Property Rights Protection, Accounting Policy Choice And Economic Consequences

There have been great achievements of the construction of market economy system and economic development after the reform and opening-up in our country; many scholars try to explain the miracle of China's economic growth. To sum up, there are two major kinds of explanations. The first one emphasizes that local government actively promote the "financial federation" assumption for the growth of fiscal revenue under the condition of decentralization of authority, and the other stresses the "tournament" assumption of political promotion for assessment of GDP of local officials under the condition of centralization of power. Specifically, the major driving forces of China's economic growth can be ascribed to the fiscal decentralization of economy and high centralization of governmental power. Although great progress have been achieved of the construction of market economy system, the protection of Chinese property rights remains at low level in phase of the economic transformation, especially, private enterprises are frequently confronted with the intervention from local government. It is an irrefutable fact that business operation is at greater risk of predatory. When business operation are at greater risk of predatory, enterprises will take the appropriate policies to avoid this risk, and the choice of accounting policy is undoubtedly an appropriate tool. In addition, due to the stage of development and some history reasons, the level of property rights protection and law enforcement vary significantly across different areas in China, which provide the ideal system environment for us to control unobservable factors of national level to research enterprises' choices of accounting policy under the condition of the predatory risk due to the weak property rights protection system.Based on these above reasons, in accordance with the political cost assumption of accounting policy choice, this paper incorporates the predatory risk into the interactive mechanism of the property rights protection and the accounting policy choice, and constructs the theoretical analysis framework of how does property protection affect accounting policy choice. At the same time, we apply the theoretical framework to test how does property protection level affect the choice of enterprise accounting policy from the following three perspectives:negative earnings manipulation, tax avoidance and accounting conservatism, and we also consider the moderating effect of the property attribute, state-owned background and political connection to the relationship between the property rights protection and the choice of accounting policy. On this basis, this paper not only examines the economic consequences of the negative earnings manipulation and tax avoidance, but also examines the relationship between information transparency and corporate value under different level of property right protection. Four main conclusions are formed as below:Firstly, this paper examines empirically whether firms hide earnings by downward earnings manipulation to avoid predatory risks when they face weak property rights protection, and the economic consequences. After controlling for endogeneity, we find that:compared with the state-owned enterprises, the private enterprises have more significant downward earnings manipulation because they face more risks under weak property rights protection; private enterprises without state-owned background have more significant downward earnings manipulation; and private enterprises without political connection has more significant downward earnings manipulation. Economic consequences test shows that:downward earnings manipulation of private enterprises under weak property rights protection enhances the corporate value, shown as positive market response, but state-owned enterprises do not have such effect.Secondly, this paper examines empirically whether firms legitimate tax avoidance to avoid predatory risks when they face weak property rights protection, and the economic consequences. After controlling for endogeneity, we find that: compared with the state-owned enterprises, the private enterprises have more significant tax avoidance because they face more risks under weak property rights protection; private enterprises without state-owned background have more significant tax avoidance; and private enterprises without political connection has more significant tax avoidance. Economic consequences test shows that:although tax avoidance under weak property rights protection can enhance the corporate short-term performance, it damage the corporate long-term performance.Thirdly, this paper examines empirically how the level of property protection influence accounting conservatism and whether information transparency can enhance corporate value. After controlling for endogeneity, we find that:compared with the state-owned enterprises, private enterprises face more predatory risk, therefore they have more accounting conservatism under weak property rights protection; private enterprises without state-owned background have more significant accounting conservatism; and private enterprises without political connection has more significant accounting conservatism.Fourthly, based on weak legal protection environment in phase of the economic transformation, this paper examines whether information transparency can enhance corporate value. We find that information transparency only enhances corporate value in areas with good legal protection. And further tests find that information transparency enhances corporate value more significantly in non state-owned corporate, or corporate with more severe agent problem. The above research results indicate that, in weak legal protection environment, information transparency may not enhance corporate value. On the contrary, it may even lead to greater business predatory risk.Our study makes five contributions to existing literature:First, based on the political cost assumption of accounting policy choice, this paper incorporates the predatory risk into the interactive mechanism of the property rights protection and the accounting policy choice, and constructs the theoretical analysis framework of how does property protection affect accounting policy choice. Then this paper propose the property protection motivation of accounting choice and test empirically. Our research extend the theory of accounting policy choice based on the political cost assumption.Second, based on the theoretical analysis framework of the property protection motivation of accounting choice, this paper derive that when a corporate face greater risk of predatory, it will take appropriate policy to hide its real performance. With aid of this theoretical framework, we propose property protection motivation from three perspectives:negative earnings manipulation, tax avoidance and accounting conservatism. We also use large sample to test differences of negative earnings manipulation, tax avoidance and accounting conservatism under different level of property protection, and their economic consequences. Our research not only support Durnev et al. (2009) that when corporate faces larger political cost because of predatory risk, it has motivation to manipulate accounting information to protect its property, but also extend the theory of property protection motivation from negative earnings manipulation, tax avoidance and accounting conservatism, and contributes to the literature in this field.Third, our research supports the property protection function of "political connection", and further clarifies the true purpose of private enterprise which seeks political connections, and enriches "supporting hand" theory of political connection.Fourth, our research shows that private enterprises seeking state-owned background due to property protection motivation, which clarifies the true purpose of private enterprise building state-owned background in Chinese unique institutional background.