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Matthias Nnadi, Kamil Omoteso and Yi Yu

This paper provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting…

Abstract

This paper provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting quality of Hong Kong firms which are cross-listed in mainland China with those of Hong Kong firms cross-listed in China using specific earnings management metrics (earnings smoothing, timely loss recognition, value relevance and managing towards earnings targets) under pre- and post-IFRS regimes.

The financial reporting quality of Chinese A-share companies and Hong Kong listed companies are examined using earnings management measures. Using 2007 as base year, the study used a cumulative of −5 and +5 years of convergence experience which provide a total of 3,000 firm-year observations. In addition to regression analyses, we used the difference-in-difference analysis to check for the impact of regulatory environments on earnings management.

Through the lens of contingency theory, our results indicate that the adoption of the new substantially IFRS-convergent accounting standards in China results in better financial reporting quality evidenced by less earning management. The empirical results further shows that accounting data are more value relevant for Hong Kong listed firms, and that firms listed in China are more likely to engage in accrual-based earnings management than in real earnings management activities. We established that different earnings management practices that are seemingly tolerable in one country may not be tolerable in another due to level of differences in the regulatory environments.

The findings show that Hong Kong listed companies’ exhibit higher level of financial reporting quality than Chinese listed companies, which implies that the financial reporting quality under IFRS can be significantly different in regions with different institutional, economic and regulatory environments. The results imply that contingent factors such as country’s institutional structures, its extent of regulation and the strength of its investor protection environments impact on financial reporting quality particularly in transitional and emerging economies. As such, these factors need to be given appropriate considerations by financial reporting regulators and policy-makers interested in controlling earnings management practices among their corporations.

This study is a high impact study considering that China plays a significant role in today’s globalised economy. This study is unique as it the first, that we are aware of, to compare real earnings activities against accrual-based earnings management in pre- and post-IFRS adoption periods within the Chinese and Hong Kong financial reporting environments, distinguishing between cross-listed and non-cross-listed firms.

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Neo-Transitional Economics
Type: Book
ISBN: 978-1-78441-681-2

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Book part

This chapter examines China’s corporate governance and accounting environment that shapes the adoption of internationally acceptable principles and standards…

Abstract

This chapter examines China’s corporate governance and accounting environment that shapes the adoption of internationally acceptable principles and standards. Specifically, it examines international influences, including supranational organizations; foreign investors and international accounting firms; domestic institutional influences, including the political system, economic system, legal system, and cultural system; and accounting infrastructure. China’s convergence is driven by desired efficiency of the corporate sector and legitimacy of participating in the global market. Influenced heavily by international forces in the context of globalization, corporate governance and accounting practices are increasingly becoming in line with internationally acceptable standards and codes. While convergence assists China in obtaining legitimacy, improving efficiency is likely to be adversely affected given that corporate governance and accounting in China operate in an environment that differs considerably from those of Anglo-American countries. An examination of the corporate governance and accounting environment in China suggests heavy government involvement within underdeveloped institutions. While the Chinese government has made impressive progress in developing the corporate governance and accounting environment for the market economy, China’s unique institutional setting is likely to affect how the imported concepts are interpreted and implemented.

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Adoption of Anglo-American Models of Corporate Governance and Financial Reporting in China
Type: Book
ISBN: 978-1-78350-898-3

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Article

Peter Rampling, Ian Eddie and Jackie Liu

Kato & Long state that executive compensation has attracted much attention from economists in the past two decades yet most academic work on executive compensation has…

Abstract

Purpose

Kato & Long state that executive compensation has attracted much attention from economists in the past two decades yet most academic work on executive compensation has been concentrated on a few developed countries such as the USA and the UK, mainly due to data availability. In light of the mounting interest in the vital role that corporate governance may play in economic development, however, it is of considerable importance to study how firms in developing countries compensate their top executives. In particular, for transition economies struggling to transform their state‐owned enterprises (SOEs) into profitable modern firms through various reform measures, the provision of efficient managerial incentives is a crucial ingredient of the successful transition of the economy. Since executive pay‐performance link represents the bulk of managerial incentives for top management, a closer look at the nature of pay‐performance link for top management in transitional economies will provide much needed information for the evaluation of the current reform effort and the designing of future reform measures. This paper seeks to address these issues.

