The Product Market Competition And Accounting Conservatism

Since China’s reform and opening up, we have introdued the market competition mechanism, which helps the product market rapidly develop. The number of enterprise increases and the product market competition gradually strengthens. From the whole aspect, although the development of current market economy is in a rapid rhythm, it is inadequate-which directly results to our country product market competition presents the phenomenon of industrial structure’s concentration, excessive industry competition and administrative monopoly. Product market in China has experienced a predatory competition stage, this competition mode directly results in the industrial structure of our country shifting from scattered competitiveness to monopoly concentrated tends. At the same time, because of the excessive input and high exit barriers,the product market appears the phenomenon of excess production capacity. These reasons contributed to the product market competition.According to the Accounting Standards, enterprises have the right to choose the accounting policy, which can properly reflect its business activities and financial status timely. However, when the enterprises face with different levels of product market competition,which will affect the choices of accounting policy, some tendency accounting policy will be chosed and therefor results in the important principle-Accounting Conservatism inadequtely carried out. Product market competition affects the choice of Accounting Policies.On the one hand, the product market competition provides outside investors more information since the competition increases the number of enterprises in one industry, which gives the enterprises a benchmark to evaluate their financial performance. The lower degree of information asymmetry limits the managers’ ability of adverse events; On the other hand, the enterprise in the fierce competition environment enhances the risk of liquidation and perish. In this environment, accounting conservatism is especially important since it can limit the management to invest in negative NPV projects and force the management to minimum loss of projects, which effectively alleviate the agency conflict problems. Therefore, the product market competition makes the managers timely confirm economic losses and commonly use the accounting conservatism principle,thus robusting the level of accounting conservatism.Based on the theory Analysis of Product Market Competition and the Accounting Conservatism,we use the improved Basu model and the data of A-share listed companies from the year 2007 to 2013 to carry on the empirical research. The results show that the level of Accounting Conservatism is positively associated with the degree of Product Market Competition. To further the study, we find that, from the property rights perspective, when the nature of the enterprise is state-owned, it will reduce the influence of the Product Market Competition to the Accounting Conservatism carried on before. On the basis of the research’s conclusion, by combining the phases and characteristics of our country’s product market competition, we put forward some relevant policy recommendations, namely to strengthen the product market competition intensity, to cultivate better competition environment, to prevent excessive concentration of the product market and to refine the accounting conservatism principle into specific provision.