Research On Accounting Conservatism Based On Managerial Incentives Considerations

The separation of ownership and control in publicly held firms often creates incentive conflicts between stockholders and management, which causes agency costs for the firms' stockholders. Two types of agency costs arise in a standard principal-agent setting: incentive costs and the costs of implementing sub-optimal decisions. The former refers to the costs that the principal incurs in motivating the agent to make desired decisions, and the latter to the principal's welfare loss in implementing decisions that are second best rather than first best. This study focuses on the point of view of agency costs to examine the interaction of accounting conservatism and managerial incentive.Based on the theory of information economics and the principal's contract design problem, this paper analyzed and researched the accounting conservatism behaviors of the enterprise. Aiming at the view of managerial incentive, and deepened the understanding of the theory of accounting conservatism , which gave some useful proposals to the design of principal's contract, the design of managerial incentive mechanism, and governed the earnings management based on the managerial incentive of china.This paper discusses the interaction mechanism of managerial incentive and accounting conservatism based on reviewing the concepts and connotations of the incentive, managerial incentive and accounting conservatism. The game model is built to prove that the incentive value of accounting signal is strengthened by the accounting conservatism. The agent is rewarded for good performance and punished for bad performance. And the enlargement of the gap between the reward and the punishment will induce the agent to make more efforts on their task. However, this enlargement will lead the increase of the agent costs while the agent just has limited responsibility for his bad performance. Then the implement of sub-optimal decisions can balance the agent effort and agent cost.The innovation of this paper is taking use of a perspective different from the traditional method. The principal usually tends to encourage the agent by using the reported accounting earnings. But since the effort of the agent is not determined by the external environment but the inner attributes, this paper assumes that the accounting income is more useful on controlling the sub-optimization of alternative costs if it is measured by Conservatism other than neutral or radical principle.