Design/methodology/approach

A review of available literature for this topic was sourced, collated and summarised.

Findings

The significant pay‐performance link for top management in China's listed firms is overall encouraging news for current policy makers in China, who consider public listing in the stock market as a key mechanism of achieving such a goal for large SOEs. However, not all news is good. Perhaps most importantly, they have found that government ownership of China's listed firms is weakening pay‐performance link for top managers and thus possibly making China's listed firms less effective in solving the agency problem.

Originality/value

Taken in context with other literature and research, this paper provides an insight into the link between Chinese state‐owned enterprises (SOEs) and other publicly listed firms and executive remuneration.

Details

Asian Review of Accounting, vol. 21 no. 2
Type: Research Article
ISSN: 1321-7348

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Article

Jiajia Chen, Rong Zhang and Bin Liu

The purpose of this paper is to find the key influence factors of executive compensation within China ports and listed shipping companies and provide some reasonable…

Abstract

Purpose

The purpose of this paper is to find the key influence factors of executive compensation within China ports and listed shipping companies and provide some reasonable suggestions. Eventually, help to perfect the executive compensation evaluation mechanism against the background of new area.

Design/methodology/approach

Grey correlation analysis is an important part of grey system theory. Professor Liu Sifeng further studies the relationship between two sequences absolute increment on the basis of Deng’s degree and put forward the “Grey absolute correlation degree,” which is widely used in practice. In the study, on the basis of the area of the line between sequences size, it measures the correlation degrees of firm performance, executive stock holding, continuous growth capacity and other relevant factors of executive payment in China ports and listed shipping companies.

Findings

The paper concludes that the main factors influence CEO salary in China ports and listed shipping companies are return on equity and growth rate of fixed assets. However, the authors consider the frequent occurrence of executives’ corruption in China listed state-owned enterprise under the environment of financial and economic crisis, the authors argue that the significant influence of net assets attributed to shareholders cannot be ignored. In addition, cash flow in operating activities and executive stock holding both have relatively important effect on executive compensation.

Research limitations/implications

This paper still has some limitations. First, it merely takes into account the financial indicators and ignores the influence of non-financial indicators to the performance evaluation of listed companies, such as: innovation ability, human capital and goodwill. Second, it has not considered the power consumption and other types of “invisible income” in the executive compensation structure, neither the influence of investing and financing activities on corporate performance. Consequently, these are likely to cause a certain deviation to the results of the study.

Practical implications

The outcome obtained in this paper can be provided for China ports and listed shipping companies to establish a reasonable executive compensation evaluation and incentive mechanism under the background of depressed shipping market.

Social implications

This paper intends to use correlation analysis between firm performance, executive stock holding, sustainability and executive compensation in the new area of time, tries to make a greater contribution to the major component of salary policy and then make some suggestions on incentive supervising and restraining mechanisms for the ports and listed shipping firms in China.

Originality/value

Although scholars have done many studies about the association analysis of executive compensation and firm performance, they neglect the economic environment of industry. Meanwhile, considering the non-financial indicators and incomplete information, this paper studies the grey correlation analysis of executive compensation and influence factors in China ports and listed shipping firms under the background of the Chinese flagging shipping industry.

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Article

Zhongyi Xiao, Rui He, Zhangxi Lin and Hamilton Elkins

This study investigates the determinants of Chief Executive Officer (CEO) cash compensation in relation to corporate governance and performance in China's listed firms

Abstract

Purpose

This study investigates the determinants of Chief Executive Officer (CEO) cash compensation in relation to corporate governance and performance in China's listed firms. This article also aims at analyzing gender earning differentials among CEOs.

