Wage and Accounting Conservatism: Evidence from China

Yongjian Shen, Shangkun Liang and Donghua Chen

China Journal of Accounting Studies, 2013, vol. 1, issue 1, 32-46

Abstract: Whereas employees want their wages to stay at a sustainably high level, managers want to cut labor costs. This contrast may lead to different accounting conservatism preferences between the two parties. We use Khan and Watts’ (2009) C score model to examine the effects of wage amount and rigidity on accounting conservatism. We find that the degree of accounting conservatism is positively correlated with (1) the amount of wages, (2) the rigidity of wages and (3) the number of employees. In addition, our results also show that conservatism has increased since the enactment of the Law of the People’s Republic of China on Employment Contracts in 2008. This paper connects two different fields (wage and accounting conservatism) and expands on contracts related to the conservatism raised by Watts (2003).

Date: 2013
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DOI: 10.1080/21697221.2013.781769

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