Conservatism And The Transparency Of Listed Companies’ Financial Information

This paper investigates the impact of conservatism on disclosure from the perspective of transparency of financial information. Firstly, the concept of conservatism and transparency is defined on the basis of the previous studies. Secondly, how the conservative accounting policy impacts the transparency is analyzed theoretically and tested empirically. And from the Chinese elimination system this paper further analyzes and tests the system-formation causes for which the listed companies abuse conservative accounting policy for big bath and the lower transparency. Lastly, according to the result of this research some revelations are shown, the limitation is pointed out and the future research direction is given.To sum up, the main conclusions are as follows:with the increase of conservatism, the transparency of accounting information is also improved within a proper scope. However, when conservatism exceeds a certain degree, the transparency is falling instead of rising, which takes on an inverted-U relationship. After eliminating the disturbance of earning management, the transparency is improved with the enhancement of conservatism. These results show that the transparency of financial information will vary with the different using of the conservative accounting policy. That is, insiders are inclined to choose high transparency, which can mitigate IA when the company really implements the prudent accounting policy. The transparent financial information can not only reduce the risk that the capital market has a negative reaction due to insufficient information of the outsider but also deliver the message that the company’s accounting result is conservative and reliable, which helps to mitigate information asymmetry (IA) and improve a company’s positive market effect. However, when a company implements extremely downward earnings management under the guise of conservatism, its accounting information will be opaque in order to ensure the discovery of their behavior, which leads to more serious IA.The study also finds out that those companies threatened by elimination system (ST system and delisting system), based on accounting numbers, are inclined to reduce transparency hence result in "excessive" conservatism. However,"excessive" conservatism is only related to delisting system, not to ST system. At the same time, those companies are more likely to reduce transparency through the "excessive" conservatism. This article also puts forward some policy recommendations correspondingly based on the above findings.