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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Accounting, Auditing and Taxation, Volume 10, Issue 1, Spring 2001, Pages 1–22
This study examines empirically whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be value-relevant. The study is motivated by the market-based value-relevance literature in the U.S. and by the recent developments of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1998 with available data, we obtain evidence of value-relevance in China based on a return and a price model. Specifically, we address three research questions. First, we document that accounting information is value-relevant in the Chinese market according to both the pooled cross-section and time-series regressions or the year-by-year regressions. Second, we further examine whether value-relevance in China changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and liquidity of stock. Third, this study examines two competing explanations about the value-relevance of accounting information between A-share and AB-share companies and finds that investors place more weight on accounting information in A-share companies. Collectively, in this study, we report evidence consistent with the notion that accounting information is value-relevant to investors in the Chinese market despite the young age of the market and the perception of inadequate accounting and financial reporting in China.
This study empirically investigates the value-relevance of accounting information in the emerging Chinese stock market. The study is motivated by recent developments in both research and practice. From the perspective of information economics, accounting and financial reporting play a vital role in an efficient capital market. Major accounting standard-setting bodies such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Committee (IASC) have adopted this investor oriented information usefulness perspective and specifically stated that the primary purpose of accounting is to meet the needs of capital markets FASB 1978 and IASC 1994. Consequently, it is not surprising that an important objective of the Chinese accounting reform is to improve the usefulness of financial reporting in the stock market Winkle and F Huss 1994, Xiang 1998 and Chen and F Gul 1999. Since Ball and Brown (1968), accounting researchers have produced numerous studies documenting the association between accounting earnings and stock returns. More recently, studies about the value-relevance of accounting information have been expanded to include both balance sheet measures of assets and liabilities and income statement measures of earnings thanks to the Ohlson model (Ohlson, 1995). While earlier studies focused on the U.S. market, more recent research has investigated the value-relevance of accounting information in non-U.S. markets because of increasing emphasis on the role of accounting information in global markets (e.g., Alford and J Jones 1993, Amir and T Harris 1993, Harris and M Lang 1994, Barth 1996, Chan 1996 and Graham 1998). The current study extends this line of inquiry into the emerging Chinese stock market. Because of the unique institutional setting of the Chinese market, the results of this study have implications for both theory and practice in China and beyond. The study starts with a test of general value-relevance of accounting information in the Chinese stock market. This test is necessary not only because there is a lack of convincing evidence on the value-relevance of accounting information in China beyond anecdotal stories of how Chinese accounting is inadequate, but also because there exist identifiable, conflicting reasons for and against finding value-relevance in the Chinese market. There are discernible factors suggesting that accounting information may not be as value-relevant in the Chinese market as in a mature market. First, Chinese accounting systems and regulations were traditionally not market-oriented. Most listed companies were state-owned before going public and the purpose of their accounting was not to provide useful information to investors but to facilitate centralized state planning and control. Although the Chinese government issued a separate accounting standard for listed companies as early as in 1992, there have been numerous unresolved issues in implementing a shareholder-oriented accounting system. Consequently, the value of accounting information in the Chinese market has been questioned in the literature Curran 1994, Aharony and C J Lee 2000 and Haw and Qi 1998a. Second, the reliability of accounting information in China has been a source of concern. Independent auditing is relatively a new phenomenon in China. While it is true that financial statements of listed companies must be audited by CPAs, the quality of audits in China has been generally perceived low (Aharony et al., 2000). A relatively weak monitoring role by outside auditors may contribute to a lack of confidence in and less use of financial statements. Finally, compared to a mature market such as the U.S. market, the Chinese market lacks a sufficient level of corporate governance such as independent outside directors, audit committee, and competition in the managerial labor market, which weakens investors’ confidence in their use of accounting information. However, there are also reasons to believe that accounting information is useful and thus impounded in stock valuation in the Chinese market. As a new market, it lacks alternative information sources other than published accounting reports such as earnings forecasts and company research by financial analysts, and management’s conference calls. While small individual investors are active in the market1, the investment profession in China is not well established and comprises only a small number of financial analysts and institutional investors such as mutual