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Article
Publication date: 9 June 2020

Wing Him Yeung and Camillo Lento

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

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.

Details

Asian Review of Accounting, vol. 28 no. 4
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 1 January 2006

Lan Jiang

Following China entered the World Trade Organisation in November 2001, attention has been paid worldwide to the current Chinese legal system, political policies, and the…

Abstract

Following China entered the World Trade Organisation in November 2001, attention has been paid worldwide to the current Chinese legal system, political policies, and the development of economic reform. Recent debates on corporate governance in China have become a global topic of interest. The corporate governance reform is now the centre of the enterprise reform. This paper evaluates the development of corporate governance reform in China and identifies its changes in legislation on corporate control. This paper provides evidence to show that China has been making significant progress in the development of corporate governance reform. It concludes that China has established a fundamental legal framework for corporate governance. The changes in regulations on corporate control indicate that the development of a more sophisticated corporate governance system is under way. However, corporate governance reform in China is still at an early stage of development. The existing problems are still significant. Laws and legal institutions have experienced difficulties keeping up with the changes that have been taking place in China. The rights of selecting management of state‐owned enterprise still remain in the hands of the state. The reform of the banking system lags behind the development of the market economy and state‐owned banks are still under government's control. The paper argues that in Chinese context as far as the rights of selecting management remain in state's hand, the independent board of directors will have less power to achieve the goals in corporate control. Thus the agency problems will not be solved, and it is very difficult to excise and protect minority shareholders' interest. In today's Chinese market the corporate governance cannot provide the protection of minority investors' interests. This paper also argues that it is very dangerous for individual investors to invest in the Chinese market and they have to bear higher risks. This paper suggests that increasing the Sophistication of the corporate governance system of both internal and external control is the key for the Chinese market. This is because the Chinese context is very complicated. There are so many regulations and laws applied in business practice. Different companies and enterprises apply different laws. This paper points out when a national corporate governance system is established it should serve the whole economic market. Thus the further reform of state‐owned enterprises and also the banking system should take place so that China can build up a real economic market structure according to international regulations. This paper also suggests that in the long‐term, building up a cultural background for applying corporate governance system is very important in Chinese society. Improving the culture in the social environment could help to improve the corporate governance in business practices.

Details

Social Responsibility Journal, vol. 2 no. 1
Type: Research Article
ISSN: 1747-1117

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Article
Publication date: 5 March 2018

Lan Sun and Omar Al Farooque

This study aims to explore corporate earnings management practices in Australia and New Zealand before and after the regulatory changes and corporate governance reforms

Abstract

Purpose

This study aims to explore corporate earnings management practices in Australia and New Zealand before and after the regulatory changes and corporate governance reforms. The study argues that the effectiveness of regulatory reforms has to be reflected in constraining earnings management in post-reform period as compared to pre-reform period.

Design/methodology/approach

Using a sample of 3,966 firm-year observations, including all ASX and NZX listed firms for the period 2001-2006, the study examines earnings management practices in both countries in pre- and post-reform periods with appropriate statistical methods.

Findings

The results indicate some interesting phenomenon: the magnitude of earnings management did not decline after the governance reform as a positive time trend is observed in the entire sample as well as in Australian and New Zealand sub-samples, suggesting that earnings management has been growing over time. Additional test indicates no structural change has occurred before and after the new regulations. The shifting from decreasing earnings management to increasing earnings management can be interpreted as an evidence that earnings become more ‘informative’ in a more transparent disclosure regime to capture short-run benefits from regulator reforms.

Research limitations/implications

The shifting of earnings management behaviour from decreasing to increasing income can be interpreted as the outcome of more “informative”, rather than “deliberate”, earnings management in a more transparent disclosure regime to capture short-run benefits of regulatory reforms, which is worth further investigation. The findings of the study can lead regulatory authorities taking appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context. Any future reforms should be directed to protecting the interest of stakeholders as well as ensuring benefits outweighing costs for them.

Practical implications

The findings of the study can lead regulatory authorities in taking appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context.

Originality/value

The study adds value to the existing earnings management literature as well as effectiveness of regulations for the benefit of wider stakeholder groups.

Details

International Journal of Accounting & Information Management, vol. 26 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 22 February 2013

Sheraz Ahmed

An important objective of corporate governance reforms is to increase transparency. The purpose of this paper is to investigate whether this objective of corporate

Abstract

Purpose

An important objective of corporate governance reforms is to increase transparency. The purpose of this paper is to investigate whether this objective of corporate governance reforms of 2002 was achieved in Russia.

