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The impact of corporate governance and ownership structure reforms on earnings quality in China

Xu_Dong Ji (Department of Accounting, La Trobe University, Melbourne, Australia)
Kamran Ahmed (Department of Accounting, La Trobe University, Melbourne, Australia)
Wei Lu (Department of Accounting, Monash University, Clayton, Australia)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 5 May 2015

3134

Abstract

Purpose

The purpose of this paper is to investigate the effect of corporate governance and ownership structures on earnings quality in China both prior and subsequent to two important corporate reforms: the code of corporate governance (CCG) in 2002 and the split share structure reform (SSR) in 2005.

Design/methodology/approach

This study utilises informativeness of earnings (earnings response coefficient), conditional accounting conservatism and managerial discretionary accruals to assess earnings quality using 12,267 firm-year observations over 11 years from 2000 to 2010. Further, two dummy variables for measuring the changes of CCG and SSR are employed to estimate the effects of CCG and SSR reforms on earnings quality via OLS regression.

Findings

This study finds that the promulgation of the CCG in 2002 has had a positive impact, but the SSR reform in 2005 has had little effect on listed firms’ earnings quality in China. These results hold good after controlling for a number of ownership, governance and other variables and estimating models with multiple measures of earnings’ quality.

Research limitations/implications

Future research could focus on how western style corporate governance mechanisms have been constrained by the old management systems and governmental dominated ownership structures in Chinese listed firms. The conclusion is that simply coping Western corporate governance model is not suitable for every country.

Practical implications

The results will assist Chinese regulators in improving reporting quality, ownership structure and governance mechanisms in China. The results will help international investors better understand quality of financial information in China.

Originality/value

This is the first to our knowledge that addresses the effects of major governance and ownership reforms together on accounting earnings quality and, thus, makes a significant contribution on understanding the effect of regulatory reforms on improving earnings quality. In doing so, it also indirectly assesses the effectiveness of western-style corporate governance mechanisms introduced in China.

Keywords

Citation

Ji, X., Ahmed, K. and Lu, W. (2015), "The impact of corporate governance and ownership structure reforms on earnings quality in China", International Journal of Accounting & Information Management, Vol. 23 No. 2, pp. 169-198. https://doi.org/10.1108/IJAIM-05-2014-0035

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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