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Contemporary Accounting & Economics 10 (2014) 148–159 Contents lists available at ScienceDirect Journal of

Contents lists available at ScienceDirect

Journal of Contemporary Accounting & Economics

journal homepage: www.else vier.com/locate/jcae

Economics journal homepage: www.else vier.com/locate/jcae The effects of harmonization and convergence with IFRS on

The effects of harmonization and convergence with IFRS on the timeliness of earnings reported under Chinese GAAP

Grace Shu-hsing Wu a , , Shu-hsing Li b , Steve Lin c

a Chang Jung Christian University, Taiwan b National Taiwan University, Taiwan c Florida International University, USA

Taiwan c Florida International University, USA article info Article history: Received 16 August 2011

article info

Article history:

Received 16 August 2011 Revised 1 June 2014 Accepted 4 June 2014 Available online 14 June 2014

Keywords:

IFRS Convergence Chinese GAAP Future earnings response coefficient

abstract

This study examines the effects of a series of harmonization and convergence with IFRS on the timeliness of recognition of earnings in emerging Chinese markets. We find that earnings reported under Chinese GAAP have a lower earnings response coefficient, but a higher future earnings response coefficient, than earnings reported under IFRS before Chinese GAAP converged with IFRS in 2007. This indicates that earnings reported under Chinese GAAP are generally less timely than earnings reported under IFRS before conver- gence. We also find that the future earnings response coefficient of earnings reported under Chinese GAAP continues to increase, indicating that the timeliness of recognition of earn- ings reported under Chinese GAAP worsened after a series of harmonization and conver- gence with IFRS in China. Taken together, this study provides evidence indicating that harmonizing and converging national accounting standards with IFRS in emerging capital markets may not necessarily increase accounting quality. 2014 Elsevier Ltd. All rights reserved.

1. Introduction

This study examines whether a series of harmonization and convergence with International Financial Reporting Standards (IFRS) 1 improves the timeliness of recognition of earnings in emerging Chinese capital markets. Although previous studies (e.g., Sami and Zhou, 2004; Liu and Liu, 2007) have examined the relative value relevance of accounting information prepared in accordance with IFRS and Chinese GAAP (PRC GAAP), 2 little is known about the effects of a series of harmonization and convergence with IFRS, which were launched in China during 1998–2007, on the timeliness of recognition of earnings reported under PRC GAAP. This is an important issue for the following two reasons. First, previous studies (e.g., Sami and Zhou, 2004; Liu and Liu, 2007 ) find that accounting numbers, including earnings reported under PRC GAAP, primarily based on less timely historical cost accounting, are less value-relevant than earnings reported under IFRS, based on more timely fair value accounting. To the best of our knowledge, no study has examined the extent to which a series of harmonization and convergence with IFRS in China before 2007 improves the timeliness of recognition of earnings reported under PRC GAAP. This study fills the gap in the literature.

Corresponding author. E-mail address: shwu@mail.cjcu.edu.tw (G.S.-h. Wu).

1 This study considers IFRS to include International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) that were issued by both the International Accounting Standards Committee (IASC) and the International Accounting Standards Board (IASB), respectively.

2 The value relevance studies only provide the association between share prices and earnings, and the book value of equity, which do not provide direct evidence about how current-year stock returns reflect current-year and future earnings.

1815-5669/ 2014 Elsevier Ltd. All rights reserved.

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Second, most of the previous studies (e.g., Jeanjean and Stolowy, 2008; Barth et al., 2008 ) largely focus on the effect of IFRS adoption on firms’ earnings quality. However, many countries, such as Japan and China, have chosen to harmonize and/or converge their domestic accounting standards with IFRS instead of a full adoption of IFRS. The effect of harmonization and convergence with IFRS on earnings quality should differ from a full adoption of IFRS, which has not yet been examined in the literature. Following Warfield and Wild (1992) and Collins et al. (1994) , 3 we first examine and compare the earnings response coefficient (ERC) and future earnings response coefficient (FERC) for earnings reported under IFRS and PRC GAAP. We then investigate and compare FERC under PRC GAAP throughout the harmonization (1998–2005) and the convergence (2007– 2009) periods that aimed to align Chinese accounting practices with international accounting standards. More specifically, we compare the ERC and FERC in four sub-periods. They include the pre-harmonization (1994–1997), initial harmonization (1998–2000), further harmonization (2001–2005), and post convergence (2007–2009) periods. The Chinese government started the first accounting reform in China in 1993. However, the initial and further harmonization with international accounting and corporate governance practices did not take place until 1998 and 2001, respectively. PRC GAAP only allowed certain financial assets and liabilities to be valued at fair value during the harmonization period (e.g., goodwill impairment loss, gains on debt restricting). Starting in 2007, all Chinese enterprises listed on the Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange ( SZSE) are only required to prepare their financial statements in accordance with the Accounting Standards for Business Enterprises (ASBE), which have been largely converged with IFRS with some differences. We find that earnings reported under PRC GAAP consistently have a lower ERC than earnings reported under IFRS for firms that issued both A- and B- shares in the pre-, initial, and further harmonization periods. This suggests that IFRS earn- ings contain more timely information than PRC GAAP earnings. Further analyses show that PRC GAAP earnings in both the initial and further harmonization periods have a lower ERC than that in the pre-harmonization period. More importantly, we find that PRC GAAP earnings in the convergence period (2007–2009) have a higher FERC than that in the further harmoni- zation period (2001–2005). The above results are robust after controlling for firm size, growth, risk, industry, earnings per- sistence, trading volume, and ownership structure in China. This study contributes to the extant literature by providing consistent evidence indicating that the timeliness of recognition of earnings as reported under PRC GAAP consistently declined after a series of harmonization and convergence with IFRS in China. Overall, our findings imply that harmonization and convergence with IFRS in emerging capital markets may not necessarily lead to an increase in accounting quality. Our results should be of interest to investors, financial analysts, accounting standards setters, and other users of financial statements. The rest of this paper is organized as follows: Section 2 presents background information on a series of harmonization and convergence with IFRS in China during 1998–2007. Section 3 reviews prior research and develops three testable research hypotheses. Section 4 discusses the test methodology and the sample. Section 5 reports the results of empirical tests. Section 6 concludes.

