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Accounting conservatism, ultimate ownership and investment efficiency

Accounting conservatism, ultimate ownership and investment efficiency 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Accounting conservatism, ultimate ownership and investment efficiency

Xiaodong Xu; Xia Wang; Nina Han
China Finance Review International , Volume 2 (1): 25 – Jan 27, 2012
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25 pages

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391211197456
Publisher site
See Article on Publisher Site

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.

Journal

China Finance Review International – Emerald Publishing

Published: Jan 27, 2012

Keywords: Accounting conservatism; Investments; Information asymmetry; Agency cost; Cost of capital; Ultimate ownership

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