Corporate Governance and Accounting Conservatism in China

Corporate Governance and Accounting Conservatism in China*
Donglin Xiaa and Song Zhub,** b School of Economics and Management, Tsinghua University, China School of Economics and Business Administration, Beijing Normal University, China

a

Abstract A principal-agent relationship exists among creditors, shareholders and management, and information asymmetry among them leads to asymmetric loss functions, which induces conservative accounting. This paper investigates the determinants of accounting conservatism using accrual-based measures and data from 2001 to 2006 in China. We find that a higher degree of leverage, lower level of control of ultimate shareholders and lower level of management ownership lead to more conservative financial reporting. We also find that political concerns and pressures among state-owned enterprises are greater than those among non-state owned enterprises, which leads to more conservative financial reporting among the former. However, a decrease in such concerns leads to a decrease in accounting conservatism. Overall, we find that among the determinants of conservatism in China, debt is the most important, followed by ownership, and that board has little influence. JEL classification: G30; M41 Keywords: Information asymmetry; Agency problem; Accounting conservatism; Political concerns; Corporate governance

*

We thank George Yang from Chinese University of Hong Kong and participants at CJAR Summer Research Workshop for helpful comments. We express our sincere appreciation to the anonymous referee and the English editor. This paper is sponsored by the National Natural Science Foundation of China (grant number 70772017). ** Corresponding author. Song Zhu: E-mail address: [e-mail]. Correspondence address: School of Economics and Business Administration, Beijing Normal University, Beijing, China, 100875. Donglin Xia: E-mail address: [e-mail]. School of Economics and Management, Tsinghua University,

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