Accounting Conservatism, Ultimate Ownership and Investment Efficiency Improvement

This paper examines the role of accounting conservatism on firm investment behavior in China. We find that the association between accounting conservatism and capital expenditure is significantly positive when inside capital is not enough to use for investment, suggesting that conservatism can expend the level of investment by decreasing information asymmetry and cost of capital; However, the association between accounting conservatism and capital expenditure is significantly negative when inside capital is enough to use for investment, suggesting that conservatism can curtail the level of investment by mitigating the interest conflicts between management and outside shareholders and decreasing agency costs. Additionally, we find that the severity of information asymmetry and agency problem affects the role of accounting conservatism on firm investment behavior, the association between accounting conservatism and capital expenditure is weaker for firms with ultimate ownership controller as local government or individuals.