Earnings opacity and corporate governance for Chinese listed firms: the role of the board and external auditors

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate governance and earnings opacity in China.

Design/methodology/approach

Two corporate governance mechanisms form the basis of the analysis: 1) the board of directors and 2) the external audit function. OLS regression analysis is employed on a large sample from 2000 to 2014 with 20,235 firm-year observations.

Findings

Corporate governance is found to be associated with reduced levels of earnings opacity for Chinese listed companies. Furthermore, the association between corporate governance and reduced levels of earnings opacity strengthened after the implementation of various key reforms.

Practical implications

Chinese regulators are advised to proceed with caution as not all Western approaches to corporate governance are transferrable to the Chinese setting.

Originality/value

This study contributes to the literature by analyzing broad latent constructs of corporate governance in addition to individual observable dimensions in order to reveal that various key reforms have been successful in strengthening the link between governance and reporting quality for Chinese listed companies.

Citation

Yeung, W.H. and Lento, C. (2020), "Earnings opacity and corporate governance for Chinese listed firms: the role of the board and external auditors", Asian Review of Accounting, Vol. 28 No. 4, pp. 487-515. https://doi.org/10.1108/ARA-06-2019-0124