Annual Report Comment Letter And Corporate Accounting Conservatism

The report of the 19 th National Congress of the Communist Party of China emphasized "transformation of government functions and innovation of supervision methods".Under the institutional background,China Securities Regulatory Commission established the comment letter system in 2014.As a non-punitive supervision method,the comment letter is mainly aimed at the information disclosure of firms,can transmit firm’s risk signals.When creditors who focus on the quality of firm’s accounting information perceive the signal,they will put forward higher demands for the accounting conservatism of the firm,and strengthen supervision to protect their own interests.Using a sample of Chinese listed firms from 2015 to 2019,we explore the impact of annual report comment letters on firm’s accounting conservatism,and focuses on the external supervision and governance role played by creditors.The results show that the comment letter has a significant effect on improving the accounting conservatism of firms.The mechanism is that the exchange comment letter conveys incremental risk information to creditors,so creditors strengthen the supervision and restraint of firms by increasing the cost of debt capital,and ultimately increasing the firm’s accounting conservatism.Further analysis results show that the effect is stronger for firms with a higher level of information asymmetry,non-state-owned firms,firms with more debt and the content of the comment letter involves matters related to accounting conservatism and company risk.It confirms the important external supervisory role played by firm’s creditors.This study helps to comprehensively understand how stock exchange comment letters prevent financial risk,protect the interests of investor and stakeholders,and promote the healthy and development of the capital market.