Design/methodology/approach

The empirical analysis is based on the panel data set which contains information on the CEOs of 1,701 firm-year observations over the period 2006-2010. A Oaxaca decomposition is also implemented to measure the gap between male and female CEO compensation.

Findings

The paper observes that CEO compensation relies more on firm accounting performance than on stock market performance. This relationship is especially evident when accounting performance is measured as the return-on-assets. Dominant shareholders such as the state and block holders have a distinct impact on the use of incentive pay. The presence of a compensation committee in a Chinese listed firm is correlated with an excessive pay package for the Chief Executive Officer (CEO), even though there is evidence that pay-for-performance is more likely in the presence of a compensation committee. Furthermore, this context extends the international body of evidence on CEO compensation by offering a novel accounting of the gender gap in pay among China's listed firms. Examination of the dataset reveals that women represent approximately 6.8 percent of CEOs. In keeping with international norms, female CEOs are more senior and better educated than their male counterparts, yet they receive less favorable compensation. The Oaxaca decomposition shows a larger unexplained part of the pay-gap and suggests that the gender statistically explains a great deal of the gap in pay between male and female CEOs across China's listed firms.

Originality/value

This article contributes to the international corporate governance literature and implications for the design of good corporate governance for China's listed firms. Moreover, this article also highlights the current gender gap among CEOs in compensation.

Details

Nankai Business Review International, vol. 4 no. 4
Type: Research Article
ISSN: 2040-8749

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Book part

Ping He, Kun Wang and Xing Xiao

The goal of this paper is to investigate the relationship between government control and firm value in China.

Abstract

Purpose

The goal of this paper is to investigate the relationship between government control and firm value in China.

Design/methodology/approach

Government might extract social or political benefits from a state-controlled firm, thus decreases firm value. However, government’s monitoring on firm management reduces managers’ agency problem, which increases firm value. We first build a game-theoretic model to prove the existence of optimal government control given these two roles of government, and we then employ the OLS regression method to test the theory predictions using the length of intermediate ownership chains connecting the listed state-owned enterprises to their ultimate controllers as the measure of government control.

Findings

We find that firm values first increase then decrease as government control weakens. Moreover, we find that government usually retains a stronger control over state-owned enterprises than the optimal level. In addition, we show that government control can be further weakened in firms with good corporate governance mechanisms, which serve as a substitution of government monitoring.

Social implications

Our results demonstrate that government control in China is still a necessary but costly mechanism to mitigate agency costs, especially when corporate governance system is underdeveloped.

Originality/value

We identify the substitution effect between government control and corporate governance using a unique measure of government control.

Details

The Political Economy of Chinese Finance
Type: Book
ISBN: 978-1-78560-957-2

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Article

Kelvin Henry Kyissima, Gong Zhang Xue, Thales Pacific Yapatake Kossele and Ahmed Ramadhan Abeid

The purpose of this paper is to analyze the corporate capital structure stability of listed firms in China during the period 1990–2013.

Abstract

Purpose

The purpose of this paper is to analyze the corporate capital structure stability of listed firms in China during the period 1990–2013.

Design/methodology/approach

The study uses panel data from a sample of 716 firms that have been listed in China for at least 15 years. A fixed-effects panel data regression model with time effects is used in the estimation.

Findings

The findings show that size, profitability and investment opportunities have a significant influence on capital structure, whereas the tangibility of assets is not found to be significant. Few industries show significance in explaining differences and variation in leverage ratios.

Social implications

It is recommended by this study that corporate managers of listed firms in China should consider leverage ratios variation while choosing the capital structure.