funds. Most transactions are executed by individual investors with limited access to information other than publicly available accounting numbers. As a result, price may be less informative and accounting information may contain more surprises in the Chinese market, both of which lead to an increased reliance upon accounting numbers by investors. Second, the government has made considerable efforts since the start of the Chinese stock market to improve accounting and financial reporting practices. For example, disclosure requirements for annual reports have been revised annually in last few years to meet an increased demand for financial reporting. Collectively, these efforts may have had a positive impact on the efficiency of the market and the confidence of Chinese investors in accounting numbers. Furthermore, the Chinese market is segmented both in trading rules and reporting requirements. A substantial number of shares issued by Chinese listed companies are held by the state or ‘legal persons’ (i.e., enterprises or institutions) and are not traded in the same way as shares held by individual investors in the market. These institutional shareholders usually have direct access to insider information, and they rely less on publicly available information than individual investors do. Accordingly, companies with a higher proportion of institutional shareholders may have fewer incentives to improve the quality of reported financial statements, which in turn may reduce the usefulness of financial information. In financial reporting, companies issuing only A-shares to domestic investors differ from companies also issuing B-shares to foreign investors. While A-share companies prepare only Chinese GAAP-based financial statements usually audited by a local CPA firm, AB-share companies are required to reconcile their financial statements to IAS and have their IAS-based financial statements audited by another CPA firm (usually a Big 5 auditor). Since IAS is a more conservative accounting standard than Chinese GAAP (Chen et al., 1999) and Big 5 auditors are more established and experienced, the existence of a dual reporting and dual auditing mechanism may improve the value-relevance of accounting information for AB-share companies. Consequently, it is more an empirical question of whether accounting information is useful to domestic investors in China as measured by the contemporaneous association between accounting numbers and stock valuation. Two existing studies examine value- relevance of accounting information in China Haw and Qi 1998a and Bao 19992 but both focus on the value-relevance of Chinese GAAP versus IAS-based accounting information to foreign investors in the Chinese market. While Haw et al. (1998a) report that information based on Chinese GAAP is value-relevant and that reconciliation to IAS has limited value to foreign investors in the B-share market, they also find significant incremental information content of IAS reconciliation for H shares traded on the Hong Kong Stock Exchange. This result implies that the same accounting information may have varying degrees of value-relevance in different markets. Using a different testing procedure, Bao and Chow (1999) provide conflicting evidence and conclude that accounting information based on IAS has greater information content than that based on Chinese GAAP to B-share investors in China. Not only do these two studies differ in conclusion, they both suffer from two potential problems. First, the B-share market is known for its lack of liquidity. As a result, the small trading volume may not allow stock prices to fully reflect new information in the market. For example, a substantial number of B shares on the Shanghai Stock Exchange (SSE) are priced under US$0.10 during their testing period. An increase or decrease in the stock price amounting to one cent (the minimum change) would effectively lead to a suspension of trading due to the trading rule on maximum daily price variation (i.e., ten percentage of the opening price). Second, B shares are supposed to be traded by investors outside China. These investors may not have access to Chinese GAAP-based financial reports, which are published domestically. Furthermore, the reconciliation of GAAP discrepancy is required to be disclosed only with the A-share report. Therefore, including B-share prices and A-share earnings and book value simultaneously in one model may imply an association which is not consistent with actual practices in the market. Furthermore, A-share companies and domestic investors dominate the Chinese market. Value-relevance of accounting information with respect to foreign investors in the B-share market does not necessarily imply that domestic investors will respond to accounting information in the same way in the A-share market. This study extends current research by providing evidence of value-relevance with respect to domestic investors using data exclusively from the A-share market. This is a fundamental issue because accounting is a primary source of public information in the Chinese market, and the purpose of various measures taken by the Chinese government to improve accounting and financial reporting is to increase the usefulness of accounting information. Based on the experience of mature markets around the world, one can conclude that the Chinese market will not grow into a mature market if accounting does not provide useful information to investors to make investment decisions. The remainder of the paper is organized as follows. The next section briefly discusses the institutional environment of stock markets and financial reporting in China. The section that follows reviews previous research and provides background information about the research questions in this current study. Then, research methods are discussed and results presented. The paper ends with a summary and conclusion of the study.