2. Institutional background and IFRS convergence

2.1. Harmonization and convergence with IFRS in China

To move towards a market economy, China began the first wave of accounting reforms in 1993 by introducing the Enter- prise Basic Accounting Standard s and amending the national accounting law to align Chinese accounting practices with inter- national accounting standards. A two-stage harmonization activity with IFRS took place after the Ministry of Finance (MOF) issued the Accounting System for Joint Stock Limited Enterprises and Accounting System for Business Enterprises (ASBE) in 1998 and 2001, respectively, which further brought Chinese accounting standards in line with international accounting standards and, mostly importantly, significantly improved both the quality and quantity of corporate accounting disclosures. The above changes were also accompanied by some dramatic reforms in corporate ownership structure, corporate governance, and market infrastructure. Given all of the above accounting and governance reforms in China, IFRS and PRC GAAP still differed significantly in many accounting measures and information disclosure requirements. Even after harmonization with IFRS, PRC GAAP still had more restrictive rules for estimating depreciation expense, bad debt expense, and measuring inventory ( Sami and Zhou, 2004 ), and did not recognize or record deferred taxes or other liabilities, such as lease obligations and contingencies. IFRS also required much more comprehensive disclosures in financial statements than did PRC GAAP. For example, IFRS allowed firms to use fair values to value assets (e.g. investment property, financial instruments, and intangibles) and liabilities, while PRC GAAP required historical cost for these assets. Starting in 2007, all Chinese enterprises listed on the SHSE and SZSE are required to prepare their financial statements in accordance with the Accounting Standards for Business Enterprises (ASBE), which mirror IFRS with some minor differences, including fair value accounting. The ASBE include New Basic Standards and 38 specific ASBE (16 of these standards were issued by the MOF during the period May 1997–November 2001). The ASBE that became effective in 2007 not only

3 Collins et al. (1994) include three future returns and earnings in the regressions, since their objective is to maximize the R-squared values of the returns- earnings model ( Ettredge et al., 2005 ). The objective of this study is not to maximize R-squared value, but to test whether harmonization and convergence with IFRS would improve ERC and FERC. Therefore, this study only adds the next year’s earnings and stock returns to the traditional return-earnings model.

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introduced significant changes to PRC GAAP, but also significantly increased both the quantity and quality of accounting dis- closures. For example, ASBE 37 (equivalent to IFRS 7 Financial Instrument: Disclosures ) requires firms with financial instru- ments to disclose information about the significance of using financial instruments, and the nature and extents of the risk that arises from using these instruments. ASBE 30 also requires disclosing the profit from discontinued operations net of tax and the details regarding the carrying amount and fair values of the fixed assets to be disposed of, and the estimated disposal costs and expected time of disposal ( Deloitte Touche Tohmatsu, 2006 ). In summary, there have been a series of harmonization and convergence with IFRS in China during 1998–2007 that aimed to align the Chinese accounting practices with international accounting standards. However, some accounting differences between IFRS and PRC GAAP still remain because China has not fully adopted fair value accounting.

