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Association Between Borrower and Lender State Ownership and Accounting Conservatism


  • We thank Sudipta Basu, Siqi Li, Shiva Sivaramakrishnan, Doug Skinner (the editor), Jerry Zimmerman, Hao Zhang, an anonymous reviewer, and workshop participants at University of Houston, University of Utah, University of Waterloo, Xiamen University, the 2nd Symposium of China Journal of Accounting Research, the 7th International Symposium on Empirical Research, and the 2009 American Accounting Association Annual Meeting for helpful comments. Hanwen Chen acknowledges financial support from the National Nature Science Foundation of China (NSFC-70672101) and the National Philosophy and Social Science Foundation of China (07BJY027). Yanyan Wang acknowledges financial support from the National Nature Science Foundation of China (NSFC-70972114) and the Education Ministry (09YJC790164).


We examine the association between borrower (firm) and lender (bank) state ownership and accounting conservatism for a sample of Chinese firms. We hypothesize that state-owned enterprises (SOEs) adopt less conservative accounting than non-state-owned enterprises (NSOEs) because lenders are less concerned with downside risk for SOEs than for NSOEs. We also hypothesize a negative relation between conservatism and the fraction of total loans a firm borrows from state-owned banks (SBs) because SBs have weaker demand for assurance of sufficient net assets to cover loan repayments than non-state-owned banks (NSBs). We find support for both hypotheses. Further analyses reveal that: (1) firms that borrow from commercial SBs exhibit more conservative accounting than firms that borrow from policy SBs and (2) firms adopt more conservative accounting as they get more loans from banks with foreign ownership or exclusively foreign banks. However, the results of these additional analyses are to some extent sensitive to alternative measures of accounting conservatism.