t-statistic
Constant 6.460 3.034*** 12.440 5.461***
(0.003) (0.000)
Ownership dimensions:
Ownership concentration –0.036 –1.854*
(0.064)
Managerial ownership 0.087 2.257**
(0.025)
Institutional ownership 0.000 0.524
(0.600)
Concentration * conservatism 0.01 0.287
(0.774)
Managerial * conservatism 0.096 3.188**
(0.015)
Institutional * conservatism 0.023 1.952*
(0.052)
Control variables:
Firm size –0.299 –1.794* –0.623 –3.606***
(0.073) (0.000)
Financial leverage –3.787 –3.329*** –5.529 –4.121***
(0.001) (0.000)
Firm age 0.014 0.671 0.027 1.005
(0.503) (0.316)
Industrial dummy 0.231 4.071*** 0.300 5.292***
(0.000) (0.000)
Country dummy 0.983 2.812*** 0.855 2.446***
(0.001) (0.002)
R-squared 0.088 0.137
Adjusted R-squared 0.077 0.121
F-statistics 8.037*** 8.150***
Hausman test (Chi2) 44.531*** 62.593***
p-value (Chi2) 0.000 0.000
Notes: t-critical: at df 644, and confidence level of 99% is 2.326 and level of
95% is 1.645 and level of 90% is 1.282. F-critical (df for denominator
n-E-1 = 645-8-1 = 336) and (df for numerator = E = 8 and confidence level of 99%
is 2.51 and confidence level of 95% is 1.94 and confidence level of 10% is 1.67.
The upper value is for t-statistic test and the lower value in brackets (p-value) is
the probability value for this test. Symbols mean significance at: *10%; **5% and
***1% levels.
534 A.M.M. Hamdan

Table 5 Random-effect panel regression of Tobin’s Q models

Tobin’s Q models
Moderated model by
Variables Non-moderated model
conservatism
E t-statistic E t-statistic
Constant 3.285 4.364*** 2.217 3.220***
(0.000) (0.001)
Ownership dimensions:
Ownership concentration 0.018 2.605**
(0.010)
Managerial ownership –0.016 –1.114
(0.266)
Institutional ownership 0.014 0.099
(0.921)
Concentration * conservatism 0.031 0.407
(0.684)
Managerial * conservatism 0.022 0.059
(0.953)
Institutional * conservatism 0.010 2.466**
(0.014)
Control variables:
Firm size –0.086 –1.499 –0.002 –0.046
(0.135) (0.964)
Financial leverage 0.580 1.675* 0.292 0.876
(0.095) (0.382)
Firm age –0.018 –2.621*** –0.020 –2.887***
(0.009) (0.004)
Industrial dummy 0.356 1.986*** 0.486 2.654***
(0.003) 0.002
Country dummy 0.592 1.361 0.879 1.499
(0.176) 0.15
R-squared 0.181 0.391
Adjusted R-squared 0.064 0.274
F-statistics 2.551*** 3.348***
Hausman test (Chi2) 0.420 3.785
p-value (Chi2) 0.981 0.706
Notes: t-critical: at df 644, and confidence level of 99% is 2.326 and level of
95% is 1.645 and level of 90% is 1.282. F-critical (df for denominator
n-E-1 = 645-8-1 = 336) and (df for numerator = E = 8 and confidence level of 99%
is 2.51 and confidence level of 95% is 1.94 and confidence level of 10% is 1.67.
The upper value is for t-statistic test and the lower value in brackets (p-value) is
the probability value for this test. Symbols mean significance at: *10%; **5% and
***1% levels.
 The role of accounting conservatism in the relationship 535

From the two Tables 4 and 5, it is noticed that Hausman test emphasised the necessity for
using FE for the model ROA and RE for Tobin’s Q model. This implies that GCC firms
have similar environments with regard to organising, size, and work conditions, but
different with regard to market environment in which they operate. This is logical as
every GCC financial market has its own special conditions and different order that copes
with its economic situation. Based on the results in the two Tables 4 and 5, we can
discuss hypotheses test as follows:

5.3 The role of accounting conservatism in the relationship between ownership

concentration and firm performance
The results in Table 4 showed that ownership concentration played a negative role in the
performance of GCC firms. A few numbers of shareholders controlling firm shares
encourage them and management to consider only the interests of this group without any
consideration for interests of other shareholders (Claessens et al., 2002; Classens and
Fan, 2002). Greater shareholders, the majority of whom are businessmen and influential
politicians, work to achieve their personal interests in the firm (Kumar and Zattoni,
2014b; Zattoni and Judge, 2012). But can accounting conservatism contribute to the
decrease of negative impact of ownership concentration on firm performance? This is
what the first hypothesis tries to find an answer for. It is noticed, from Table 4, that the
impact of ownership concentration on performance became positive after the factor of
accounting conservatism was involved in the relation between them. Although this
relation was with no significant statistical reference, yet this result gives us an indication
on the positive role of accounting conservatism in decreasing the negative impact of
ownership concentration on firm performance (Cullinan et al., 2012), as such
conservatism limits their ability to manipulate with financial data and contribute to
decrease asymmetrical information which threatens the interests of greater shareholders
among others.
Customarily, Tobin’s Q measurement provides us with different indications on RQA.
Table 5 shows that ownership concentration plays a positive role on market performance
as seen in Tobin’s Q model. This might be referred back to the trust investors of GCC
financial markets have in greater shareholders of businessmen, families, and others. The
investor positively considers the control such people have on the company, though such
owners might work more for their interests than interests of the firm. However,
accounting conservatism might provide investors with more information about the firm,
as that might provide them with a cleaner picture about the status of the firm and limit the
name effect of greater investors on the firm market performance. Thus, we notice that the
variable, concentration conservatism in Table 5, was positive but with no statistical
significance.

5.4 The role of accounting conservatism in the relationship between

managerial ownership and firm performance
Firms endeavour to increase managerial ownership to reduce agency costs and to
encourage managers to work for the interest of the firm not for their own personal
benefits. In GCC firms, managerial ownership help improve firm performance through
reducing conflicts of interest and prompting managers to work for the benefits of the
536 A.M.M. Hamdan

firm. Accounting conservatism will enhance the role of managerial ownership in the
performance of GCC firms, seen in the ROA, as the results presented in Table 4
demonstrate. But, the GCC financial community still looks negatively to managerial
ownership. Thus, we find that the effect of this ownership was negative in Tobin’s Q with
no statistical significance, as shown in Table 5. We find that accounting conservatism can
help change this investor negative attitude toward managerial ownership in the firm.
However, we can accept the second hypothesis of the study that accounting conservatism
helps in consolidating the positive role of managerial ownership in firm performance.
The level by which owners can control management behaviour is regarded one of the
basics determining ownership structure. In the changing conditions in which it is difficult
for owners to control all daily problems, managerial ownership can be more efficient in
such conditions for it reduces control costs (Demsetz and Lehn, 1985). In another hand,
increase of ownership from outside the firm will lead to an increase in the asymmetrical
information, i.e., managerial ownership will decrease asymmetrical information
according to the study of Lafond and Roychowdhury (2008).

5.5 The role of accounting conservatism on the relationship between

institutional ownership and firm performance
According to literature, our study argues in favour of a positive role accounting
conservatism plays in the relation between institutional ownership and the performance.
Results presented in Tables 4 and 5 ascertain that. We noticed that institutional ownership
has non-statistical positive role in ROA and Tobin’s Q. But introducing accounting
conservatism in the relation will consolidate the positive role the institutional ownership
plays in both the operative and market performances of the firm. GCC institutions enjoy
trust of the financial community and own organisation and control tools by which they
positively affect firm performance.

5.6 Further results

The study provides us with additional results on the relation between control variables
and performance. It is noticed that firm size negatively relates to performance even with
accounting conservatism. Small firms can get better returns through utilising its assets
and through having a good name in the market. As for financial leverage, and its relation
to performance, a discrepancy was found between accounting and market measurements.
It appeared that the leverage had a negative relation with ROA even with the presence of
accounting conservatism, while has a positive relation with Tobin’s Q. This is referred to
the different opinions investors have regarding firm debts. Finally, the oldest firms in the
market gain returns better than those of new ones. But the late firms to get into market,
gains better returns according to Tobin’s Q measurement. This is attributed to investor’s
behaviour and their look to emerging firms.

6 Conclusions

During the latest period, corporate governance found its way to practice in the GCC
financial markets. These markets have recently acknowledged such principles. Due to
that, these markets resorted to commercial law to organise firms and secure interests of
 The role of accounting conservatism in the relationship 537

different parties. In this study, we would like to draw the attention to another mechanism
which might help in organising the relation between stakeholders; this mechanism is
accounting conservatism. The study aimed to investigate the role of accounting
conservatism in the relation between ownership structure and performance. It
investigated three dimensions of ownership structures: ownership concentration,
managerial ownership, and institutional ownership. It explained firm performance
through two different measures: ROA and Tobin’s Q. Sample of the study consisted of
215 firms from all gulf countries for the period 2013–2015.
In summary, accounting conservatism in GCC financial markets play a significant
role in reducing asymmetrical information and in improving control over management
behaviour and governance. The study also showed that ownership concentration has a
negative effect on the ROA, while accounting conservatism reduces this negative effect
and presents useful information that might help to fairly asses’ firm investors. It was also
made clear that conservatism plays a role in consolidating the positive relation between
managerial ownership and firm performance. Conservatism also makes investors trust
managerial ownership. Finally, accounting conservatism enhances the role of institutional
ownership in improving performance of GCC firms as this kind of ownership enjoys
acceptance and trust of investors in GCC markets.

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