2.2. Classes of shares, ownership structure, and market regulations

Chinese-listed firms could issue several classes of shares including A-, B-, H-, and N- shares. A-shares are issued to Chinese domestic investors and may be divided into four major subcategories: state shares held by government or state-owned enterprises; shares held by legal persons; shares held by domestic institutions and foreign partners of joint ventures; and shares held by employees. Many listed firms in China are somehow affiliated with government ( Firth et al., 2007 ). Only one-third of A-shares were tradable before the ‘‘split-share’’ reform in April 2005. In contrast, B-shares are all tradable, which are issued to and traded between international investors, although Chinese domestic investors can also trade B-shares starting from February 2001. H-shares are those Chinese shares listed on the Hong Kong Stock Exchange ( HKSE ); N-shares are those Chinese shares listed on the New York Stock Exchange. Finally, although financial statements for the B- (A-) share market were prepared in accordance with IFRS (PRC GAAP), financial statements for both A- and B- shares are now only prepared in accordance with PRC GAAP, which has been largely converged with IFRS since 2007. To ensure compliance with all required accounting standards, the Chinese Securities Regulatory Commission (CSRC) and the Chinese Institute of Certified Public Accountants (CICPA) impose severe penalties for any noncompliance ( Defond et al., 2000 ). To improve shareholders’ protection, the CSRC also issued ‘‘ Guidelines for Corporate Governance of Listed Firms ’’ and a ‘‘ Notice of Establishing an Independent Directors System in Listed Firms ’’ in 2001 to further enforce basic accounting disclosure requirements, including timely disclosures on the related-party transactions and intangible assets. There are also severe legal penalties for any violations of the Code of Corporate Governance for the listed firms; however, maintaining an effective audit committee in the firm was not mandatory until 2008. The Chinese government also issued new auditing standards in 1996 and 1997 to improve auditing quality, and built an independent accounting profession in 1998 by disaffiliating auditors from their sponsoring governmental agencies . The Chinese Institute of Certified Public Accountants (CICPA) established four special committees in 2004 to discipline CPA firms that had violated accounting and auditing regulations. Following the U.S., the CSRC also imposed an auditor rotation require- ment in the same year. The above changes are widely believed to have significantly reduced information asymmetry in Chinese stock markets ( Zhou, 2007 ). To further improve the quality of financial reporting, the CSRC also implemented new auditing standards, which became effective from 1 January 2007. However, based on the report of the World Economic Forum’s Global Competitiveness (2011), which evaluates the strength of auditing and financial disclosures in individual countries, China is ranked at the 61st position (out of the 134 countries), which is lower than other Asian developing economies, e.g., Taiwan (3rd), Hong Kong (12th), and Malaysia (25th) ( Piotroski and Wang, 2012 ). In summary, the Chinese government has been engaging in several major changes in accounting and auditing standards to be in line with international practices. This study has controlled for firms’ ownership structure due to the unique classes of ownership structure in China.

3. Prior research and hypotheses development

Different from previous studies on the relative value relevance of IFRS and PRC GAAP, this study investigates the effects of a series of harmonization and convergence with IFRS on the timeliness of recognition of earnings in China. In other words, this study focuses on FERC, i.e., the extent to which current share return reflects information contained in future earnings. We believe that it is important to consider FERC when evaluating a firm’s earnings quality. We predict that a series of har- monization and convergence with IFRS in China should have improved Chinese firms’ earnings quality and, therefore, increased their ERC and decreased FERC. This study relates to two strands of accounting research. They include the contemporaneous relationship between stock returns and earnings reported under IFRS and PRC GAAP, and the timeliness of recognition of earnings, measured by the association between current stock returns and future earnings. The following sections summarize relevant previous studies and develop three testable hypotheses for empirical analyses.

3.1. Effect of harmonization and convergence with IFRS on the timeliness of earnings

Chinese companies prepared their financial statements in accordance with both IFRS and PRC GAAP if they issued both A- and B- shares before 2007. Many studies examine the relative value relevance of accounting numbers reported under IFRS

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and PRC GAAP. For example, Bao and Chow (1999), Sami and Zhou (2004), and Liu and Liu (2007) find that earnings and book values of shareholders’ equity reported under IFRS are generally more value-relevant than those reported under PRC GAAP. However, these studies do not examine the ERC and FERC of earnings reported under IFRS and PRC GAAP. This is an important issue because a series of harmonization and convergence with IFRS in China over the last two decades may have changed earnings quality and disclosures that would have impacts on ERC and FERC. Many studies also find that earnings quality generally improved following IFRS adoption. For example, using a sample of firms from 21 countries that switched to IFRS during 1994–2003, Barth et al. (2008) compare several accounting quality met- rics, including earnings management, timely loss recognition, and value relevance, before and after IFRS adoption. They find that accounting quality significantly improved following the adoption of IFRS in these countries. Hung and Subramanyam (2007) also find that firms applying IFRS provide timelier information and have less earnings persistence because IFRS places

a greater emphasis on fair values and is more likely to incorporate the effects of economic events in the financial statements. Overall, previous studies provide evidence indicating that earnings reported under IFRS are recognized on a timelier basis than earnings reported under domestic accounting standards, and that IFRS adoption generally improves earnings quality. None of these studies, however, examine the effects of harmonization and convergence with IFRS on earnings quality using Chinese data. A full adoption of IFRS may have very different impacts on earnings quality compared to harmonization and convergence with IFRS because the former requires full compliance with IFRS and the latter allows certain deviations from IFRS. Another strand of accounting research examines the timeliness of recognition of earnings, measured by the association between current stock returns and future earnings. For example, Collins et al. (1994) examine how earnings’ lack of timeli- ness affects the contemporaneous return-earnings relation. They find that both current and future earnings can explain roughly 3–6 times as much of the annual return variation as current earnings alone. Their finding implies that FERC is high when ERC is low because current earnings reported under traditional historical cost accounting are not recognized on a timely basis and, therefore, current stock returns reflect the price information contained in future earnings. Although PRC GAAP allowed certain fair value accounting practices, the underlying nature of PRC GAAP was still domi- nated by traditional historical cost accounting in the harmonization period. Since traditional historical cost accounting underlying PRC GAAP provided less timely information for investors compared to fair value accounting underlying IFRS, we predict a lower ERC, but a higher FERC, for earnings reported under PRC GAAP compared to earnings reported under IFRS.

