An Empirical Study of the Role of Conservative Accounting Information in Protecting Investor
|School||Southwestern University of Finance and Economics|
|Keywords||Conservative accounting information The principle ofconservatism accounting The value relevance of earnings Earningsmanagement|
Accounting conservatism is one of the important characteristics and practices of financial reports, it implied one should be cautious when recognized and measured economic matters, it is a principle which has a long history and is deeply rooted in people’s hearts. It is generally believed, accounting conservatism has important economic consequences, it will benefit the stakeholders. However, in recent years, accounting standards bodies represented by the FASB started to give up the accounting conservatism in order to achieve the so-called "neutral". Therefore, domestic and foreign scholars tried to carry on a systematic study of conservatism principle with empirical research, so that their studies can provide further empirical evidence for standard setting in the cancelation of the conservatism principle.According to the foreign literature, the research on conservatism started from the generation of Watts in1993, then followed by extending from different angle. At first, scholars mainly focused on comprehensively analyzing the causes, then began to investigated measures, in recent years, scholars are keen on evaluating the economic consequences. Many research results showed that the conservatism played a positive role in reducing agent cost, enhancing the efficiency of debt contract, inhibiting the inefficiency of investment, increasing stock price information and improving the efficiency of market pricing and so on.And according to the research of domestic, the researchers mainly focus on the inspection of whether there is conservatism in the listed company of China, and analyzing its main influencing factors, but the study of the economic consequences of conservatism started from2008. Firstly the research was very narrow, mainly concentrated in testing the efficiency of investment and financing. Then they pay little attention to the economic consequences of increasing stock price information and improving the efficiency of market pricing and so on, but they haven’t studied in depth. In recent years, researchers began to pay attention to the economic consequences of investor protection, they carried on the empirical test, and mainly from two aspects, reducing agency costs and the influence of corporate governance mechanism. In addition, there are a small number of researchers begin to pay more attention to the impact on relevant value of earnings and earnings management.On the surface, the domestic scholars’research on accounting conservatism, began from concentrating on its existence to analyzing its influence factors and measurement method, and then to discussing its economic consequences. Their understanding deepened. However, according to the economic consequences of the research, especially about investor protection, researchers haven’t interpreted the function of conservative accounting information on investor protection from the perspective that the use of conservative accounting principles whether raised the reliability and the relevant value of the earnings information (accounting information). However, it is necessary to determine.Effective operation of capital market is conducive to the growth of the economy, but the effective operation of capital market cannot without the participation of the main players of the market. Investors as the principal players of the capital market, the pros and cons of its interest protection, largely determined whether the capital market will be effective and sustainable developed, so how to ensure the interests of investors, is an important problem to be solved in the development of China’s economic. In real life, even in the developed capital market like European and American, the phenomenon commonly occurred that managers hided company’s actual situation, mislead investors or seriously damaged investor rights and interests through reporting false accounting information, faking financial reporting and other methods. Of course, China’s capital market is no exception.Under the condition of capital market, investor value asset and then make investment decisions based on the information obtained especially the accounting information. If investors are lack of the target company’s true and reliable accounting information, it is impossible to protect their rights and interests.In this sense, accounting information has important economic consequences, accounting information as the main source of company information, plays an important role in investor protection through the pricing and governance function. The fundamental purpose of the pricing function is to provide investors with relevant and reliable accounting information, to help investors value asset effectively and make right investment decisions, then reduce the loss caused by the wrong pricing and decision, and thus to protect the interests of the investors; And the governance functions’ basic purpose is to reduce the information asymmetry between enterprises and investors, and to constraint the insiders and restrain their opportunism behaviors, even as a substitute for the governance mechanism, so that the governance can balance, and finally the interests of the investors can protected. However, the pricing and governance function of the accounting information has positive correlation to the quality of accounting information. The higher the quality of accounting information, the more effectively the function can, so that the outside investors can predict the company value, cost and future performance better, and also the governance mechanism can run efficiently and effectively and the efficiency of governance can promote. Thus, accounting information, especially the high quality accounting information can play an important role on investor protection.Existing documents and evidence implied, relevance and reliability are two important representative indicator of accounting information quality. Conservative accounting information is known as the high quality of accounting information, then, whether conservative accounting information is more relevant and reliable, and whether it can play a better pricing and governance function, and thus enhanced the protection of investors?In empirical research, the quality of accounting information usually determined through earning attributes. Francis, etc.