Design/methodology/approach

This paper utilizes the data collected from UBS Brunswick's “Russian Equity Guides” published during 1999‐2004, and companies’ annual reports. The modified accrual model of Jones presented by Dechow et al. is used to ascertain the quality of reported earnings of 91 Russian listed companies during the pre‐ and post‐ reform periods.

Findings

This research paper shows that the quality of earnings – measured as the inverse of absolute discretionary accruals – is not affected by the 2002 reforms in Russia. Therefore, one of the most important objectives of bringing transparency in the Russian corporate sector was not successfully achieved. Instead, this paper finds that adoption of international financial reporting standards (IAS/USGAAP) by Russian listed companies improved the transparency of corporate disclosures irrespective of the reforms. Moreover, the need for large capital investments after the Russian financial crisis of 1998 was depicted by maintaining large pools of accruals by Russian listed companies. Finally, the results show ferrous metal and telecom sector companies have generally lower quality of earnings than other sectors.

Research limitations/implications

This paper builds on the previous accounting literature by studying the determinants of the quality of reported earnings in one of the most interesting emerging economies. The study re‐emphasizes the importance of legal and regulatory framework in determining the level of corporate transparency in emerging economies. The results obtained here are insightful for future accounting research and policy makers in assessing the potential pros and cons of regulatory reforms. However, the paper does not judge or comment on the quality and enforcement of the prescribed reforms. The results describe the trend of the accounting quality in Russia during the analysis period only.

Originality/value

This is one of the first studies on Russian listed firms testing the impacts of the most important of all reforms introduced in Russia since the fall of the USSR. This extends the knowledge not only for academics and investors but for Russian policy makers in particular and for corporate regulators in other emerging markets in general.

Details

Journal of Accounting in Emerging Economies, vol. 3 no. 1
Type: Research Article
ISSN: 2042-1168

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Book part
Publication date: 1 January 2008

Pik Kun Liew

Purpose – The purpose of this paper is to understand the roles of corporate governance reforms in Malaysia following the 1997/1998 Asian crisis from the perspectives of…

Abstract

Purpose – The purpose of this paper is to understand the roles of corporate governance reforms in Malaysia following the 1997/1998 Asian crisis from the perspectives of corporate managers.

Design/methodology/approach – The primary evidence used is drawn from a series of in-depth semi-structured interviews with Malaysian corporate managers involved in the overseeing of the governance structures within their companies.

Findings – This study shows that most interviewees believed that an appropriate corporate governance system could play a role in resolving the problems associated with the interlocking and concentrated corporate ownership structure in Malaysia. However, the effectiveness of the corporate governance reforms in dealing with this issue is questionable. It also reveals that Malaysian companies ‘changed’ their corporate governance practices predominantly to recover (foreign) investor confidence lost during the crisis and to fulfil the legal requirements enforced by the government, where the latter was under pressure from the international community (especially, the World Bank and IMF) to ‘improve’ the Malaysian corporate governance practices after the crisis.

Originality/value of paper – This paper adds to the literature on corporate governance, especially in the context of developing countries. Prior research investigating corporate governance issues in developing countries has been limited, particularly the lack of in-depth examination of corporate governance practices from the perspectives of corporate managers. This paper will be of great value to researchers and practitioners seeking to gain a better understanding of the roles of corporate governance in Malaysia.

Details

Corporate Governance in Less Developed and Emerging Economies
Type: Book
ISBN: 978-1-84855-252-4

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Article
Publication date: 7 May 2020

Lan Sun

This study is primarily motivated by the increasing concern of the academic, practitioners, regulators and standard setters regarding the quality of earnings and financial…

Abstract

Purpose

This study is primarily motivated by the increasing concern of the academic, practitioners, regulators and standard setters regarding the quality of earnings and financial reporting. The purpose is to investigate whether the accrual anomaly exists in Australia; whether the occurrence of the accrual anomaly is attributed to the discretionary accruals component stemming from managerial discretion; and the impact of corporate governance reforms on accrual mispricing.

Design/methodology/approach

This study employs the Mishkin (1983) rational expectations test to examine whether the earnings expectations embedded in stock prices accurately reflect the differential persistence of earnings components. It also employs the hedge portfolio trading strategy to examine whether taking a long position in firms with low accruals and a short position in firms with high accruals will yield positive abnormal stock returns.

Findings

The results show that investors overestimate the persistence of accruals and underestimate the persistence of cash flows and subsequently, overprice the accruals and underprice the cash flows. The evidence of accrual mispricing is severe for the component of discretionary accruals. Nonetheless, the association between discretionary accruals and abnormal returns are weakened during the corporate governance reforms period.