H1a. The earnings response coefficient is lower for earnings reported under PRC GAAP than earnings reported under IFRS;

H1b. The future earnings response coefficient is higher for earnings reported under PRC GAAP than earnings reported under IFRS. To harmonize with International Accounting Standards, the MOF promulgated several new accounting standards from 1997–2001, which significantly reduced the differences between PRC GAAP and IFRS, including relaxing the limits on pro- visions for bad debts, adopting long-term investment valuations, requiring equity methods for long-term investments with 20–50% share holding, detailing inventory, and temporary investment valuations for the lower of cost or market. More importantly, additional disclosure requirements were imposed during this period of time. For example, the ‘‘ Disclosures of Related Party Relationships and Transactions ’’ and ‘‘ Events Occurring after Balance Sheet Date ’’ were released and came into effect in 1997 and 1998, respectively, to increase the transparency of accounting information. The Accounting System for Business Enterprises (ASBE) was introduced in 2001 to further harmonize PRC GAAP with IFRS. The revised accounting standards require firms to recognize impairment losses on receivables, inventories, investments, fixed assets, intangibles, and other assets, and provide clear guidance to recognize certain goods, services, royalties, and interest. As a result, the differences between PRC GAAP and IFRS were further reduced after the initial harmonization during 1998–2000. If both the initial and further harmonization activities with IFRS in 1998 and 2001 increased the timeliness of recognition of earnings, we should observe a higher ERC (lower FERC) for earnings reported under PRC GAAP in the harmo- nization period. Hence, we predict:

H2a. The earnings response coefficient under PRC GAAP is higher in the post- harmonization period than in the pre-harmonization periods;

H2b. The future earnings response coefficient under PRC GAAP is lower in the post- harmonization period than in the pre-harmonization periods. Starting from 2007, PRC GAAP has been substantially converged with IFRS to further reduce the accounting differences

between the two sets of accounting standards and further improved the quality of earnings in China. Therefore, we expect

a higher ERC and lower FERC in the post-convergence period compared to the harmonization period. Therefore, we predict:

H3a. The earnings response coefficient under PRC GAAP is higher in the post-convergence period than in the harmonization

period;

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H3b. The future earnings response coefficient under PRC GAAP is lower in the post-convergence period than in the harmo- nization period.

3.2. Effects of firm characteristics on ERC and FERC

Previous studies ( Ettredge et al., 2005; Tucker and Zarowin, 2006 ) find that the informativeness of firms’ earnings is determined by the firms’ information environment, earnings attributes, and industry sectors. To avoid any potential omitted factors in our empirical tests, this study controls for firms’ growth, risk, firm size, earnings persistence, and loss. The control variables also include China’s unique institutional factors, such as state, public, and institutional share ownership, and trader behavior. Previous studies have proposed that firms with high state ownership generally attract investors with better access to insi- der information ( Defond et al., 1999 ). In other words, firms with high state ownership have less demand for accounting dis- closures. Xiao et al. (2004) find that the extent of a firm’s voluntary, Internet-based disclosure decreases with higher state ownership, but increases with the level of institutional ownership in China. Generally, different ownership involves different financial reporting incentives which, in turn, impact the value relevance of accounting earnings ( Ding et al., 2007 ). Therefore, this study controls for firms’ state-owned, institutional, and public shares. Warfield and Wild (1992) and Lundholm and Myers (2002) find that the amount of future earnings reflected in current- year stock returns varies across industries. Current-year stock returns may reflect more future earnings news in industries with longer accounting recognition lags, such as manufacturing, than in those with shorter lags. We therefore control for the manufacturing industry. Prior studies also find that Chinese domestic investors generally trade on speculation and focus on short-term trading gains ( Wang and Xu, 2004; Sami and Zhou, 2004 ), such that the short holding period may influence share prices. We there- fore control for trading volume in this study.

