Accounting conservatism as a strategy to deter entry: Evidence from China's Negative List System

This paper examines the market force and real effect of accounting conservatism from the perspective of an entry game. Using China's Negative List System (NLS), a nationwide deregulation policy resulting in a significant increase in new business registrations of new entrants, we find that incumbents affected by the NLS, especially those at competitive frontiers within an industry, increasingly adopt accounting conservatism in reaction to the NLS-induced market changes. Additional tests indicate that the underlying mechanism lies in the imposing threat of entry, effectively ruling out the alternative explanations related to corporate governance. Moreover, we observe that industries exhibiting a higher inclination towards conservative accounting tend to be less susceptible to new entrants. This finding suggests that the adoption of accounting conservatism could be interpreted as a tactical measure to deter new entrants.