Research limitations/implications

It should be cautious to attribute the investors' ability to accurately price accruals and cash flows to the passage of corporate governance reform program. Despite there is control for firm size, book-to-market, PE multiple, growth and leverage, other macro-economic factors such as interest rates, inflation and GDP could potentially have an impact on stock returns.

Practical implications

The passage of corporate governance reform program has increased the level of financial reporting disclosure and the monitoring of management, which subsequently improved accruals persistence and earnings quality. A direct practical implication is that investors should better understand the information in accruals for future earnings when the corporate disclosure environment is strengthened.

Social implications

This study provides useful information to regulators, academics and investors interested in market efficiency and accrual mispricing. The results suggest that the reform of corporate governance is associated with more efficient prices. This may be of interest to the regulators who intend to improve earnings quality and financial reporting environment through the regulatory reform.

Originality/value

To test the accrual anomaly in the period of corporate governance reforms is particularly useful to regulators and policy makers. It allows regulators and policy makers to gain insight as whether the change of regulation has been effective – more transparent and timely reporting of financial information are supposed to help the investors to better understand the accruals and thus mitigate the potential for accrual mispricing.

Details

Asian Review of Accounting, vol. 28 no. 3
Type: Research Article
ISSN: 1321-7348

Keywords

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Book part
Publication date: 7 January 2015

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.

Details

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
Publication date: 1 March 2006

Steven T. Petra

Reforms set forth in Sarbanes‐Oxley and the NYSE, AMEX, and NASD are designed to prevent the reoccurrence of corporate collapses at companies such as Enron Corp., WorldCom

Abstract

Purpose

Reforms set forth in Sarbanes‐Oxley and the NYSE, AMEX, and NASD are designed to prevent the reoccurrence of corporate collapses at companies such as Enron Corp., WorldCom Inc., and Global Crossing Ltd. The purpose of this paper is to discuss the possible impact the reforms may or may not have had in controlling the abuses uncovered in recent corporate failures.

Design/methodology/approach

This paper examines the reforms to corporate governance and the rationale behind the reforms, and examines how the actual governance structures of Enron, WorldCom, and Global Crossing during the years of their accounting scandals compared to the new requirements. It also offers a discussion as to whether the new reforms would have been helpful in preventing management's manipulation of earnings.

Findings

Global Crossing's governance structure would have satisfied a majority of the reforms. Enron's and WorldCom's governance structures would have satisfied less than half of the reforms.

Practical implications

This paper highlights the need for management and shareholders alike to focus on the substance of the reforms and not merely the form of the reforms in order to make meaningful improvements to corporate governance.

Originality/value

This paper should serve as a warning to the investing public. The reforms in and of themselves should not be relied on to prevent future corporate scandals. The reforms, however, do focus the spotlight directly on corporate boardrooms where shareholders can now insist that directors' interests be separate from those of the CEO and upper management.

Details

Corporate Governance: The international journal of business in society, vol. 6 no. 2
Type: Research Article
ISSN: 1472-0701

Keywords

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Article
Publication date: 5 May 2015

Xu_Dong Ji, Kamran Ahmed and Wei Lu

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…

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.

Details

International Journal of Accounting & Information Management, vol. 23 no. 2
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 2 October 2017

Saibal Ghosh

The purpose of the study is to understand the importance of corporate governance reforms for the Middle East and North Africa (MENA) country banks. To address this issue…

Abstract

Purpose

The purpose of the study is to understand the importance of corporate governance reforms for the Middle East and North Africa (MENA) country banks. To address this issue, the author combines the staggered timing of corporate governance reforms for banks across MENA countries with bank-level data for the period 2000-2012 and examine the impact on bank performance.

Design/methodology/approach

The author employs fixed effects regression within a difference-in-differences specification for the analysis.

Findings

The analysis suggests that not all governance characteristics are equally effective and some of these characteristics exert a more pronounced effect on bank performance as compared to others. These results also vary across oil-exporting and -importing nations and differ during the crisis. Besides, the authors find that improved operating efficiency and access to finance are the key channels through which governance improves bank performance.

Practical implications

Corporate governance reforms in the MENA countries need to be carefully tailored, taking into account the inherent economic characteristics of the country for it to exert durable impact. The challenge for policymakers is to find the right balance that can ensure maximum benefits for the banking sector, while minimizing the challenges involved in its implementation.

Originality/value

To the best of the authors’ knowledge, this is one of the earliest studies for MENA country banks to examine the interface between corporate governance reforms and bank performance, while controlling for the possible endogeneity of such reforms on performance.

Details

Corporate Governance: The International Journal of Business in Society, vol. 17 no. 5
Type: Research Article
ISSN: 1472-0701

Keywords

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