4. Research design and sample

To test H1, that predicts that earnings reported under PRC GAAP have a lower ERC and a higher FERC than earnings reported under IFRS, we follow prior studies (e.g., Ettredge et al., 2005 ) to control for firm-specific factors, such as growth, loss, risk, firm size, and earnings persistence, We also control for institutional factors in the Chinese stock market, such as state, public, and institutional shareholding, trading volume, and manufacturing industry. The complete model for our test on H1 is therefore as follows:

RET A

t

¼

a þ k m YEAR t þ b 0 E PRC ðIFRSÞ

t

1

þ

b 1 E PRC ðIFRSÞ þ b 2 E PRC ðIFRSÞ

t

t

þ1

þ b 3 RET A þ1 þ b 4 GW t þ b 5 LOSS t þ b 6 RISK t þ b 7 SIZE t

t

þ b 8 PERSIST t þ b 9 STATE t þ b 10 PUBLIC t þ b 11 INSTITU t þ b 12 MANUF t þ b 13 VOLUME t þ e

ð 1Þ

where RET A represents the current period annual returns of A- share at time t ; and E PRC ( IFRS ) t 1 , E PRC ( IFRS ) t , and E PRC ( IFRS ) t +1 rep- resent the prior, current, and next period earnings per share reported under PRC GAAP (IFRS), respectively, deflated by the share price of A- shares at the beginning of year t . In addition, RET A +1 represents the next period stock returns of A- share; GW , firm growth , measured by the market-to-book value of equity ratio ( M/B ); RISK is proxied by earnings variability, which

is measured by the standard deviation of earnings before interest and taxes, divided by total assets, for the preceding three

years of the sample firm in the particular year; Loss equals 1 if current year earnings are negative, 0 otherwise; SIZE is mea- sured by the natural log of total assets; PERSIST, earnings persistence, measured by a dummy variable that equals 1 if next- year earnings are negative, 0 otherwise ( Ettredge et al., 2005 ); STATE is the percentage of equity shares held by the govern- ment; PUBLIC is the percentage of equity shares held by the public; INSTITU is the percentage of equity shares held by insti- tutional investors; VOLUME is the natural log of the average trading volume over the period eight months before and four months after the current year end; MANUF is coded 1 for firms in manufacturing industries, and 0 otherwise; and YEAR is

series of year dummy variables. In line with prior literature ( Lundholm and Myers, 2002; Ettredge et al., 2005; Tucker and Zarowin, 2006 ), the coefficient of prior period earnings, or b 0 , should be negative, and ERC, or b 1 , should be positive. FERC, or b 2 , is hypothesized to be posi- tive if current earnings are not recognized on a timely basis. Because RET A +1 is correlated with the unexpected component of E PRC ( IFRS ) t+ 1 , the coefficient of the next-period returns , or b 3 , is hypothesized to be negative. More importantly, we predict that the ERC (FERC) in the PRC GAAP model should be lower (higher) than that in the IFRS model if PRC GAAP earnings are rec- ognized on a less timely basis than IFRS earnings. To test H2 (H3), we add POST, a dummy variable that indicates 1 if the test period is in the post- harmonization (conver- gence) period, 0 otherwise, to the Eq. (1). Hence, Eq. (2) is used to investigate whether the ERC (FERC) is higher (lower) in the post harmonization and convergence period.

a

t

t

t

RET A ¼ a þ b 0 E PRC

þ

þ b 1 E PRC þ b 2 E PRC

þ1

þ b 3 RET A þ1 þ b 4 POST þ b 5 POST E PRC þ b 6 POST E PRC þ b 7 POST E PRC

t

t

1

t

t

þ1

t

t

1

t

t

b 8 POST RET A þ1 þ b 9 GW þ b 10 LOSS þ b 11 RISK þ b 12 SIZE þ b 13 PERSIST t þ b 14 STATE t þ b 15 PUBLIC t

t

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

Table 1

Sample distribution.

153

Year

Observations

Panel A: Pre-IFRS harmonization period

1994

22

1995

46

1996

47

1997

68

Total

183

Panel B: Initial-harmonization period

1998

71

1999

75

2000

68

Total

214

Panel C: Further-harmonization period

2001

76

2002

75

2003

72

2004

63

2005

44

Total

330

Panel D: IFRS convergence period

2007

83

2008

84

2009

78

Total

245

where POST is a dummy variable that equals 1 for the post-harmonization (1998–2005) and post-convergence (2007–2009) periods, and 0 for the pre-harmonization (1994–1997) and pre-convergence periods (2001–2005). Other variables are defined in Eq. (1).

We predict that the coefficient of POST E PRC is positive and significant, and the coefficient of POST E PRC is expected to

t

t

þ 1

be negative and significant if harmonization and convergence with IFRS improve the timeliness of recognition of earnings. We also control for other factors that may affect ERC and FERC in our tests.

4.1. Sample selection and data collection

The sample consists of all Chinese-listed firms that issue both A- and B-shares on the SHSE or SZSE . Only firms with PRC GAAP and IFRS earnings and market data, such as A-share prices, available between 1993 and 2010 are included in this study. Both the accounting and market data were obtained from the Taiwan Economic Journal (TEJ). We find 972 firm-year obser- vations with both PRC GAAP and IFRS accounting information available during 1993–2010 4 after deleting the extreme obser- vations for the main variables of interest (i.e., top and bottom 1%). 5 We also use the restated ASBE earnings data (i.e., the data substantially converged with IFRS) in 2006 as the prior-year earnings for sample firms in 2007. The sample distribution of firms issuing both A- and B-shares appears in Panels A, B, C, and D of Table 1 .

