Influence Of Accounting Conservatism To Earnings Quality Of Listed Companies

Accounting information is intended to provide decision-useful information to users of the report, to reduce the asymmetric information problems brought by principal-agent relationship. With the improvement and the continuous development of China’s capital market, the equity of listed companies has been more widely dispersed. The majority of shareholders cannot exercise effective oversight of the management of the companies. They are more concerned about the market, using stock trading or bond trading to diversify risk. Thus, high quality of accounting information should be decision-making related, which means able to assist investors to make the right decisions. As the core information of financial statements, earnings information is one of the most important indicators helping the investors and creditors measure business performance and future growth of the enterprises. Thus, earnings quality analysis helps alleviate the information asymmetry problem of the capital market. Combined all kinds of explanations of earnings quality, I conclude the conditions needed to be called as earnings with high quality:(1) Earnings information with high quality should be real, not manipulated. Authenticity is the precondition for the other explanations;(2) Earnings information with high quality should have continuity, should have correlation between periods, in order to facilitate investors to make decisions;(3) Earnings information with high quality should have predictability, which can help investors get useful information from the existing earnings information to the predict the company’s future earnings information.Accounting conservatism has been demanded for a long time. It is an important financial accounting practice. The basic requirements of accounting standards said, the recognition, measurement and reporting should be maintained due care, the assets and income should not be overvalued, while the liabilities or expenses should not be underestimated, In the years when the capital market was not yet developed, reflecting the fiduciary duty was the main goal of accounting. The principal proposes the need of accounting conservatism, to constraint agent from overvaluing the assets and income, or underestimating the liabilities and losses, thereby reducing agency costs and improve contract operating efficiency. However, in contemporary capital market which has been increasingly developed, the main objective has switched to decision-making usefulness. Users of financial statements rely on accounting information to make the right decisions. Relevance has become the primary requirement as well as reliability, or even higher. How could accounting conservatism improve the relevance of accounting information has become a problem that both the academics and practitioners should be concerned. Based on the "information neutrality", FASB and IASB abolished the quality requirement of conservatism in the first stage of the draft of joint conceptual framework. However, there are requirements for accounting conservatism enterprises in China’s accounting standards. With the development of the capital markets, how accounting conservatism could affects the earnings quality of listed companies, and does the accounting conservatism has the ability to adapt to the requirements of the capital market, is the issue this paper attempts to explore.Based on existing research results, from asymmetric information theory and decision usefulness departure, this paper has analyze the impact of accounting conservatism on earnings quality through three angles, which were the extent of earnings management, earnings persistence and earnings predictability. I have used the2008-2012A-share listed companies as my analysis samples. I have used regression analysis to get the experience evidence to verify the theoretical assumptions. And I have raised several policy recommendations based on the evidence.This paper has been separated into five chapters, and the brief introduction of each chapter is as following:The first chapter has introduced the background, purpose, significance, and research method, research ideas of this paper;The second chapter has reviewed the existing research scholars at home and abroad;The third chapter has described the theoretical foundation, analyze the effect of accounting conservatism on earnings quality and put forward the hypothesis; The fourth chapter has introduced the research models and implied the regression test, which verified the theoretical assumptions;The fifth chapter was the conclusion of the research, based on which raised several policy recommendations and proposed future research.Through theoretical analysis, we propose the following assumptions:H1a:Accounting conservatism inhibits accrual earnings management of listed companies; Hlb:Accounting conservatism exacerbates real earnings management of listed companies; H2:Accounting conservatism reduces the earnings persistence of listed companies; H3:Accounting conservatism reduces the earnings predictability of listed companies.Through empirical testing, we draw the following conclusions:(1) We use Basu model adjusted by the market to test accounting conservatism of China’s A-share market listed companies, verify the existence of accounting conservatism.(2) We use C-Score to measure accounting conservatism, and use the extended Jones model to calculate the non-manipulated accruals amount DAcc. We use DA as the absolute value of DAcc to measure the accrued earnings management. After control the other variables, C-Score was significantly negatively correlated with the DA, indicating the accounting conservatism has a negative effect on the accrual earnings management.(3) We use Roychowdhury’s method to calculate real earnings management indicators RM. After control the other variables, C-Score was significantly negatively correlated with RM, indicating that accounting conservatism has a positive role in the real earnings management.(4) We merge the conservatism dummy variable into earnings autoregressive model, and use cross-variable coefficients to determine the impact of accounting conservatism on earnings persistence. Test results show that cross-variable coefficient is significantly negative, indicating that company with strong accounting conservatism has weaker persistence.(5) We use ERC to measure the earnings predictability, and use cross-variable coefficients to determine the impact of accounting conservatism on earnings predictability. Test results show that cross-variable coefficient is significantly negative, indicating that company with strong accounting conservatism has smaller ERC.For research findings, combined with the actual situation of China’s capital market, this paper proposes the following policy recommendations:(1) Moderate use of accounting conservatism;(2) Promote the use of fair value;(3) Improve corporate governance;(4) Strengthen external oversight.The innovations are mainly reflected in the following three aspects:(1) Comprehensive definition of earnings quality from three aspects, combine the decision-making useful accounting objectives, study the influence of accounting conservatism to the quality of the earnings from both theory and practice, which make the conclusion more persuasive;(2) Ground-breaking research on the impact of accounting conservatism to real earnings management;(3) Design the conservatism dummy variable CON.This paper also has the following shortcomings:(1) No distinction between markets and industries;(2) No distinction between downward earnings management and upward earnings management;(3) Does not take into account of other control variables affect earnings quality.Future studies might be done from the following aspects:(1) Conduct research on different markets;(2) Research for the financial industry;(3) More in-depth exploration of the impact of accounting conservatism on earnings quality combining institutional change, corporate governance and other factors.