FOR THIS WORKSHOP ONLY DO NOT QUOTE DO NOT CIRCULATE Compliance Cost, Corporate Governance and Accounting Conservatism

Information asymmetry among stakeholders is the cause of accounting conservatism, since it leads to the asymmetric loss function which brings in the required mechanism to protect the interest of parties with information disadvantage; Agency theory suggests that stakeholders need conservative accounting reports since conservatism will be reciprocal beneficial for all parties and management incentives are more influential in accounting numbers. This paper investigates the determinants of accounting conservatism basing on the accrual measures using data from 2001 to 2006 in China. We find that more debt, more control right of controlling shareholders, and lower management ownership will lead to higher required conservatism. We also find that since the compliance cost for SOEs is higher than that for NSOEs, their accounting conservatism is higher thereafter. As the compliance cost reduces, accounting conservatism will be lower too. The independence of board has little influence on conservatism in China, but higher rate of insider director will lower the conservatism for NSOEs, showing the power of management on accounting information. We also find that among the determinants of conservatism in China, debt is the most important factor, ownership is the next, and board has little influence. Keyword: Information Asymmetry; Agency Problem; Regulation Hypothesis; Accounting Conservatism; Compliance Cost; Corporate Governance