5. Empirical results

5.1. Descriptive statistics

Tables 2 reports the descriptive statistics for all of the variables examined in our empirical analysis. Comparing Panel A and B of Table 2 , we find that the means and medians of the current earnings and future earnings reported under PRC GAAP are consistently higher than those reported under IFRS in the pre-IFRS harmonization period, but they become rather similar in the further harmonization period. This result confirms that discrepancies in accounting measures decrease following the harmonization with IFRS. We also find that earnings under IFRS and PRC GAAP continue to decline throughout the four test periods. Panel C (D) of Table 2 reports the descriptive statistics for the control variables under PRC GAAP (IFRS). Firm growth, measured by market-to-book value of equity ratio, appears to be much higher during the initial harmonization period (1998–2000) than that in other periods. Risk, measured by three-year earnings variability, also reached its peak during

4 Although the test period is from 1994 to 2009, we need 1993 and 2010 data for both models (1) and (2).

5 The main variables of interest include prior and current share prices and prior, current, and future earnings. As a robustness test, we also winsorized all of the continuous observations at 1% and 99%, and re-ran the regression analyses reported in Tables 4 and 5 . We find that the results for our variables of interest (i.e., ERC and FERC) are consistent with those previously reported.

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Table 2 Descriptive statistics for firm issued both A- and B-shares during 1994–2009.

 

Pre-harmonization 1994–1997 (183 obs.)

 

Initial Harmonization 1998–2000 (214 obs.)

 

Further Harmonization 2001–2005 (330 obs.)

 

IFRS Convergence

 

2007–2009 (245obs.)

Variables

Mean

Median

STD

Mean

Median

STD

Mean

Median

STD

 

Mean

Median

STD

Panel A: PRC GAAP earnings

 

RET A

t

0.266

0.053

0.678

0.280

0.246

 

0.536

0.06

0.15

0.403

 

0.081

0.016

0.47

PRC

E

= P t 1

0.125

0.070

0.150

 

0.129

0.038

0.416

 

0.029

0.020

0.127

0.011

0.014

0.049

t

1

PRC

= P t 1

0.098

0.048

0.160

0.037

0.021

0.104

0.034

0.020

0.114

0.016

0.017

0.045

E

t

PRC

E

= P t 1

0.066

0.032

0.133

0.042

0.018

0.114

0.04

0.023

0.112

0.019

0.016

0.041

t

þ 1

RET A þ 1

t

0.173

0.002

0.601

0.279

0.228

0.528

0.416

0.038

1.115

0.152

0.06

0.455

 

1994–1997 (183 obs.)

1998–2000 (214 obs.)

 

2001–2005 (330 obs.)

Variables

 

Mean

Median

STD

 

Mean

Median

STD

Mean

 

Median

STD

Panel B: IFRS earnings

 

IFRS

E

= = P t 1

 

0.112

0.006

 

0.160

 

0.036

 

0.021

0.102

 

0.030

 

0.021

0.130

t

1

IFRS

t

E

= P t 1

0.082

0.037

0.150

0.036

0.018

0.105

0.033

0.021

0.118

IFRS

E

= P t 1

 

0.056

0.025

0.139

0.035

0.015

0.125

0.042

0.023

0.109

t

þ 1

       
 

1994–1997 (183 obs.)

 

1998–2000 (214 obs.)

 

2001–2005 (330 obs.)

 

2007–2009 (245 obs.)

 

Mean

Median

STD

Mean

Median

STD

Mean

Median

STD

 

Mean

Median

STD

Panel C: Control variables under PRC GAAP

 

GW

 

2.028

1.810

1.267

10.338

2.755

 

25.45

3.102

1.876

8.320

 

5.422

3.708

8.106

RISK

0.04

0.027

0.034

0.038

0.028

0.037

0.072

0.021

0.262

0.063

0.022

0.124

SIZE

6.202

6.187

0.337

6.278

6.268

0.348

6.366

6.362

0.423

6.472

6.473

0.652

PERSIST

0.142

0.000

0.350

0.144

0.000

0.352

0.149

0.000

0.367

0.146

0.000

0.354

LOSS

0.076

0.000

0.266

0.154

0.000

0.361

0.145

0.000

0.353

0.175

0.000

0.366

 

1994–1997 (183 obs.)

 

1998–2000 (214 obs.)

 

2001–2005 (330 obs.)

Mean

Median

 

STD

Mean

 

Median

STD

Mean

 

Median

STD

Panel D: Control variables under IFRS

 

GW

 

2.161

1.925

 

1.460

4.997

 

2.653

10.837

1.747

 

1.853

18.009

RISK

0.057

0.033

0.078

0.036

0.027

0.033

0.082

0.025

0.284

SIZE

6.179

6.164

0.346

6.624

6.243

0.343

6.356

6.347

0.426

PERSIST

 

0.229

0.000

0.421

0.252

0.000

0.435

0.169

0.000

0.375

LOSS

0.158

0.000

0.366

0.224

0.000

0.418

0.190

0.000

0.393

1994–1997 (183 obs.)

