The role of accounting regulation on good news recognition and conditional conservatism: evidence from China’s 2006 accounting regulation

Abstract

PurposeThis study aims to investigate the impact of accounting regulation (AR) on good news (GNs) recognition and conditional conservatism (CC), using the Chinese experiment in the 2006 AR.Design/methodology/approachThe current study applies the Basu (1997) model to a sample of 26,755 firm-year observations from 1997 to 2017.FindingsThe study finds that GNs recognition is significantly reduced and becomes significantly less than bad news recognition under China’s 2006 AR, suggesting that CC is enhanced under China’s 2006 AR.Research limitations/implicationsThis paper excludes the financial sector from the sample. Thus, generalizing results on the financial sector is not appropriate. In addition, the available literature on this topic is limited as it deals with convergence with IFRS, not the full adoption of IFRS.Practical implicationsThe study findings are expected to benefit policymakers and accounting standard setters in controlling GNs recognition and CC as well.Originality/valueWhereas prior studies on this topic report their results on CC only, without considering the role of AR on GNs recognition, this paper highlights the role of AR on both GNs recognition and CC as well.