Accounting Conservatism for Obtaining New Long-Term Loans: Evidence from Chinese Private Firms

Posted: 10 Nov 2015 Last revised: 26 Jan 2017

See all articles by Mingzhu Wang

Mingzhu Wang

King'S College London

Jason Zezhong Xiao

University of Macau

Jigao Zhu

University of International Business and Economics

Date Written: January 15, 2017

Abstract

This study analyzes whether and how accounting conservatism in Chinese private firms taking out new long-term loans is associated with creditors’ information demand. We show that private firms with new long-term debts report more conservatively than those with fewer or no new long-term debts and that new long-term debts have ex ante rather than ex post effects on accounting conservatism. While prior literature documents that listed Chinese state-owned enterprises (SOEs) adopt less accounting conservatism than listed non-SOEs, we find that soft budget constraints of private SOEs and their resistance to the increasing performance targets set by the government lead to more conservative reporting than private non-SOEs. Private firms in less marketized regions report more conservatively than those in more marketized regions and, when having more new long-term debts, produce more conservative accounting than other private firms. These indicate that the relation between institutions and accounting conservatism is substitutive rather than complementary as documented in prior studies. Our findings from a transition and emerging economy contribute to the debate on whether to retain conservatism as an accounting principle.

Keywords: Accounting Conservatism; Private Firms; Creditors; State-Owned Enterprise; Regional Marketization

JEL Classification: M41

Suggested Citation

Wang, Mingzhu and Xiao, Jason Zezhong and Zhu, Jigao, Accounting Conservatism for Obtaining New Long-Term Loans: Evidence from Chinese Private Firms (January 15, 2017). Available at SSRN: https://ssrn.com/abstract=2687787

Mingzhu Wang

King'S College London ( email )

30 Aldwych
Franklin-Wilkins Building
London, WC2B 4BG
United Kingdom

HOME PAGE: http://https://kclpure.kcl.ac.uk/portal/mingzhu.wang.html

Jigao Zhu

University of International Business and Economics ( email )

Room 412, Ningyuan Building
Huixindong street 10
Beijing, 100029
China

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