Accounting conservatism, ultimate ownership and investment efficiency

Xiaodong Xu; Xia Wang; Nina Han

doi:10.1108/20441391211197456

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China Finance Review International

ISSN: 2044-1398

Online from: 2011

Subject Area: Accounting and Finance

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Accounting conservatism, ultimate ownership and investment efficiency

Document Information:
Title:	Accounting conservatism, ultimate ownership and investment efficiency
Author(s):	Xiaodong Xu, (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China), Xia Wang, (School of Business, East China Normal University, Shanghai, China), Nina Han, (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China)
Citation:	Xiaodong Xu, Xia Wang, Nina Han, (2012) "Accounting conservatism, ultimate ownership and investment efficiency", China Finance Review International, Vol. 2 Iss: 1, pp.53 - 77
Keywords:	Accounting conservatism, Agency cost, Cost of capital, Information asymmetry, Investments, Ultimate ownership
Article type:	Research paper
DOI:	10.1108/20441391211197456 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	JEL classification – G31, M41, O16. This paper is supported by the “Asymmetric Information, Liquidity Constraints of Corporate Structure and Investment” (program approval number: 707726062) of National Natural Science Foundation and “Studies on Financial Restraint, Net Worth of Internal Capital and Investment of Listed Companies” (program approval number: 08BJY024) of National Social Science Foundation. With thanks to Professor Guochang Zhang and Assistant Professor Min Wu, both from the Department of Accounting of The Hong Kong University of Science & Technology, for their constructive opinions. The authors take sole responsibility for their views.
Abstract:	Purpose – The purpose of this paper is to analyze and examine the role of accounting conservatism on firm investment behavior in China. Design/methodology/approach – By combining a developed theoretical framework and empirical study, this paper examines the impacts of accounting conservatism on firm investment. The sample and data are all collected from Wind and CAMAR databases. Findings – The paper finds 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, the paper finds that the severity of information asymmetry and agency problem affects the role of accounting conservatism on firm investment behaviour, and the association between accounting conservatism and capital expenditure is weaker for firms with ultimate ownership controller as local government or individuals. Originality/value – This is the first paper to analyze and examine the impacts of accounting conservatism on firm investment in China directly. The findings are also useful to explain the awkward predicament found by prior literature.