Study on Conditional Conservatism Within Fair Value Measurements Based on Anti-discount Expectations

As a rapidly growing emerging capital market, China has attracted the attention of both investors and scholars. To alleviate the expectation of external users of listed companies’ financial statements to “discount” items in levels 2 and 3 of the fair value measurement, listed companies will treat these items as conditional conservatism. It refers to the conservatism of companies when confirming bad news of unrealized gains and losses sooner than confirming good news. A sample was selected for empirical analysis to verify the existence of this relationship. The results are as follows: (1) the higher the proportion of levels 2 and 3 fair value measurements, the stronger the conditional conservatism of the company’s profit and loss; (2) the higher the proportion of cash holding of operating activities in a company’s operating profit and the higher the audit quality, the higher the proportion of levels 2 and 3 fair value hierarchy measurements, and the stronger the conditional conservatism of the company’s profit and loss; and (3) the lesser the internal control defects in a company, the higher the proportion of levels 2 and 3 fair value hierarchy measurements, and the stronger the conditional conservatism of its profit and loss. The findings provide empirical evidence to identify listed companies adopting conditional conservatism to alleviate discounting expectations of fair value items of financial statements’ external users and provide a reference for improving the standards and regulation of listed companies.