The Impact of Management Ability on Accounting Conservatism Considering the Moderating Role of Institutional Shareholders and Board Independence

Subject Areas : Ethics and accounting

Akbar Valizadeh Oghani ¹ , Amir Ata Alizadeh ² , Maryam Erfan Esfanjani ³

1 - Department of Management, Sarab Branch, Islamic Azad University, Sarab, Iran
2 - Department of Accounting, Seraj Institute of Higher Education, Tabriz, Iran.
3 - Department of Accounting, Seraj Institute of Higher Education, Tabriz, Iran.

Received: 2025-03-18 Accepted : 2025-07-23 Published : 2025-08-11

Keywords: Management Ability, Accounting Conservatism, Institutional Shareholders, Board Independence, Financial Transparency.,

Abstract :

Objective: Managerial ability, when founded on specialized skills and practical experiences regarding the analysis of business risks and opportunities, plays a crucial role in enhancing the quality of financial decision-making and reporting. Managers who are equipped with such ability can accurately estimate future cash flows and asset values based on realistic analyses and prevent the recognition of unrealistic losses. In such conditions, the reduction of excessive conservatism in financial reports is not only not a sign of weak control, but also indicates managerial maturity and an accurate understanding of financial and economic opportunities. In fact, excessive conservatism in reporting, if applied mechanically with no analytical justification, may lead to displaying a distorted image of the true condition of the company, disrupting economic decision-making. On the other hand, in such cases, the supervisory role of institutional shareholders and an independent board of directors finds critical importance, because through control mechanisms and constant monitoring of managers' performance, these institutions make sure that conservatism reduction has not surpassed the standard accounting frameworks and is in line with the interests of shareholders. These supervisory institutions, by creating a balance between managerial discretion and accountability requirements, provide managers with the ability to make decisions with relative freedom, without compromising the transparency or reliability of financial information. In such a structure, reducing conservatism not only harms the quality of financial reporting but also can be considered as an effective solution toward reflecting a more realistic image of the company’s economic performance. That said, this can only be achieved if the managerial ability is accurately evaluated and it is applied under effective control mechanisms in pursuit of the company’s and the stakeholders’ long-term goals and interests. In other words, improving the analytical skills of managers, along with applying structured supervision, can pave the way for the formation of a balanced pattern in financial reporting; a pattern with neither excessive conservatism nor tolerance in financial assignments, which bases decisions on reliable data and expert analysis. Therefore, an effective interaction between managerial ability and supervisory institutions is deemed a key requirement for enhancing transparency, accountability, and efficiency of the financial reporting system. Hence, this research aims to investigate the impact of managerial ability on accounting conservatism by taking into account the moderating role of institutional shareholders and the independence of the board of directors.

Materials and methods: The present research is applied in nature, and its findings are useful for decision-making and problem-solving in companies and organizations. From a methodological perspective, this study is a descriptive-correlational approach and analyzes the relationships between variables. Furthermore, this study is categorized as causal-comparative since it investigates causal relationships after the occurrence of events. Regarding the nature of the data, this research follows a quantitative approach, and it has been conducted based on the financial managerial information of companies listed on the Tehran Stock Exchange. These data have been extracted from the Rahavard Novin software and the Codal.ir website and collected using the Microsoft Excel software. Additionally, the EViews software was employed for data analysis through the multiple regression method. In terms of time and place, this study follows library and field research approaches, providing a comprehensive analysis using internal and external resources as well as real data. The statistical population includes all companies listed on the Iranian stock exchange that actively traded shares during the five years from 2019 to 2023 and were engaged in the production of goods and services. Considering the characteristics and particular nature of Stock Market companies, special conditions were assumed for determining the sample size. Based on these conditions, after applying the systematic elimination method, a total of 133 companies were selected as the final statistical samples of the research.

Findings: Research findings indicate that there is a reverse relationship between managerial ability and accounting conservatism. This means that the more capable the managers, the less tendency they have toward adopting conservative practices. This may be due to their higher confidence in making decisions based on accurate information and thorough analyses. Moreover, it is shown that institutional shareholders, through active supervision, contribute to higher levels of accounting conservatism and serve as a positive moderating factor in this relationship. In contrast, the independence of the board of directors has a reverse moderating effect, meaning that companies with capable managers prevent excessive conservatism by increasing transparency and accountability, which leads to balance in financial reporting.

Conclusion: Due to access to more accurate information, the ability to conduct more comprehensive analysis of risks, and relying on intelligent data-driven forecasting, capable managers have less tendency to adopt conservative approaches in financial reporting. This behavioral pattern can be analysed through the stewardship theory framework, because this theory does not merely view managers as self-interested agents, but it also considers them as committed, loyal shareholders who act in the long-term interest of the organization. From this perspective, information transparency and fair, unbiased financial presentation of financial data take precedence over restrictive conservative reporting. In fact, capable managers, by relying on their analytical skills, are more willing to take responsibility for financial decisions, and they tend to present information with no bias or manipulation. However, the organizational governance structure plays a key role in determining the conservatism level in financial reporting. According to institutional theory, institutional pressures, particularly the active supervision of institutional shareholders, force organizations to follow more conservative practices in financial reporting. This is because such measures enhance the organizational legitimacy in the eyes of the external stakeholders and supervisory institutions. In this context, institutional shareholders, focused on preserving financial stability and reducing informational risk, tend
to advocate for adherence to accounting practices that ensure greater conservatism in financial data presentation. In contrast, from the standpoint of resource dependency theory, the independence of the board of directors plays a significant role in forming the financial reporting policies. By utilizing diverse information resources and multiple perspectives, a board of directors with relative executive independence is able to make more balanced decisions with a rational compromise between transparency and conservatism. In such a structure, the members of the board of directors, as independent supervisors with strategic insight, will be able to prevent managers from incorporating their individual biases in financial information, while simultaneously paving the way for enhancing the quality of financial reporting. Therefore, the interaction between individual characteristics of managers, the organizational governance structure, and relevant theoretical frameworks plays a key role in determining the conservatism level in financial reporting, and it can lead to improved investor decision-making, promote transparency in the capital market, and long-term stakeholder trust.

 

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