Relationship Public Company Accounting Conservatism And Over-investment Behavior

The investment decision of corporation is very important for its cash flow growthand future development, and the efficiency of investment behavior would directlyaffects the realization of corporate value maximization. In recent years, mostcorporations in China had substantial investments. However, as a result ofstate-owned holding, debt soft constraint and imperfect governance mechanism, theoverinvestment behavior, which would damage the shareholders’ value, is also verycommon. Accounting conservatism, as one of the accounting information qualitycharacteristics, is also an effective corporate governance mechanism. Now there arefew studies about how accounting conservatism would affect the overinvestmentbehavior. In my paper, I would make an empirical study focus on the relationshipbetween the provision and reversal of assets impairment of Chinese listed companiesand their overinvestment to discuss whether accounting conservatism could efficientlycontrol the overinvestment behavior in our companies.The empirical study result shows that, in general, the provision of assetsimpairment could control the overinvestment behavior, but this influence has not beensignificantly enhanced after the implementation of the new accounting standard.Furthermore, the reversal of assets impairment would lead to overinvestment and thisinfluence has been reduced after the implementation of the new accounting standard.In addition, the study between the provision and reversal of long-term assetimpairment and overinvestment also present the same results. The results indicate thataccounting conservatism could positively and effectively control the overinvestmentbehavior in our companies and the new accounting standard in2007has morecontributions to the influence.