Production Network Centrality and Accounting Conservatism

SYNOPSIS As firms become increasingly embedded in complex production networks, stakeholders are becoming more aware of how interfirm linkages expose companies to cascading risks. This study investigates whether firms that occupy more central positions in these networks—where exposure to propagated shocks is arguably largest—are more likely to adopt conservative accounting practices in response to stakeholder demands. Using data on Chinese firms, we find a positive association between production network centrality and accounting conservatism. The effect is stronger among firms with relatively high levels of short-term debt, low institutional ownership, less customer-base concentration, and low diversification. This study contributes to the literature by identifying network position as a determinant of accounting conservatism and highlighting conservatism as a risk mitigation tool in interdependent systems. For practitioners, our findings suggest that investors, lenders, and business partners should incorporate firms’ network positions when evaluating their risks and interpreting the informativeness of conservative reporting. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: C12; D80; G30.