The affinity between litigation risk and firm value through accounting conservation of publicly-listed firms in the Philippines : a corporate governance perspective

Date of Publication


Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Accountancy

Subject Categories



Ramon V. Del Rosario College of Business



Thesis Adviser

Angelo Unite

Defense Panel Chair

Cynthia P. Cudia

Defense Panel Member

Florenz C. Tugas

Alger C. Tang

Aeson Luis C. Dela Cruz

Alloysius Joshua S. Paril

Arnel Onesimo O. Uy


This paper investigates the relationship of litigation risk and firm value through the practice of accounting conservatism of publicly listed firms in the Philippines. First, the paper identifies relevant factors to the explanation of accounting conservatism, a subset of which is the risk of shareholder litigation. Second, we link the determined litigation risk to firm value, measured by Tobin Q and return on assets (ROA), through the degree of accounting conservatism it induces on a managers investment decisions. In investigating these relationships, theoretical bases and empirical evidence are used. Specifically, the financial statements of 120 publicly listed firms in the Philippines are analyzed for quantitative and qualitative data, as a result of that we contribute to the scant body of research in the Philippine setting on shareholder litigation risk, accounting conservatism, and firm value.

A particular element of a number of publicly listed firms in the Philippines is the concentration of ownership by family-affiliated corporate groups. For firms under that arrangement, the separation of ownership and control is indistinguishable, which poses a corporate governance problem transfer of wealth from minority shareholders to majority shareholders. Though prior studies have exhibited the role of accounting conservatism in complementing or substituting a firm corporate governance structure, the absence of meaningful representation for minority shareholders demands the filing of shareholder litigation against a firm management to influence their investment decisions that affect the creation of firm value. In line with the principal-agent framework, we formulate hypotheses to address the innate agency problem attributable to a poor governance structure.

Employing a panel data regression, we find that there is a statistically significant relationship between litigation risk (LIT) and our two alternative firm-year measures of accounting conservatism (C-Score and AC-Score). There is evidence that the increased risk of shareholder litigation influences a higher degree of accounting conservatism practiced by management in financial reporting. Additionally, we find that an increase in the conservative behavior of management leads to a higher level of firm value (TobinsQ and ROA), as a result of making better investment decisions and discontinuing poorly performing investments in a timely manner.

Following our comprehensive analyses, we lay down in-depth recommendations for a wide-range of readers who are interested in either enhancing our findings or executing our arguments. In summary, we strongly suggest the practice of accounting conservatism for executives and managements of institutions on the basis of its tangible benefits. We also discuss points of consideration for standard-setters and governments as guide in establishing new regulations on the financial markets, and points of improvements for future scholars as archetype for their working empirical model.

Abstract Format






Accession Number


Shelf Location

Archives, The Learning Commons, 12F, Henry Sy Sr. Hall

Physical Description

vii, 160 leaves : illustrations (some colored) ; 28 cm. + 1 computer disc ; 4 3/4 in.


Business enterprises--Valuation--Philippines; Accounting--Philippinies

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