A Study On The Accounting Conservatism And Its Economic Consequences

Accounting conservatism, refers to that the accountants do not overstate assets orincome and underestimate liabilities or expenses in the process of confirmation. Asthe basic principles of accounting, it has a long history and it has been an importantaccounting confirmation and measurement practice. The new accounting standardsissued in2007and paid enough attention to accounting conservatism. The outbreak ofthe financial crisis in2008, set off a wave of studies on the economic consequences ofaccounting conservatism at home and abroad. Research of accounting conservatismhas become to be a hot spot.For the study of accounting conservatism, academia in foreign countries hasachieved certain successes. But China’s academic study starts late and researchfindings are not uniform and the comprehensive study of accounting conservatism andcost of equity capital is rare, particularly for the study of accounting conservatism incompany level. This has provided an opportunity for our research. This study not onlybroadened the perspective of the economic consequences of accounting conservatism,but also enriched the literature for accounting conservatism and cost of equityresearch.This paper selects listed companies in Shanghai and Shenzhen stock marketsfrom2009to2011as the research sample. Firstly, Basu model and K-W model areused to conform that accounting conservatism exists widely among the listedcompanies. Then, according to K-W model and simplified MTB model, accountingconservatism is divided into conditional conservatism and unconditional conservatism.Finally, we use PEG model to calculate the cost of equity capital K. From the twoaspects: conditional conservatism and unconditional conservatism, examined therelationship between accounting conservatism and cost of equity capital separately.Then taking Beta, Size, Lev, TR, ROA, Industry, Year as the control variables, thispaper researches the influence of accounting conservatism of2009-2011year on thecost of equity capital of2010-2012year in our Chinese industry. Empirical resultsshow that the accounting conservatism can deliver a positive signal that the higher thecompanies’ accounting conservatism is, the lower cost they will need to achieve costof equity.To sum up, this paper not only verifies the popularity of accounting conservatismof industry, but also calculates the conditional and unconditional accounting conservatism on company level, making the study of accounting conservatism moreconvincing. Empirical test on the influence of accounting conservatism on cost ofequity capital illustrates that accounting conservatism can convey a positive signal,which not only broadens the view of study on the economic consequences ofaccounting conservatism at home, but also help listed companies understand theinfluence of accounting conservatism on cost of equity capital. Therefore, this paperhas important theoretical and practical significance.