Research On Accounting Conservatism And Firm Investment Decisions

It's said that accounting conservatism is the oldest and perhaps the most deeply rooted principles (Sterling,1967), Basu (1997) argues that conservatism has influenced accounting practice for at least five hundred years. Conservatism is not only an important quality of financial reporting properties, but also is an effective corporate governance mechanisms (Ball and Shivakumar,2006). Accounting conservatism, commonly defined as the deferential variability required for recognition of profits versus losses (Watts 2003a), is one of the most intensively researched topics in the empirical accounting literature over the last decade. Lafond and Watts (2008) think that information asymmetry between firm insiders and outside equity investors generates conservatism in financial statements. Conservatism reduces the manager's incentives and ability to manipulate accounting numbers and so reduces information asymmetry and the deadweight losses that information asymmetry generates. This increases firm and equity values. But inefficient investment will reduce the value of the firm, as the typical form of agency problems and asymmetric information, it has also been the focus for the scholars of finance and accounting. Jensen and Meckling (1976) pointed out that an inevitable conflict of interest exists among management shareholders and creditors, but these conflicts can be coordinated through contractual means to reduce agency costs, and contract is one of the main factors that generate conservatism (Watts,2003). Unfortunately, despite the inefficient investments in macro and micro levels are prevalent, but how to reduce inefficient investments have not formed a consensus, especially in China in which has a special economic environment and institutional context,scholars have different understanding of inefficient investment,so they have different advises to how to improve the investment efficiency.Based on information asymmetry and agency theory, several hypotheses about relationship between accounting conservatism and company investment are proposed. Using data spanning the 2000-2009 years of Chinese A-share listed companies, this dissertation empirically test these hypotheses under different corporate governance and business environment, by using of descriptive statistics, mean test, correlation test and multiple logistic regression statistical analysis, mixed linear regression, fixed effects and random effects models and other quantitative analysis. The main research findings include:(1) Accounting conservatism has become the basic features of financial reports of listed companies in China's, for the state-owned holding company,the degree of conservatism is lower than the non-state-owncd holding company,debt levels is main factors to lead to differences in the conservatism; (2) Inefficient investment behavior is universal, as opposed to non-state-owned holding companies, the state-owned holding companies have a higher proportion of capital investment and lower the overall investment ratio;(3) Accounting conservatism has effect on the type of investment, and is negative correlation with financial assets investment;(4) In state-owned holding company, accounting conservatism is significantly negatively associated with over-or under-investment, while in the non-state-owned holding company, accounting conservatism is mainly played the role of inhibiting over-investment;(5) Accounting conservatism plays the role of monitoring managers'investment decisions, conservatism is positive associated with company's future profitability and negatively associated with the proportion of the possibility and magnitude of impairment of assets. After implementing the new accounting standards in 2006, these correlations are more significant;(6) For the company in financial distress, accounting conservatism can mitigate risk shifting which is an investment distortion that occurs as a result conflicts of interest between shareholders and debtholders. The mitigating effect of accounting conservatism is more pronounced in state-owned holding companies;(7) "Soft budget constraint" has significant influence on investment decisions of listed companies, as opposed to non-state-owned holding company, long-term bank borrowings of state-owned holding company are more positive associated with over-investment, while the short-term loans play the role of lowering over-investment;(8) A higher proportion of outstanding shares can inhibit the shifting of risk for the interests of shareholders, suggesting that the increase in the proportion of tradable shares is conducive to enhancing corporate governance.In summary, our findings contribute to a growing body of literature that studies the economic consequences of accounting information. We not only provide evidence on the specific benefits of conservatism in mitigating agency problems associated with managers'investment decisions, but also find that different efficiency of accounting conservatism in regulating corporate investment behavior is caused by the nature of property rights. These findings deepens theoretical about economic consequences of accounting information, extends the application of accounting theory to company decisions area. These findings have positive reference value to monitor investment and revise accounting standards.