Accounting Standards Change, Earnings Management And Earnings Conservatism

Conservatism has a great and permanent influence on accounting theory and practice. Most of accounting standards setting bodies throughout the world take conservatism as an important accounting principle. In order to implement conservatism which is an influential accounting policy in the world, China has improved gradually the requirements of conservatism by changing accounting standard several times. For example, The Accounting System of Business Enterprises (ASBE) implemented since 2001 increased the number of items as to provision for assets impairment from four to eight. However, under the special institutional background of securities regulations in China, such as Special Treatment (ST) regulation, much empirical evidence showed that listed firms take big bath by taking advantage of provision for assets impairment in order to avoid being marked 'ST' or delisted. Since this kind of earnings management also generate understatement of assets as earnings conservatism do, we have to consider its effect on the test result of conservatism when doing research on earnings conservatism in China.Using the data of listed firms in China's stock market, this dissertation empirically examines the relationship among accounting standards change, earnings management and earnings conservatism. Specifically, this dissertation firstly examines whether the Accounting System of Business Enterprises (ASBE) implemented since 2001 improved significantly the earnings conservatism of the listed firms. Then, if the accounting system change did improve the earnings conservatism, this dissertation continues to examine whether the improved earnings conservatism resulted from discretionary accruals or not. Lastly, after analyzing the special institutional background in China, this dissertation further examines whether the improved earnings conservatism after 2001 is really earnings conservatism that can proxy for high quality earning or just a seeming conservatism which results from the big bath behavior of the listed firms.The main conclusions of this dissertation are as follows. The Accounting System of Business Enterprises (ASBE) implemented since 2001 improved significantly the earnings conservatism of the listed firms. But the improved earnings conservatism mainly results from discretionary accruals. After the big bath behavior's effect on the test of conservatism is considered, research evidence show that the improved earnings conservatism after 2001 is just a seeming conservatism which results from the big bath behavior of the listed firms. When the other proxies, such as Accruals Quality, are also used to test the earnings quality of listed firms in China and then the test result are compared with the one of earnings conservatism, we find that the displayed earnings conservatism of listed firms after 2001 can't proxy for high quality earnings because the test result of earnings conservatism is easily affected by big bath earnings management.In summary, the above research results suggest that accounting quality ultimately is determined by the underlying economic and political factors influencing managers' incentives, and not by accounting standards per se. Under the special institutional background of securities regulations in China, such as ST regulation, the test on earnings conservatism is greatly affected by earnings management of the listed firms. So if we judge the earnings quality of listed firms only simply based on the test result of earnings conservatism, we may draw incorrect inference.