The Test Of Accounting Conservatism And Its Affecting Factors Analysis And Economic Consequences Analysis

This paper bases on the conservatism principle of accounting, Defining conditional conservatism as earnings reflecting"bad news"more quickly than"good news", unconditional conservatism as the gap between recognized and unrecognized components of equity, measured by the market-to-book ratio. Using data from 1998-2004 of listing corporation, and with firms'stock returns to measure news, the paper tests the conditional conservatism in China stock market by regress earnings on returns and find that the contemporaneous sensitivity of earnings to negative returns is two to three times that of earnings to positive returns, so the evidence of asymmetric timeliness of earnings is found out. The paper also finds that the time series of accruals is a kind of method to test the conservatism in accounting and examines the role of accruals in accounting conservatism. The paper finds that conditional conservatism reflected in earnings is mainly due to the accrual component of earnings, not the cash flow component of earnings. The paper finds a negative association of conditional and unconditional conservatism; the test indicates that assessing earnings timeliness requires the recognition of, and control for MTB ratio. Through a series of empirical tests, the paper finds the listing corporations'accounting conservatism is increasing; the bubble of stock market is not as large as the accounting numbers implies. The paper also empirically suggests that the extent of conditional conservatism is influenced by the degree of income smoothing, and income smoothing can help explain the differences in conditional conservatism. It finds that income smoothing has a more robust impact on conditional conservatism than does unconditional conservatism, the impact of which seems to be dependent on methodological choices. Income smoothing and unconditional conservatism taken together eliminate the significant differences in conditional conservatism. Through model, the paper studies the factors affecting accounting conservatism, and finds that conditional conservatism is mainly due to impairment accounting and the valuing method of lower of cost or market for inventory; unconditional conservatism is caused mainly by the use of accelerated depreciation and historical cost accounting for positive net present value projects. There are different motives behind two kinds of accounting conservatism. The motivation for conditional conservatism is to counterbalance manager's perceived incentives to report upward accounting numbers during difficult period. The motivation for unconditional conservatism is the difficulty in certain economic assets and liabilities'valuation. According to behavioral finance theory, investors are not fully rational due to cognitive psychology, so they prefer conservative accounting rather than neutral accounting because accounting conservatism provide a commitment which can positively induce greater effort in controlling information aggressiveness. The view that accounting conservatism negatively affects the quality of accounting information such as consistence, usefulness, verification and relevance also exists. The paper supposes the optimal accounting conservatism increases with asymmetry response of investor to income and loss, and decreases with the investor's information quality requirement enhancement. The paper provides a new angle of view to explain the bubble of stock market in the microeconomic level.