Financial Distress,Accounting Conservatism And The Usefulness Of Debt Contract

Private enterprise is the main channel to solve the problem of employment,the main platform of technological innovation,and the main source to keep the economic vitality.The global financial crisis since 2008 keeps having influence on financial market as well as the real economy.Private enterprise,who only has weak anti-risk capability their own,bears largest and the most direct influence from this.Under the double pressure of economic downturn and credit less available,lots of private enterprises are in financial distress.This so-called "financial distress" is that the debtor can not pay matured debts.Generally speaking,enterprises have the following choices to solve financial distress:private workout,internal adjustment and file for bankruptcy.In developing capital market,file for bankruptcy is the most significant way to get out of financial trouble.Debtors could always improve business structure and capital composition through renegotiation when facing financial trouble.As China is now under transition economy,although state-owned enterprise is easier to be in financial distress and has worse reaction to this compared to private enterprise,state-owned enterprise is protected by implicit guarantees from nationalized bank.However,private enterprise would suffer financing discrimination,unsound legal system and weak protection for investors.In this way,it would be extremely difficult for private enterprise to solve once it was in financial distress.At the same time,creditors in emerging market have more bargaining power than developing capital market.(Fan,Huang and Zhu,2013)According to recent empirical research,in many countries,enterprises would privately solve financial distress through debt contract.(Gennaioli and Rossi,2013;Blazy,Martel and Nigam,2014;Evans Ⅲ,Shuqing and Nagarajan,2014).In China,it would be harder to get out of financial distress for private enterprise than state-owned enterprise.(Fan and Huang,2011)Thus,this thesis is focusing on the following three issues:(1)What is the reason for private enterprise to be in financial distress?(2)When private enterprise is in financial distress,the conflict between shareholders and creditors will increase.How could we remit the conflict?(3)Does the accounting conservatism of private listed company have usefulness of debt contract?When private listed company is in financial conflict,will its usefulness of debt contract in accounting conservatism be weakened?This thesis uses private listed companies in our country during 2007 to 2012 as research object and contracted solving on financial distress as angle of view.First of all,I introduce a simple theoretical model among institution,ownership structure and financial risk,test the relationship between level of block holder ownership of private listed company and financial risk,and the influence on this relationship that was brought from institutional factors.which is consistent with LLSV(1998),it means concentration of ownership of shares is a substitute mechanisms for poor investor protection for Chinese Private Listed Companies Secondly,I use quantile regression method,which is proposed by Koenker and Bassett in 1978,to test the influence on accounting conservatism of private listed company from financial risks.Lastly,I use treatment-effects model,starting from the point of view of solving debt contract problem in financial distrees,test the influence on the relationship between the accounting conservatism of private listed company and new loan that was brought from financial distree.As a result,I came to the following main conclusions:Firstly,the level of block holder ownership of private listed company is related to financial risks.In different places of private listed companies,the higher the level of protection to investors,the lower the financial risk will be,and the lighter negative impact from level of block holder ownership to company’s financial risks.Also,CEO duality,board size,ratio of independent directors and financial risk of the company is non-significant.Large-scale private enterprise with positive and significant influence of financial risk from debt ratio,higher chance of development will have lower financial risk.Secondly,according to the result of OLS,the higher financial risk a private listed company has,the larger accounting conservatism it will have.Private listed company with higher financial risk will have stabler choice of accounting policy.As the result of quantile regression shows,for the private listed company whose accounting conservatism is on the normal or lower level(use the data in this chapter as an example,whose accounting conservatism is lower than 0.6 quantitle),the marginal effect(rise with accounting conservatism)that financial risks have on accounting conservatism of private listed company firstly rises up and then gradually falls down.In other words,with the increase of accounting conservatism quantitle,coefficient of estimation will firstly rises up and then falls down.This shows that:different impacts from financial risks to accounting conservatism of private listed company will show different governance effects to company.The influence of financial risks to accounting conservatism of private listed company in private listed company with high robustness will not have governance effects,but in private listed company with normal and low robustness will have governance effects that firstly rise up and then fall down.Thirdly,accounting conservatism is helpful for private listed company to get new loan through the signal of accounting information quality delivery and debt paying ability.This indicates that the loan decision of bank will consider accounting conservatism of private listed company.After the private listed company is in financial distress,the accounting conservatism and sensitivity of new loan will decrease a lot.Financial distress will decrease the ability of accounting conservatism that protect investors’ benefits,and decrease the dependence of investors to accounting conservatism when these investors such as banks make credit decisions.As a result,the usefulness of accounting conservatism in debt contract.To conclude,accounting conservatism of private listed company is useful for debt contract,when private listed company is in financial distress,financial distress will decrease the usefulness of accounting conservatism to debt contract.