Conditional Conservatism and Investment Efficiency Under a State Ownership Environment : Evidence from China

Prior studies on developed markets have documented that conditional conservatism is positively associated with investment efficiency. In this study, we investigate whether this association can be shaped by the unique institutional environment—state ownership of firms and banks—in China. First, we examine the association between conditional conservatism and investment efficiency in China’s unique corporate setting and find that conditional conservatism can reduce (facilitate) investment in listed firm settings in which overinvestment (underinvestment) is most likely, and thereby improve investment efficiency. Further analyses reveal that the effects of conditional conservatism on improving investment efficiency are less pronounced in state-owned enterprises (SOEs) and firms with higher fractions of loans borrowed from state-owned commercial banks. Moreover, we find that these effects have become more pronounced in non-SOEs than in SOEs after the implementation of the stimulus program in 2008, which results in a large increase in bank borrowing by Chinese firms. Overall, this study provides new evidence on how the effects of conditional conservatism on investment efficiency can be shaped by concentrated state ownership and politically driven lending in China