Accounting Conservatism

This dissertation studies the accounting conservatism, including conditional conservatism and unconditional conservatism, in China mainland. Firstly, I find that the earnings of listed companies reflect bad news more quickly than good. Using six variables to measure conservatism, we find that its presence in the full sample results from the big bath behavior of loss companies. Secondly, I test the alternative hypothesis about big bath behavior of loss companies, including put option theory and accounting conservatism theory, and prove that the earnings management theory can explain all the facts that I has found. Finally, using data from 1994 to 2004,I test the time series properties of earnings, cash flows and accruals, and find that the financial reports become more and more unconditionally conservative in China mainland.The topic of Chapter 3 is conditional conservatism. Using the companies listing in SHSE and SZSE form 1998 to 2004, I find that there is accounting conservatism in China mainland: the earnings of listed companies reflect bad news more quickly than good. Because of the ST and delisting requirements in mainland China, loss companies have strong incentives to take a big bath, which leads to bad news being reflected more quickly than good news in accounting earnings. Using 6 proxy to measure conditional conservatism, including the skewness of earnings distribution, the variability of earnings, the earnings-return association, the accruals-cash flow association, the persistence of earnings, the information content of earnings relative to cash flow, I find that the conditional conservatism is gone when I control the effect of the loss companies. Witch means that the conservatism of the full samples is the result of the big bath behavior of loss companies and there is no conditional conservatism in China.There are alternative explanations for big bath behavior itself, including the abandonment option and conservatism. In Chapter 4, I attempt to provide some additional discussion of these explanations. The abandonment option theory cannot explain why the earnings volatility of loss companies is higher than that of profitable concerns., and it either cannot explain the negative skewness of accounting earnings and the negative distribution of ROE. The conservatism can't explain the why the conservatism depends on operating performance. But the earnings management can explain all the facts that I has found. So I can draw the conclusion that conservatism in China mainland is the result of the big bath behavior of loss companies.In Chapter 5, we test the time-series properties of earnings, cash flows and accruals. Firstly, I find that ROA is declining since 1998, while the CFO, sales and major operating profits are going up from 1998. So the declining of ROA is the result of the accruals, which means that financial reporting become more conservative in China mainland. Further more, I prove that the conservatism is unconditional conservatism. Finally, Using 3 proxy to measure conditional conservatism, I find that there is no conditional conservatism in China when I control the big bath behavior of loss companies.