1998–2000 (214 obs.)

 

2001–2005 (330 obs.)

2007–2009 (245 obs.)

Mean

Median

STD

Mean

Median

STD

Mean

Median

STD

 

Mean

Median

STD

Panel E: Control variables for ownership structure, trading volume, and industry

 

STATE

0.369

0.447

0.252

0.367

0.409

 

0.227

0.340

0.341

0.219

 

0.221

0.205

0.205

PUBLIC

0.126

0.100

0.092

0.153

0.131

0.109

0.183

0.154

0.119

0.396

0.360

0.194

INSTITU

0.208

0.075

0.245

0.144

0.052

0.206

0.123

0.009

0.172

0.090

0.000

0.150

VOLUME

5.162

5.158

0.482

5.331

5.315

0.308

3.893

4.723

1.494

5.731

5.743

0.572

MANUF

0.469

0.000

0.500

0.457

0.000

0.499

0.490

0.000

0.500

0.448

0.000

0.495

Note: RET A is the annual stock return for year t calculated as the cumulative 12-month raw return for A-shares ending four months after the fiscal year end.

t

RET A þ 1 is the annual stock return for year t + 1 calculated as the cumulative 12-month raw return for A-shares ending four months after the fiscal year end.

t

E

E

E

IFRS

1

IFRS

t

t

IFRS

E

E

t

þ 1

PRC

1

PRC

t

PRC

þ 1

t

t

= P t 1 is the earnings per share for year t 1 under PRC GAAP, deflated by the beginning stock price of A-shares for period t.

= P t 1 is the earnings per share for year t under PRC GAAP and deflated by the beginning stock prices of A-shares for period t .

= P t 1 is the earnings per share for year t + 1 under PRC GAAP, deflated by the beginning stock price of A-shares for period t .

= P t 1 is the earnings per share for year t 1 under IFRS, deflated by the beginning stock price of A-shares for period t .

= P t 1 is the earnings per share for year t under IFRS, deflated by the beginning stock price of A-shares for period t .

= P t 1 is the earnings per share for the year t + 1 under IFRS, deflated by the beginning stock price of A-shares for period t .

E

Note: GW indicates firm growth, measured by the market value-to-book value of equity ratio. RISK equals 1 if earnings variability over the preceding three years is greater than the median of the sample, 0 otherwise. Earnings variability, measured by the standard deviation of earnings before interest and taxes divided by total assets.

SIZE is firm size, measured by the natural log of total assets. STATE is the percentage of the equity shares held by the government. PUBLIC is the percentage of equity shares held by the public. INSTITU is the percentage of equity shares held by institutional investors. VOLUME is trading volume, measured by the natural log of actual trading volumes. MANUF is coded 1 if the firm is in the manufacturing industry, 0 otherwise. PERSIST indicates earnings persistence, equals 1 if the next year’s earnings are negative, 0 otherwise. LOSS equals 1 if the current year’s earnings are negative, 0 otherwise.

the further harmonization period (2001–2005). Average firm size appears to be similar during all of the test periods. More importantly, firms are more likely to have lower earnings persistence, measured by negative next-year earnings, under IFRS than PRC GAAP. This is consistent with Hung and Subramanyam (2007) , in that IFRS uses more fair value accounting, causing

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

155

Table 3 Pearson correlation coefficients.

Pre-harmonization (1994–1997, 183 obs.)

Initial-harmonization (1998–2000, 214 obs.)

 

RET A

t

E

PRC

t

1

 

PRC

t

E

E

PRC

t

þ 1

 

RET A

t

E

t

PRC

1

E

PRC

t

E

PRC

t

þ 1

Panel A: PRC GAAP earnings

 

E

PRC

t

1

0.333

E PRC

1

t

0.073

 

E

PRC

t

0.426

0.801

E

PRC

t

0.058

 

0.530

E

PRC

t

þ 1

0.289

0.620

0.746

E

IFRS

t

þ 1

0.067

0.498

0.843

 

RET A þ 1

t

0.057

0.257

0.257

0.262

RET A þ 1

t

0.301

0.174

 

0.09

0.037

Further-harmonization (2001–2005, 330 obs.)

 

IFRS convergence (2007–2009, 245 obs.)

 

E

PRC

t

1

0.258

E PRC

1

t

0.056

 

E

PRC

t

0.436

0.564

E

PRC

t

0.176

0.149

 

E

PRC

t

þ 1

0.485

0.552

0.639

E

IFRS

t

þ 1

0.192

0.051

 

0.179

RET A þ 1

1994–1997 (183 obs.)

t

0.320

0.187

0.127

0.268

RET A þ 1

1998–2000 (214 obs.)

t

0.132

 

0.061

0.211

0.106

 

RET A

t

E

IFRS

t

1

 

IFRS

t

E

E

IFRS

t

þ 1

 

RET A

t

E

t

IFRS

1

E

IFRS

t

E

IFRS

t

þ 1

Panel B: IFRS earnings

 

E

IFRS

t

1

0.317

E IFRS

t

1

0.153

E

IFRS

t

0.394

0.851

E

IFRS

t

0.039

 

0.801

E

IFRS

t

þ 1

0.300

0.723

0.841

E

IFRS

t

þ 1

0.121

0.542

 

0.667

 

RET A þ 1

2001–2005 (330 obs.)

