The predictive ability of “conservatism” and “governance” variables in corporate financial disclosures

Purpose – The purpose of this paper is to examine the extent to which “corporate governance” and “conservatism” variables can contribute to the predictive ability of corporate financial disclosures. Design/methodology/approach – Multiple discriminant analysis is used to differentiate between good and poor companies in Australian manufacturing industry on the basis of their 2009 performance. A classification model including size, governance and conservatism variables, together with financial ratio data is constructed based on 2008 data, and used to predict 2009 performance. Findings – A model with conservatism, total debt/total assets, company size, and “percentage of shareholdings held by non-executive directors” (representing corporate governance) as its independent variables, has a classification accuracy of 80.6 percent, and a predictive accuracy of 62.2 percent. Research limitations/implications – The relatively small sample size, for Australian manufacturing companies, limits both the predictive ability of the model and its generalisability elsewhere. Practical implications – The findings of the paper demonstrate the importance of both “conservatism” and “corporate governance” measures in determining corporate financial performance. Originality/value – The paper uses familiar discriminant methods in an unfamiliar context – focusing on surviving companies exhibiting extremes of financial performance.