Diversification Of Corporate Equity Investment,Capital Management Mode And Conservatism

ABSTRACT:I analysis how diversified equity investment impacts accounting conservatism. The study finds that(1) Accounting conservatism will decrease as equity investment decreases. Highly diversified list company is usually less conservative. The business is mainly distributed in subsidiary companies when equity investment is at high level. But the subsidiary corporations are wide geographically distributed, doing business in different industries with numerous managers. As a result, it is never easy for the headquarters of parent company to monitor the subsidiaries. The managers of subsidiary companies may sacrifice accounting conservatism to increase their book profit. Diversified equity investment will lower the risk of debt default. As a result the creditor will lower the demand for the accounting quality of debtor.(2) For the listed companies with high equity investment level, company is usually less conservative when debt is heavily distributed in its parent company. If there is a finance company, the influence will dismiss. Parent company is a listed company. It is good at financing than its subsidiaries. The demand of bank for the accounting quality of parent company is lower than for subsidiary company.The main contribution of this paper is to reveal the relationship between the parent and subsidiary company structure characteristics and accounting conservatism. In recent years, there are a large number of literatures examining the listing corporation accounting conservatism. Related papers mainly focus on the debt contract perspective. However, there is little existing research concerning the influence of structure factor. This paper suggests that the agency problem between parent company and subsidiary company will damage the accounting conservatism when business is mainly distributed in the subsidiary. Compared to the parent company, the subsidiary liquidity is weak. Creditor will increase the requirement of accounting conservatism for loan business when the debt is mainly distributed in the subsidiary company. This paper has important reference value to understand the intrinsic link between the corporate structure;haracteristics and accounting conservatism.