Stop Bashing: Chinese Firms Even Have Better Financial Reporting Quality

Purpose The purpose of this paper is to investigate whether US regulatory actions around reverse mergers (RM) have exerted any spillover effects on the Chinese firms listed in China and whether Chinese firms have exhibited lower financial reporting quality than their US counterparts. Design/methodology/approach To test the possible spillover effect, this paper calculates three-day cumulative average abnormal returns (CAAR) and the aggregate CAAR for a series of US regulatory actions in 2010 and 2011. The study then compares the accrual quality, conditional conservatism, and information content of accruals of Chinese firms and US firms. Findings The paper documents a spillover effect of US actions around RM on Chinese stocks listed in China. Overall results do not support the perception that Chinese firms have lower financial reporting quality than their US counterparts. Research limitations/implications While this study provides evidence consistent with investors perceiving poor financial reporting quality among Chinese firms, that perception is not justified by empirical evidence. Practical implications Investors need not be overly concerned about the financial reporting quality among the Chinese firms when they make asset allocation decisions. Social implications A reality check is important given that perceptions may be outdated, biased, misleading, and costly. Originality/value This study puts the financial reporting quality of Chinese firms into perspective helping global investors assess information risk for optimal resource allocation.

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Does Attestation of the effectiveness of Internal Control over Financial Reporting Discourage Earnings Management? Evidence from China

Accounting and Finance Research ◽

10.5430/afr.v7n4p1 ◽

2018 ◽

Vol 7 (4) ◽

pp. 1

Author(s):

Li Dang ◽

Qiaoling Fang

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Internal Control ◽

Reporting Quality ◽

Financial Statements ◽

Financial Reporting Quality ◽

Chinese Government ◽

Chinese Firms ◽

Public Firms ◽

Sarbanes Oxley

To improve financial reporting quality, the Chinese government issued the Basic Standard for Enterprise Internal Control in 2008 and other related guidelines/regulations in the following years (hereafter China SOX). The scope of China SOX is broader but similar to Section 404 of the Sarbanes-Oxley Act (SOX) in the U.S. Formal adoptions of China SOX requires management and external auditor’s report on the effectiveness of internal control over financial reporting (ICFR). A company’s ICFR, if effective, should provide reasonable assurance that the company’s financial statements are reliable and prepared in accordance with the applicable accounting standards. The purpose of this study is to investigate whether China external auditor attestation of ICFR discourage earnings management, an indicator of financial reporting quality. By analyzing a sample of Chinese public firms during 2011 to 2013, we find that: (1) Chinese firms that disclose audited ICFR reports exhibit lower earnings management than firms that do not; (2) Chinese firms that are mandated to disclose audited ICFR reports exhibit lower earnings management than firms that voluntarily disclose audited ICFR reports. Our empirical results seem to suggest that attestation of the effectiveness of ICFR discourages earnings management and therefore improve financial reporting quality.

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The impact of equity incentive plans (EIPs) on accounting conservatism in listed Chinese firms

Journal of Applied Accounting Research ◽

10.1108/jaar-01-2020-0013 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Sun Liu ◽

Jie Zhang

Keyword(s):

Financial Reporting ◽

Reporting Quality ◽

Accounting Conservatism ◽

Financial Reporting Quality ◽

Chinese Firms ◽

Content Type ◽

Listed Firms ◽

Equity Incentives ◽

Different Types ◽

Equity Incentive

PurposeThis study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.Design/methodology/approachBased on a sample of 2,243 listed firms and 9,950 firm-year observations for the period of 2008–2017, this study employs piecewise cross-sectional regression models with year and industry fixed effects to examine the associations proposed in the research hypotheses.FindingsThis study finds a positive relationship between the adoption of EIPs and accounting conservatism in listed Chinese firms. Further analyses reveal that this positive relationship is more pronounced when listed Chinese firms use restricted stock units (RSUs), instead of stock options, in their EIPs.Research limitations/implicationsUnlike many early studies, this paper empirically investigates the impacts of two different types of equity incentives – stock options and RSUs – and thus contributes to accounting and corporate governance literature by providing a better understanding of the impacts of different types of equity incentives on financial reporting quality. However, this study does not consider other alternative equity incentive measurements because of the limited data regarding Chinese firm's executive compensation.Practical implicationsThis study offers investors and policymakers in China some insight into how accounting conservatism in listed firms might be shaped by equity incentives used in their managerial compensation schemes.Originality/valueThis study is one of the few that examines the effects of using equity incentives in a large emerging market. It offers support for the view that the recent introduction of policies on EIPs by the Chinese government has an overall positive impact on listed firm's financial reporting quality, as reflected by greater degrees of accounting conservatism.

