The Small And Medium Investors' Protective Effect Of The Accounting Conservatism Under The Pyramid Ownership Structure

As a newly founded transforming market economy, there are two typical problems in our capital market. One is the concentration of the ownership and the unsound internal control; the other is the weakness of the external oversight and the lack of the protection mechanism of investors'interest. In these circumstances, cases of the tunneling behavior by the ultimate controllers and the invasion and occupation of the interests of small shareholders burst out frequently. And the interest conflicts between the ultimate controller and the small shareholders are obvious. Especially under the pyramid ownership structure, the cash flow rights and the controlling rights depart, and the one of the consequences is the lower equity investment only provides a little alignment effect between the ultimate controller and the small shareholders. But the higher degree of the controlling rights strengthens the entrenchment effect of the ultimate controller. The accounting plays an important role in the investors'protection related system because it can provide necessary information for the exercise of the related rights by the investors. The conservatism which is one of the core characteristics of the accounting information quality, can realize the investors'protection by the pricing function and the governance function. The conservative accounting information eases the conflicts between the external investors and the internal controller. The ultimate controllers'motivation of the appropriation of the company's capital will be weakened and the investors'protection of the accounting information will be realized.In this paper, we examined the relation between the separation of the cash flow rights and the controlling rights and the accounting conservatism under the pyramid ownership structure by using the data of the listed companies in Shanghai and Shenzhen security exchange markets in 2007 and 2008. We found the negative correlation between the separations of the above two rights and the accounting conservatism. And the result is salient. So this paper provided us certain amount of evidence of the investors'protection mechanism and the effect of the accounting information and provided us a broader perspective into the knowledge of the functions, the purposes and the quality characteristics of the accounting information.