نتیجه گیری انگلیسی
This study provides an empirical examination of whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be value-relevant. Using a sample of all available observations in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1998, we obtain evidence of value-relevance of accounting information in China based on a return and a price model. The results provide evidence that accounting information is value-relevant in the Chinese market according to both the pooled cross-section and time-series regressions or the year-by-year regressions. The evidence is consistent between the return model and the price model. Secondly, we further examine whether value-relevance changes in a predictable manner with respect to four factors including positive versus negative earnings, firm size, earnings persistence, and percentage of public share holdings. Overall, the results support the conclusion that value-relevance in China changes in a predictable manner. We find that while accounting earnings are value-relevant for companies reporting positive earnings, there is no value-relevance evidence for companies reporting losses. Earnings of smaller firms are more value-relevant according to the return model, which is consistent with the notion that there is less competing information about smaller than larger firms in the market. The price model suggests, however, that earnings of larger firms are more relevant in reflecting events that affect stock price levels. As for earnings persistence, we find that investors in China do not distinguish companies that have more income increasing items below operating income from those that have less. Accounting earnings are value-relevant for both types of companies. The results of both models support the hypothesis that accounting information is more value-relevant for firms whose stocks are more liquid as measured by higher public share holdings. Finally, this study examines two competing predictions about the value-relevance of accounting information between A-share and AB-share companies. While accounting information is value-relevant for both types of companies, we find that value-relevance is higher for companies issuing only A-shares. Although the dual-GAAP reporting requirement and the strengthened monitoring by both international and domestic auditors suggest higher quality financial reporting and thus higher value-relevance for AB-share companies, our evidence supports the competing explanation that investors place more weight on accounting information in companies issuing only A-share stocks. We interpret the result as AB-share companies having more alternative sources of competing information other than financial reporting. Collectively, in this study, we report consistent evidence that accounting information is value-relevant to Chinese investors despite the young age of the market and the perception of inadequate accounting and financial reporting in China. Our results have implications for practitioners in China as well as in other emerging markets. Value-relevance of accounting information has become a primary criterion for evaluating accounting policies and standards in countries where stock markets are more developed. In emerging markets, the importance of accounting information to investors is often not emphasized enough due to the rapid development of the market, the lack of supporting infrastructure and the perception that investors are too naı̈ve and irrational to pay attention to accounting information. Our results suggest that investors in the emerging Chinese stock market are rational and sophisticated with respect to the use of accounting information, despite the developing nature of accounting and financial reporting in China. Thus, accountants, auditors, standard-setters and regulators who aim at improving quality accounting information need to better understand how to improve decision usefulness of accounting information to investors. Equally important, the empirical findings of this study should be of interest to accounting researchers because of the unique institutional environment and the rapid development of accounting and financial reporting in China. The Chinese environment provides an interesting setting for studying the role of accounting information in the stock market. The value-relevance of accounting information in China since the beginning of the stock market is powerful evidence for the demand for accounting information even though Chinese accounting has been perceived less than adequate and capital market infrastructure is still under development. Consequently, studies of the usefulness of accounting information in an emerging market like the Chinese stock market can add to our knowledge and enhance our understanding of the role that accounting information plays for the fair and efficient operation of an economy. This study is not without its limitations. While we attempt to take unique environments in China into consideration in studying the value-relevance of accounting information, there are presumably many other important factors, especially those related to supporting infrastructure, such as auditing quality, corporate governance, and analysts coverage that deserve careful examination. In addition, there may be better measures for some of the variables studied such as earnings persistence in China. Future research may improve in these areas to advance our knowledge.