Originality/value

This study can be helpful in assisting companies to make financing decisions and setting up strategies relevant in their growth and profitability. The study will also have a significant assistance to bring to light corporate issues to policy makers, especially in the areas of both equity and debt financing, particularly the bond market. To the society, this study will show the nature of Chinese-listed companies, and it can assist individual investors in making decisions regarding companies in which they hold investments and in making meaningful comparisons with other companies. The paper also aims at contributing to the existing literature on the empirical study on capital structure.

Details

China Finance Review International, vol. 10 no. 2
Type: Research Article
ISSN: 2044-1398

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Article

Sun Liu and Jie Zhang

This study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.

Abstract

Purpose

This study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.

Design/methodology/approach

Based 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.

Findings

This 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/implications

Unlike 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 implications

This 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/value

This 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.

Details

Journal of Applied Accounting Research, vol. 22 no. 1
Type: Research Article
ISSN: 0967-5426

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Article

Qingquan Xin, Ruitao Li and Sonia Wong

The purpose of this paper is to provide an introduction to the reverse mergers (RMs) conducted in the Chinese stock market by summarizing the regulatory system, surveying…

Abstract

Purpose

The purpose of this paper is to provide an introduction to the reverse mergers (RMs) conducted in the Chinese stock market by summarizing the regulatory system, surveying the literature on RMs and analyzing the major characteristics of 161 RM cases.

Design/methodology/approach

This paper introduces the characteristics and evolution of the regulatory framework governing RM activity in China. Then the paper reviews relevant academic studies on the RMs in China and other countries. Finally, the paper identifies and discusses the major characteristics of 161 RM cases in the Chinese stock market from 2006 to 2016.

Findings

Private companies that go public via RMs in China not only have superior asset quality but also demonstrate good accounting and stock price performance after listing, and these results are unlike those of studies on the quality of RMs in other countries.

Research limitations/implications

This paper is based on a survey of 161 RM cases in China’s stock market, with the major characteristics of the RMs being identified and analyzed. The limitations of previous studies and suggestions for further research are discussed.

Originality/value

This paper suggests that the relative superior performance of RMs in the Chinese stock market is caused by the interplay of market forces and regulatory oversight. The Chinese regulator’s pragmatic and flexible approach plays an important role in formulating regulatory policies that respond to the changing macroeconomic environment and financial markets.

Details

China Finance Review International, vol. 9 no. 1
Type: Research Article
ISSN: 2044-1398

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Article

Lei Xu, Ron P. McIver, Yuan George Shan and Xiaochen Wang

The purpose of this paper is to link literature on China’s real estate sector and the impact of governance, ownership and political connectedness on firm financial…

Abstract

Purpose

The purpose of this paper is to link literature on China’s real estate sector and the impact of governance, ownership and political connectedness on firm financial performance. Whether these factors impact listed real estate firms differently to firms in other industry sectors is identified.

Design/methodology/approach

The paper uses pooled 2008-2013 data on A-share firms. Tobin’s Q captures firm financial performance. Explanatory variables include corporate governance, ownership, local government political connectedness, accounting data and ultimate control. Two-way interactions are estimated between real estate and ownership, governance, political connectedness and other variables. Three-way interactions are estimated between real estate, ownership, control and political connectedness. Year and industry fixed effects are absorbed.

Findings

Industry concentration and proportion of state ownership appear to positively impact performance. Firm size, gearing and greater foreign ownership appear to negatively impact performance. However, differences are identified for real estate firms, in which state control and gearing positively impact performance. Greater state and foreign ownership as well as supervisory board size negatively impact performance. Finally, state control in the presence of local government connections negatively impacts performance, while greater state ownership in the presence of local government connections positively impacts performance.

Originality/value

A lack of empirical evidence on the impact of corporate governance, ownership structures and political connectedness on firm performance in China’s real estate sector is addressed. Importantly, relationships among these factors and the financial performance of China’s listed real estate firms differ to those of firms in other industries.

Details

Managerial Finance, vol. 42 no. 6
Type: Research Article
ISSN: 0307-4358

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