Accounting Quality, Earnings Management and Cross-Listings: Evidence from China

Abstract

This paper examines the quality of financial reporting of Chinese firms cross-listed in the United States, Hong Kong and noncross-listed Chinese firms. We examine quality of financial reporting based on measures of earnings management, timely loss recognition and price-earnings association. We find that both cross-listings and noncross-listings show significant earnings smoothing and use accruals to manage earnings, and are not timely in loss recognition. We surmise that cross-listing in the United States or Hong Kong has not changed the accounting choices of Chinese cross-listing firms. However, our findings show that the market considers earnings and book value data of cross-listing firms to be more informative than those of noncross-listing firms in the event of good news. Our contribution is to show that in contrast to previous literature, firms from China do not have better reporting quality when they cross-list in the United States. There are still significant accounting deficiencies in many Chinese firms cross-listed in the United States (Financial Times, 2011).

Foreign institutional ownership and demand for accounting conservatism: evidence from an emerging market

“…Conversely, Basu et al (2005) show, using a sample of Taiwanese firms during the period 1991-1996, that family-owned firms exhibit lower earnings conservatism. However, Eng and Lin (2012) find that Chinese firms cross-listed in Hong Kong and the US do not show lesser earnings management practice or higher earnings quality. In similar vien, Lai and Tam (2017) find no association between foreign ownership and earnings manipulation in China.…”

Stop Bashing: Chinese Firms Even Have Better Financial Reporting Quality

“…It is generally believed that the legal liability and the rigorous SEC enforcement improve earnings quality of cross-listed firms. Eng and Lin (2012) find no difference in the financial reporting quality between the Chinese firms cross-listed in the US and Hong Kong and non-cross-listed Chinese firms. Chinese firms also have the incentives to overcome negative perceptions.…”

The usefulness of the double entry constraint for predicting earnings

“…In the context of earnings persistence research, the most basic acknowledgement of the relation between earnings, accruals, and CFO is already implicit in the work of Sloan (1996). This is stated as In addition, following Barth et al (2001), Baker et al, 2018, Chan et al (2004),XU et al 2018and Eng et al (2012), accruals (ACC) can be decomposed into the following components:…”