Accounting Conservatism

Accounting conservatism can be classified into two forms: conditional conservatism and unconditional conservatism. Conditional conservatism can reduce agency cost and raise the value of company, which means conditional conservatism allows companies to maximize their real value through the provision of measurement method. Prior studies propose four explanations for conditional conservatism: contracting, litigation, regulation and taxation. And conditional conservatism can also be affected by unconditional conservatism.This paper uses 663 samples from 1998 to 2006 to examine whether conditional conservatism is determined by its demand and supply, under the specific institutional environment in China. The findings are as follow: 1) demand from equity contract and debt contract induce conditional conservatism; 2) conditional conservatism and unconditional conservatism are negatively interrelated, unconditional conservatism preempts conditional conservatism in some level.This paper provides evidence to relationship between loss companies and conditional conservatism. Although big bath can enhance the conditional conservatism of loss companies in short term, our evidence suggests that loss companies using aggressive accounting policies rather than conservative accounting policies in long term.