Accounting Conservatism Alleviates Firm’s Investment Efficiency: An Evidence from China

Abstract

This study examined the association of accounting conservatism with investment efficiency, and its effects on investment efficiency by mitigating firms from under and over investments of listed companies in China (2002 to 2013). First, we find the existence of conservatism in accounting practices of Chinese firms, later to hypothesize that how conservatism improves investment efficiency to alleviate under or over investment stresses. Thus, our findings confirmed that accounting conservatism improves investment efficiency of Chinese firms by mitigating under (over) investments. Furthermore, significant correlation existed for investment efficiency with free cash flow and corporate governance such as CEO duality and percentage of board members. In robust test, we find conservatism reduces the CEO duality and top one shareholder tunneling effect which may cause agency problem.