Research On Investor Protection Role Of Accounting Conservatism

The minority shareholders are the most dominating participant in thesecurities market, and they are important to keep securities market on running anddeveloping. It is the level of minority shareholders profit protection that caninfluence or determine the extent of the securities market’s development.Information asymmetry is the leading reason that leading to the loss ofminority shareholders, and which also is the hotspot problem in investor profitprotection studying. As the part of the investor profit protection system, financialaccounting can alleviate information asymmetry by providing high-qualityaccounting information to investors. Does accounting conservatism can protect theprofit of minority shareholders and how can it do? These problems are notattached importance to and studied systematically, although accountingconservatism is a traditional and widely-applied characteristic of accountinginformation quality. This research analyzes the relationship of accountingconservatism and minority shareholders profit protection based on the informationasymmetry theory, the principal-agent theory. In addition, this research use theK&W model which provided by Khan and Watts in2009to measure the firm-yearlevel accounting conservatism, and select equity cost of capital and embezzlementof funds to show the effects of investors’ protection, then test the economicconsequence of minority shareholders profit protection by accountingconservatism based on the theoretic analysis from the aspects of pricing functionand governance function.The main conclusions of this research are as follows: 1. From the aspects of pricing function, the result of test shows thataccounting conservatism and equity cost of capital is negatively related.2. Embezzlement of funds is the misappropriating behavior of controllingshareholders who aim to maximize their own interests, the less misappropriatingbehavior the better. While the result of test shows that accounting conservatismand misappropriating behavior is negatively related.The innovations of this research are as follows:This research combine accounting conservatism with the minorityshareholders profit protection, which expand the extent of investor protectionstudies. This paper analyses the minority shareholders profit protection byaccounting conservatism through lessening the information asymmetry.