The Influence Of Mandatory Accounting Standard Change On Accounting Conservatism

Beaver & Ryan (2005) define accounting conservatism as the on average understatement of the book value of net assets relative to their market value. Recent studies classify conservatism into two forms: conditional and unconditional conservatism. Watts(2003) points out that the alternative explanations for conservatism are contracting, shareholder litigation, accounting regulation and taxation. In this paper, I only test the influence of accounting regulation on conservatism.In 2001 and 2007, mandatory Accounting Standard change happened in China, and the change may influence accounting conservatism. Using a sample of all listed A-shares firms in Shanghai and Shenzhen Stock Exchanges from 1999 to 2007 with available data, I test whether unconditional and conditional conservatism exist in the accounting system of those firms from 1999 to 2007 and whether the mandatory Accounting Standard change has some influence on unconditional and conditional conservatism. I find that unconditional and conditional conservatism exit during 1999-2007 and the existence of unconditional and conditional conservatism does not result from the "take a big bath" behavior of loss firms. I also find that the mandatory Accounting Standard change happened in 2001 improves the unconditional and conditional conservatism of the listed firms, but the mandatory Accounting Standard change happened in 2007 decreases the conditional conservatism.