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Tax Audit and Financial Reporting Quality

Korean Accounting Journal ◽

10.24056/kaj.2017.12.001 ◽

2017 ◽

Vol 26 (6) ◽

pp. 203-236

Author(s):

Im Hyeon Kim

Keyword(s):

Financial Reporting ◽

Reporting Quality ◽

Financial Reporting Quality ◽

Tax Audit

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The Impact of Going Concern on Financial Reporting Quality: Evidence from Vietnam

VNU Journal of Science Economics and Business ◽

10.25073/2588-1108/vnueab.4103 ◽

2018 ◽

Vol 34 (3) ◽

Author(s):

Phung Anh Thu ◽

Nguyen Vinh Khuong

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Financial Distress ◽

Reporting Quality ◽

Financial Reporting Quality ◽

Viet Nam ◽

Listed Firms ◽

Going Concern ◽

Debt Covenant

The investigation was conducted to contribute empirical evidence of the association between going concern and financial reporting quality of listed firms on the Vietnam stock market. Based on data from 279 companies listed on the HNX and HOSE exchanges in Vietnam for the period 2009-2015, the quantitative research. Results found that the relationship between the going concern and financial reporting quality of listed firms. Research results are significant for investors, regulators to the transparency of financial reporting information. Keywords Going concern, financial reporting quality, listed firms References Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5_suppl), 140S-154S.Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.Chen, Y., Chen, C., & Huang, S. (2010). An appraisal of financially distressed companies’ earnings management: Evidence from listed companies in China. Pacific Accounting Review, 22(1), 22–41Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77, 35-59.DeFond, M., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1), 145–176.DeFond, M.L., & Park, C.W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23(2), 115–139.Dichev, I., & Skinner, D. (2004). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.Đinh Thị Thu T., Nguyễn Vĩnh K. (2016). Tác động của hành vi điều chỉnh thu nhập đến khả năng hoạt động liên tục trong kế toán: Nghiên cứu thực nghiệm cho các doanh nghiệp niêm yết tại Việt Nam, Tạp chí phát triển khoa học và công nghệ, Quí 3, tr.96-108.Đỗ Thị Vân Trang (2015). Các mô hình đánh giá chất lượng báo cáo tài chính, Tạp chí chứng khoán Việt Nam, 200, tr 18-21.Habib, A., Uddin Bhuiyan, B., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324.Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), pp.57-81.Lu, J. (1999). An empirical study of earnings management by loss-making listed Chinese companies. KuaijiYanjiu (Accounting Research), (9), 25–35.McNichols, M.F. and Stubben, S.R., (2008). Does earnings management affect firms’ investment decisions?. The accounting review, 83(6), pp.1571-1603.Selahudin, N.F., Zakaria, N.B., & Sanusi, Z.M. (2014). Remodelling the earnings management with the appear- ance of leverage, financial distress and free cash flow: Malaysia and Thailand evidences. Journal of Applied Sciences, 14(21), 2644–2661.Skinner, D.J., & Sloan, R. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2/3), 289–312.Sweeney, A.P., (1994). Debt-covenant violations and managers' accounting responses. Journal of Accounting & Economics, 17(3): 281-308.Trần Thị Thùy Linh, Mai Hoàng Hạnh (2015). Chất lượng báo cáo tài chính và kỳ hạn nợ ảnh hưởng đến hiệu quả hoạt động của doanh nghiệp Việt Nam, Tạp chí phát triển kinh tế, 10, tr.27-50.Trương Thị Thùy Dương (2017). Nâng cao chất lượng báo cáo tài chính công ty đại chúng, Tạp chí tài chính, 1(3), tr.55-56.Uwuigbe, Ranti, Bernard, (2015). Assessment of the effects of firm’s characteristics on earnings management of listed firms in Nigeria, Asian Economic and Financial Review,5(2):218-228.

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