Accounting conservatism, ultimate ownership and investment efficiency

Abstract

PurposeThe purpose of this paper is to analyze and examine the role of accounting conservatism on firm investment behavior in China.Design/methodology/approachBy 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.FindingsThe 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/valueThis 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.