The Influence Of Accounting Conservatism On The Efficiency Of Investment And Debt Cost In Companies

Conservatism is one of the most important characteristics of high quality accounting information. Conservative accounting information contributes to protect the benefits of investors and improve the value of enterprises. Since conservatism is critical in accounting measurement and financial reporting, it will certainly influence the economic decisions of users of financial statements and thus change the efficiency of investment and debt cost in a company. This thesis aims to research the economic consequences of accounting conservatism in Chinese A-share firms, also proposes some theoretical and empirical supports on firms'choosing accounting policies and governments'establishing regulations as well as improving supervision.Using MTB and–Accruals as independent variables, this paper analyzes the sample of Chinese A-share firms during the 2001-2008 periods through statistical way and hypothesis tests. It researches the influences of conservatism on the efficiency of investment and debt cost. Also some improvements have been put forward on improving accounting conservatism and the financial information quality.From the empirical results, we found that conservatism has two aspects of economic consequences: it can improve efficiency of investment and decrease debt cost. The conclusions can be arrived as followed: firstly, it is found that when confronted with deterioration in investment opportunities, firms with more conservative accounting response more quickly by reducing the flow of capital to new investments or by withdrawing capital from existing losing projects. However, we can not conclude the influence on efficiency of investment when investment opportunity is ameliorating. Secondly, conservatism helps decrease debt cost in a firm.