Accounting conservatism and enterprise investment efficiency

Abstract

Investment is one of the most necessary foundations and activities of every enterprise. A good investment activity can increase the profits of the enterprise. Higher investment efficiency depends on correct investment decisions, which can create greater value for enterprises, even determine whether or not enterprises can survive in the capital market. Accounting conservatism is the basic principle of a company, based on the principle of receiving bad news faster than good news. It improves the quality of the company's financial information, reduces agent costs, and improves investment efficiency. This paper distinguishes investment efficiency from overinvestment and underinvestment as well as discusses their relationship with accounting conservatism based on information asymmetry and principal-agent theories respectively. This paper uses market-to-book ratio to measure accounting conservatism, uses the residual analysis model to measure investment efficiency, and there relationship is measured by multiple regression. The result is there is a negative relationship between accounting conservatism and overinvestment, and the relationship between accounting conservatism and underinvestment is positive.