The Characteristics Of Ultimate Shareholders And Accounting Conservatism: Evidence From China

Accounting Conservatism, as a basic principle of accounting, attracted a lot of attention from the academic。Especially, a bunch of empirical literatures about the accounting conservatism emerged after the earning-return model suggested by the Basu(1997). At the basis of contract interpretation about accounting conservatism, Watts(2003) claimed that Accounting Conservatism is an effective corporate governance mechanism, many western scholars give a lot of evidence to support this issue. The classical agent theory suggest that the contract usefulness of accounting information is not only providing the content of every clause for the each side of the contract, but also is playing like a monitor to make the contract more efficient, so accounting information would attenuate the agent cost between insiders and outsiders of the company which is determined by the information asymmetric. However, in order to extract the private benefit, management would not use the accounting information to convey their private information they possessed. At the same time, the opportunistic manner of management is influenced by the different institutional environment and the usefulness of corporate governance. So we can not confirm that the contract usefulness of Accounting Conservatism is absolutely right. From the view of Ultimate Shareholder, this paper use the Evidence from China to find the genuine incentives about the use of Accounting Conservatism.Use a new data set on Ultimate Shareholder's characteristics of 7146 firm-years from china during the 2004-2009 period, this paper examine the relation between the Accounting Conservatism and Ultimate Shareholder's characteristics, furthermore, we investigate the motivation about the formation of Accounting Conservatism in Chinese capital market. Since the increase of cash-flow right heighten the marginal cost to Ultimate Shareholders of extracting the private benefits of control and increase the expected level of expropriation. This paper use the cash-flow right as the substitution of private benefits of control. Firstly, at the basis of Basu(1997)'s model, we find the Accounting Conservatism is significant higher for companies with a higher control right, and the Accounting Conservatism is significant higher for companies with a lower cash-flow right. Combine this evidence with our country's institutional background, this paper'result suggest that the existence of Accounting Conservatism is associated with higher private benefits of control for the Chinese public firms. Additionally, in order to conceal the private benefits of control formed by the"tunneling"manner, Ultimate Shareholders attempt to use the conservative accounting information with the purpose of intentionally misleading investors to gain at their expense. At the basis of Khan and Watts(2009)'s model, we find the Accounting Conservatism is significant higher for companies with lower layers of control chain, namely, instead of Accounting Conservatism, Ultimate Shareholder inclined to use the complexity of pyramid structures to conceal the"tunneling"manner. Secondly, in the grouping test, we can not find the opportunistic uss of Accounting Conservatism is affected by the Ultimate Shareholder's ownership type, and the layers of control chain is associated with the lower Accounting Conservatism only for the state-owned firms. Finally, we add the interaction between state-owned and layers of control chain to the basic regression model, we find evidence that Accounting Conservatism in the state-owned firms is significant higher for the lower layers of control chain in the sample. Also, the evidence suggest that center-owned would confine the use of the complexity of pyramid structures to siphon the public firms.This paper's result suggest that we can not regard Accounting Conservatism as an effective corporate governance mechanism at the basis of our country's capital market. Oppositely, Accounting Conservatism is used by the Ultimate Shareholders to conceal the private benefits of control, therefore, based on the Chinese institutional background, we should pay more close attention to the opportunistic use rather than regard it as an effective corporate governance mechanism simply when we interpret the Accounting Conservatism.