Research On The Influence Of Accounting Conservatism On The Financing Cost In Companies

Accounting conservatism, as the oldest and the most deeply rooted principles (Sterling,1967), have influenced the accounting practice for at least five hundred years(Basu,1997). Accounting conservatism commonly defined as the deferential variability required for recognition of profits versus losses(Watts2003a, is playing an important role in practice as well as in drafting principles. However, the systematic research on conservatism has lasted no longer than20years until now while the history of accounting conservatism is longer than500years. The research in our country started even later.With the development of the securities market in recent years, more and more attention is taken on Accounting Conservatism."Accounting standards for business enterprises" issued in1992required enterprises follow the conservatism principle in the accounting practice for calculating the possible loss and expense reasonably. That is the first time Accounting Conservatism been introduced in Chinese accounting standards. The new accounting standards for business enterprises show that business transactions or matters of accounting recognition, measurement and reporting should adhere to the principle of conservatism. It is the first time to take conservatism as the quality requirements of accounting practice explicitly. With the further implementation of the existing accounting standards as well as the impact of the financial crisis, the finance department and the securities regulatory departments remind that enterprise accounting policies should also follow the principle of conservatism. What will the accounting conservatism bring about economic consequences? In particular, is there a relation between the level of accounting conservatism and financing cost in an enterprise? The research on these topics will be an important part of the whole accounting conservatism theoretical research and it is very significant in pushing accounting conservatism go further. Based on current Chinese enterprise financing situation, the capital market of our country and legal system is not perfect, especially after the financial crisis and deterioration of business environment, the creditors and shareholders are facing the great investment risk. The choice of accounting policy in the enterprise affects the financial statement data; affects investors on the judgment of enterprise production and management efficiency, solvency and profitability and decision-making of investment further more that will affect the enterprise’s financing cost.Therefore, this article use cases analyses to find what kinds result on financing cost of China’s A share listed companies by absorb accounting conservatism theory. Hopefully, it can provide empirical evidence for further research on accounting conservatism and help Chinese enterprise to choose proper accounting policies and accounting standards.This paper is divided into six parts, closely around the relationship between accounting conservatism, the cost of debt financing and equity financing cost. The main contents can be summarized into the following sections:The first part is the introduction. It gives the research background and what previous research got then shows the methodology and limitation for this article finally it finished with a brief description of the article structure arrangement. Throughout the domestic and foreign research, accounting conservatism on the financing influence on cost less, only research has generally focused on the debt cost studies, most findings suggest that accounting conservatism reduces the enterprise cost of debt for equity capital, and the effects of research is the lack thereof, this research will make up this blank.The second part is about theoretical basis of accounting conservatism. Within literature reference this part identified the difference between case research and theory research in accounting conservatism. Then from the contract theory, agency theory and signaling theory to definite accounting conservatism theory and combined with China’s actual situation to illustrate.The third part is the theory analysis and hypothesis. Combined with the second part of the theoretical foundation, this part make analysis on the effect of accounting conservatism to the financing cost and give proper’s hypothesis.Specifically, as the effect of accounting conservatism to the debts of the enterprise cost, separately from the creditor and the debtor angle corresponding accounting conservatism in the debt contract revenue and cost analysis. Accounting conservatism reduces the risk of creditor. If creditor risk compensation is reduced, there will be more willing for them to provide low rate loan then corporate get more chance to reduce debt cost. However, due to loss of revenue recognition accounting conservatism and asymmetric nature, under the same operating conditions, as compared to low levels of robustness, high level of company earnings and net assets due to be underestimated and low. Thus the debtor needs to bear certain cost. Only the above cost corresponding compensation, business and management may have enough power to provide robust accounting information including an effective way is to reduce the debt of creditor interest compensation.From the aspect of accounting conservatism influence to corporate equity cost, this article analyses both side of an investment; investors and receivers. Specifically, from the investors side, accounting conservatism can reducing the level of information asymmetry to reduce investors expect the future earnings when considering the degree of risk to investors. The required rate of return on equity financing of enterprises is reduced, cost is reduced accordingly. From the view of money receivers, by reducing the company’s management and the information asymmetry between investors, so that potential investors more willing to invest in the company, or the stock trade cost is reduced, thereby enhancing the stock liquidity, lower financing cost.Follow on the theoretical analysis there are two hypotheses be given. Hypothesis1:the higher the degree of accounting conservatism of the enterprises adopted, the lower the cost of debt going to be; hypothesis2:the higher the degree of accounting conservatism of the enterprise adopted, the lower the cost of equity going to be.The fourth part shows the sample selection and model building. Select the empirical sample, the corresponding variable metric method and the model of control variables, regression model. In order to control the impact of the financial crisis and improve the reliability of research results, this study selected from2009to2010in Shanghai and Shenzhen A shares of listed companies as the research samples, at the same time follow certain principle on the basis of the samples were screened treatment. In the measurement of accounting conservatism, according to Givoly’s (2007) study, the single index measurement is likely to lead to the wrong conclusion, considering all kinds of measurement methods advantages and disadvantages and applicability, this paper chooses equity market price book value ratio and the standardization of non-operating accruals opposite two different targets measurement and accounting conservatism.The fifth part gives the empirical results and analysis. By using descriptive statistical analysis, correlation analysis and regression analysis methods test the safe accounting policy can reduce the stock cost and the cost of debt. On the cost of debt and equity cost two research model, multivariate linear regression analysis found that, accounting conservatism and the cost of debt financing, equity financing cost of the regression coefficients were negative, and at the1%significance level, prove the proposed two hypotheses are formed, namely accounting conservatism and the financing cost is negative correlation between.The sixth part is the research conclusions and enlightenment. At chapters on the basis of the analysis summarized the conclusions of this study, specifically:First, the article confirms the accounting conservatism of Listed Companies in our country existence.Second, accounting conservatism in the debt contract and option contract has played a positive role on China’s listed companies financing cost has had a positive effect.Third, in the process of the empirical study, we also found a number of issues. The listed company financial reporting conservatism level difference is bigger; some of the companies’financial reports do not absorb accounting conservatism theory; the accounting conservatism has not yet been fully accepted under current system.Then combining with the research conclusions some suggestions have been launched at two aspects. One is companies should keep updating the new accounting standards and the relevant legal system; the second is companies should cultivate and improve the robustness of accounting information needs of investors.Throughout the study, this paper in the following several aspects of innovation: First, accounting conservatism is one of the most influential accounting principles of financial management and financing cost is one of the core concepts. But the study of the relationship between them is rarely both in domestic and overseas. The only previous studies are about discussed the cost of debt and conservatism, rarely equity cost related research. This is the first article in China try to find the relationship between accounting conservatism and the cost of financing from both debt and equity sides.Second, from contract theory, agency theory and signaling theory, combined with current China’s market status, analysis of the influence of financing cost by absorb accounting conservatism.Third, to enhance the persuasive, using two robust measurement method of comparative analysis, that is different from other related domestic researches that only use single method.Although the author tried to ensure that research rigor, but there are still some limitations:First, in order to ensure the accuracy, this paper try to use a variety of methods, to measure robustness, but based on the limitations of measuring method of defects and the concrete operation the robustness measure is not accurate enough.Second, as the effects of2008financial crisis on Accounting Conservatism still unknown, we choose only then after2009A shares of listed companies to study, this is not in the long range sample research.Third, there are many factors which can make effects on financing cost. Though some of the possible factors which can infect financing cost have been considered in the empirical research process, there are still some important factors are missing due to personal ability.