(Francis et al.,2004) divided earning attributes into:accrued profit quality, sustainability, predictability, smoothness, value relevance, timeliness and robustness. However, when we use the surplus property to examine the quality of the accounting information, we may face two major problems:one is the contradictory between attributes, the other is properties may be affected by earnings management. Considering the above reasons, this study believed that we should examine the accounting information quality from perspective of the degree the standard goal achieved, that is, if the financial statements are consistent with the goals of accounting standards, the financial report is of high quality. Specifically, on the one hand, if the financial statements prepare according to the accounting standards provide investors useful information for decision, the accounting information is relevant; On the other hand, if the accounting information is not management, then the accounting information is reliable. The higher the quality of accounting information, the stronger the function of investor protection. In this study, relevance is mainly measured through value relevance of earnings, and reliability is mainly measured by earning management.Therefore, according to present domestic research, this study will assess the role conservative accounting information played on investor protection, from the perspective that whether the use of conservatism principle can improve the quality of earnings (accounting) information.Specifically, by analyzing the sample data of the Shanghai and Shenzhen a-share non-financial companies in our country from2008to2011, this article is focused on issues that whether accounting conservatism improves the value relevance of earnings, and reduces the degree of earnings management, then improve the reliability of the information.First of all, conservatism principle’s impact on accounting earnings value relevance have been studied is this article, through the year-company measurement method reported by Khan and Watts in2009and the price model and revenue model reported by Kothari and Zimmerman in1995. Regression results show, surplus value relevance of the sample company is significantly improved in the aspect of the price model, while in the aspect of revenue model. Therefore, Either from the perspective of revenue model or from the point of price model, Accounting conservatism improved the surplus value relevance. It can be concluded, Robustness is able to improve the relevance of accounting information, and play a role of protection for investors.Secondly, in this article, the degree of earnings management is measured by the handling accrued profits under the accrual model and modified Jones model. After The introduction of company scale, asset-liability ratio, asset returns and robustness, robustness effect on earnings management behavior is studied by constructing multiple regression model. As can be seen from the regression results, there is significant negative correlation between robustness level and earnings management. Which means that a higher level of accounting conservatism can reduce the company’s earnings management motivation, and inhibit the company’s earnings management behavior. At last, it can be concluded, in the capital market of China, robustness is able to improve the quality of accounting information.To sum up, the role of the prudence principle in improving accounting information quality and ultimately protect the interests of the investors have been verified in this article.The meaning of the article:First of all, the effect of solid accounting principles in the listed company is discussed in this paper. Which is helpful for forming a systematic and comprehensive understanding of the accounting system of our country, and provide further theoretical support and reference data for the standard setters to estimate the use of solid accounting principles, and to perfect our conceptual framework of accounting standards system.Second, this article has certain reference significance in the issues of how to choose between Robustness and "neutrality", and how to adheres to the conservatism principle in the financial report, and how to provide robustness based on the high quality of financial reporting.Last, based on the institutional background and market environment in our country, by building a robust investor protection theory frame of accounting information and analyzing the mechanism of action and effect, the understanding of the economic consequences of accounting conservatism is deepened in this article.Possible contributions of this paper include the following aspects:(1) the content of the researchThis study combine the market conditions in our country, make use of the data of the listed companies, choose value relevance and earning management in the principle of reliability and value relevance, estimate the prudent investor protection effect of accounting information by investigating whether accounting conservatism reduces the degree of earnings management, or enhances the value relevance of surplus, verify the role of prudence principle.(2) the methods of the researchIn the article, the investor protection mechanism of solid accounting information have been analyzed, solid accounting information is regarded as high quality accounting information, and it has relevance and reliability. In this article, the relevance is measured by the surplus value relevance, while the reliability is measured by the earnings management. Under the condition of capital market, being regarded as the main source of company information, the accounting information could protect the interests of the investors through pricing and governance mechanism. Therefore, the pricing mechanism is showed in the aspect of improving the correlation of surplus value, and the governance mechanism is showed in the aspect of reducing the degree of earnings management.(3) the conclusion of the researchIt is showed in the article that the accounting conservatism have improved the surplus value relevance. The results indicate, under the condition of capital market in China, solid accounting principles is better in improving the value relevance of accounting earnings than neutral (fair) accounting principles. Accounting information under the principle of conservatism accounting can improve the pricing efficiency of the market, and play a better role of protection for investors. As can be seen from the regression results, there is significant negative correlation between conservatism level and earnings management. Which means that a higher level of accounting conservatism can reduce the company’s earnings management motivation, and inhibit the company’s earnings management behavior. At last, it can be concluded, In the capital market in China, robustness is able to improve the quality of accounting information.