The Study On The Impact Of Separation Of Control Rights And Cash Flow Rights On Earnings Conservatism

2008, the subprime mortgage crisis broke out in the U.S. The fair valuemeasurement attribution has been questioned, and the conservatism principle hasattracted wide attention in the accounting profession. The accounting system isconstantly reinforced the requirements to the conservatism principle in China, butChina’s listed companies use aggressive accounting policies to manipulate profit isstill relatively common. The scholars in western countries have carried out extensiveresearch on the principle of conservatism and made a series of research results, butthere is a great difference in economic system between domestic and foreign. Underour special institutional context, the research of the impact of separation of controlrights and cash flow rights on earnings conservatism can deepen the driving forces ofthe earnings conservatism, and provide empirical evidence for the controllingshareholder’s misappropriation behavior and further damage the quality of accountinginformation, and provide a theoretical basis for the objective evaluation of theaccounting system’s changing.Firstly, this paper introduces basic theory of incomplete contract theory,principal-agent theory, asymmetric information theory and the theory of corporategovernance. Secondly, this paper analyzes the impact of separation of control rightsand cash flow rights, cash flow rights and the nature of the controlling shareholderson earnings conservatism, and then states hypothesis on the basis of theoreticalanalysis. Thirdly, this paper uses the surplus/price reverse regression model to test thehypothesis based on2007-2011data of the listed companies in China. Empirical resultshows: the control shareholders’ separation of control rights and cash flow rights andearnings conservatism shows a kind of significant negative correlation. But the cashflow rights can significantly enhance earnings conservatism. From the view of thenature of the controlling shareholder, compared with non state-owned listedcompanies, state-owned listed companies show weaker earnings conservatism. Furtherstudy finds that compared with non state-owned listed companies, the separation ofcontrol rights and cash flow rights of state-owned listed companies show a strongerimpact on earnings conservatism. The cash flow rights of state-owned listedcompanies also show a stronger impact on earning conservatism. Finally, based onempirical findings, this paper has made policy recommendations from optimizing theshareholding structure of listed companies; strengthening the function of debtgovernance and improving accounting earnings-based monitoring and evaluationsystem to expect to promote conservatism of listed companies.