5. Conclusions
This study explores the demand for conditional accounting conservatism from equity investors in state-controlled firms. If leverage proxies for debt pressure for conditional conservatism, then low or zero leverage indicates low or no debt demand for conditional conservatism. Following the methodology in the study by Louis and Urcan (2015), state-controlled firms are divided into subgroups according to different leverage levels. State-controlled firms with high leverage exhibits no conditional conservatism but firms with low and zero leverage exhibits higher levels of conditional conservatism [6].
Further analysis explores possible factors that induce conditional conservatism in statecontrolled firms. The controlling shareholders with high control rights are considered as an important source of equity demand for conditional conservatism in low and zero leverage firms. This hypothesis is supported by the positive association between high control rights and conditional conservatism in the timeliness of earnings to news model.
To examine whether important firm level variables in addition to control rights are associated with incrementally significant effects on conditional conservatism, separate analyses are conducted on the joint effect of high control rights, leverage, year of incorporation before or after 1992 and dividend payments on conditional conservatism. The results show an offsetting effect between high control and leverage, a reinforcing effect between high control and year of incorporation after 1992, and a substituting effect between high control rights and dividend payments. In all results, including incorporating all variables into one model, high control rights remain significantly positive. This is consistent with the hypothesis suggesting the demand from equity shareholders with high control can be an important source inducing conditional conservatism in state-controlled firms.
