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Accounting Conservatism, Ultimate Ownership and Investment Efficiency Improvement

China Finance Review International, Vol. 2 No. 1, 2012

25 Pages Posted: 17 Jul 2012  

Xiaodong Xu

Antai College of Economics & Management

Xia Wang

East China Normal University (ECNU) - School of Business

Nina Han

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: July 11, 2012

Abstract

This paper examines the role of accounting conservatism on firm investment behavior in China. We find that the association between accounting conservatism and capital expenditure is significantly positive when inside capital is not enough to use for investment, suggesting that conservatism can expend the level of investment by decreasing information asymmetry and cost of capital; However, the association between accounting conservatism and capital expenditure is significantly negative when inside capital is enough to use for investment, suggesting that conservatism can curtail the level of investment by mitigating the interest conflicts between management and outside shareholders and decreasing agency costs. Additionally, we find that the severity of information asymmetry and agency problem affects the role of accounting conservatism on firm investment behavior, the association between accounting conservatism and capital expenditure is weaker for firms with ultimate ownership controller as local government or individuals.

Keywords: accounting conservatism, investment, information asymmetry, agency cost

JEL Classification: G31, M41, O16

Suggested Citation

Xu, Xiaodong and Wang, Xia and Han, Nina, Accounting Conservatism, Ultimate Ownership and Investment Efficiency Improvement (July 11, 2012). China Finance Review International, Vol. 2 No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2103957

Xiaodong Xu (Contact Author)

Antai College of Economics & Management ( email )

1954 Huashan Road
Shanghai 200030
China

Xia Wang

East China Normal University (ECNU) - School of Business ( email )

Shanghai 200041
China

Nina Han

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No. 535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

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