Effects of ownership type of Chinese firms on the relationship between accounting conservatism and credit ratings

Abstract

Accounting conservatism (AC) is a fundamental element of financial reporting and indicates the quality of accounting information. It is particularly crucial in assessing the usefulness of accounting information as it determines a company's cost of capital in the bond market based on accounting information. This study analyzes the relationship between AC and bond credit ratings and whether this relationship differs depending on the company's ownership structure, specifically between Chinese-owned and privately held companies. This study utilizes the ordered probit regression methodology using financial data from the CSMAR database and Wind database for 2015-2019, using STATA. The results suggest two key findings. First, higher levels of AC are associated with higher credit ratings in the bond market. This finding is consistent with previous studies on AC. Second, Chinese government ownership negatively affects the relationship between AC and credit ratings. This implies that the impact of Chinese government ownership on the credit ratings of Chinese government-owned companies is already reflected in the bond market, meaning that ownership alone does not affect the relationship. Conversely, it implies that the level of AC and the type of private enterprise positively impact the process of determining the credit rating of private enterprises. These results imply that Chinese government-owned enterprises may be at a disadvantage compared to private enterprises in the bond market. However, the results also have policy implications, suggesting that Chinese government-owned enterprises are less significantly affected by credit ratings in the bond market due to their relatively strong government oversight and control.