Ultimate Controlling Shareholders, Investor Protection And Accounting Conservatism

Accounting conservatism has always been considered as one of the important characteristics of financial statements (Sterling,1967). It has some influence on agency problems and asymmetric information problems about corporate governance and debt contracts. It’s on corporate governance and debt contracts and other agency problems and asymmetric information problems have some impact (Ball and Shivakumar,2005). Because of the lack of scientific measurement models, related studies are much later than the emergence of accounting conservatism. Thanks to Basu econometric model presented in 1997, studies of contemporary accounting conservatism are enriched. This initiative allows the relevant studies have a more classic reference model. But the scholars have mostly studied from the perspective of direct ownership structure. In fact, many shareholders tend to choose a more sophisticated way to control company in order to become the ultimate controlling shareholders of the company (La Porta et al.,1999). Study the relationship between ultimate controlling shareholders and accounting conservatism is helpful to reveal ultimate controlling shareholders’predatory behavior and information manipulation methods. At present, our country’s legal system is not perfect enough, the legal protection for investors is still inadequate, so that many domestic excellent enterprise choose listed abroad (such as taobao, jingdong, et al.), causing a large amount of capital outflow. Although our legislation in terms of the protection of shareholders’equity has been trying to improve, but there still are a lot of deficiencies. Study about the legal protection of investors in this paper provides a good direction for reform and policy recommendations for the perfection of the legal system of our country and has a certain role to the healthy development of future capital markets.After a comparative analysis of various accounting conservatism calculation models, this paper chose the C-score index proposed by Khan and Watts (2009) as a proxy variable. According to certain rules of excluding, this paper selects a sample of balance panel data composed of 1223 Chinese listed companies dated from 2010 to 2013 (4892 observations in total). Then, this paper has carried on the empirical research using relevant knowledge of econometrics and software. The results show that:(1) Accounting information of companies whose ultimate controlling shareholder is state owned enterprises is more conservative; (2) Cash flow rights have a significant positive impact on accounting conservatism; (3) Divergence between control rights and cash flow rights has a significant negative impact on accounting conservatism; (4) Accounting conservatism is weaker following better legal protection for investors; (5) Increasing the degree of legal protection for investors can effectively suppress ultimate controlling shareholders’ abuse intention and reduce the possibility of damage to accounting conservatism; (6) The C-score index proposed by Khan and Watts (2009) is applicable in China and its conclusions are consistent with those from Basu (1997) model.