0.057

t

0.220

0.233

0.250

RET A þ 1

t

0.301

 

0.005

0.110

0.007

E

IFRS 0.231

E

t

1

IFRS 0.439

t

0.519

E IFRS

t

þ 1

0.482

0.507

0.609

 

RET A þ 1

t

0.320

0.187

0.080

0.213

Note: All the variables are defined in Table 2 . Significant at the 1% level. Significant at the 5% level.

lower earnings persistence. Similarly, firms are more likely to report losses under IFRS than PRC GAAP. Panel E reports descrip- tive statistics for ownership, trading volume, and industry. We find that the average state ownership significantly reduces from 0.369 in the pre-harmonization period to 0.340 in the further harmonization period, and to 0.221 in the convergence period. In contrast, percentage of shares owned by the public significantly increases from 0.126 in the pre-harmonization per- iod to 0.183 in the further harmonization period, and to 0.396 in the convergence period. However, the institutional share- holding significantly drops from 0.208 in the pre-harmonization period to 0.123 in the further harmonization period and to 0.09 in the convergence period. Trading volume appears to be stable, except in the further harmonization period. Panel A and B of Table 3 show the correlation coefficients between our key variables, including current and future returns and current, past, and future earnings under PRC GAAP and IFRS, respectively. Panel A shows that the correlation coefficients between current returns and current and future earnings reported under PRC GAAP are positive and significant, although the correlation between current returns and past earnings is less clear cut. The correlation coefficient between current returns and current earnings reported under PRC GAAP increases from the pre-harmonization (1994–1997) to the further harmoni- zation period (2001–2005), but decreases from the further harmonization period (2001–2005) to the convergence period (2007–2009); the correlation coefficient between current returns and future earnings increases from the initial IFRS harmo- nization (1998–2000) to further IFRS harmonization periods (2001–2005), but decreases from the further IFRS harmoniza- tion period to the convergence period (2007–2009). The above findings suggests that harmonization (convergence) with IFRS may not (may) increase the timeliness of recognition of earnings. Past, current, and future earnings are positively correlated in all periods, except the convergence period. Finally, the correlation between current and future returns is negative in all periods, except the further harmonization period. Panel B shows very similar results to Panel A, in that the correlation coef- ficients between current returns and current and future earnings reported under IFRS increase from the pre-harmonization to the further harmonization period. Moreover, the correlation coefficients between past, current, and future earnings reported under PRC GAAP and IFRS in the pre- harmonization and initial-harmonization periods are generally high (above 0.498); however, further analysis using the variance inflation factor (VIF) does not show a serious multicollinearity issue.

5.2. Regression results

Table 4 presents the regression results derived from Eq. (1) . The table shows a side-by-side comparison of earnings reported under PRC GAAP and IFRS during the pre-harmonization, initial, further harmonization, and convergence periods. However, because all Chinese firms report under PRC GAAP for both A- and B-shares after 2007, we therefore show the results based on PRC GAAP in the convergence period only. The results for the pre-harmonization period (i.e., 1994–1997) show that the coefficients of E PRC and E IFRS are positive and significant at the 1% level. However, ERC under IFRS is slightly greater than that under PRC GAAP (3.11 vs. 2.24), indicating

t

t

156

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

Table 4 Regression results using firms with both A- and B-shares. RET A b 11 INSTITU t þ b 12 MANUF t þ b 13 VOLUME t þ e ð1 Þ.

t

¼ a þ k m YEAR m þ b 0 E PRC ðIFRSÞ

t

1

þ

b 1 E PRC ð IFRSÞ þ b 2 E PRC ðIFRSÞ

t

t

þ1

þ b 3 RET A þ1 þ b 4 GW t þ b 5 LOSS t þ b 6 RISK t þ b 7 SIZE t þ b 8 PERSIST t þ b 9 STATE t þ b 10 PUBLIC t þ

t

 

Pre-harmonization 1994–1997 (183 obs.)

Initial-harmonization 1998–2000 (214 obs.)

Further-harmonization 2001–2005 (330 obs.)

 

IFRS convergence 2007–2009 (245 obs)

PRC GAAP

IFRS

PRC GAAP

IFRS

PRC GAAP

IFRS

PRC GAAP

Intercept

0.53 ( 1.99) 0.21 ( 0.53)

1.19 ( 1.61) 0.68 ( 1.46)

0.48 ( 0.65) 0.07 ( 1.32)

0.01

0.62 ( 2.06) 0.39 ( 2.48)

0.80 ( 2.70) 0.34 ( 2.71)

0.45

(1.01)

(1.01)

E t 1

 

1.58 ( 2.64)

0.06 ( 0.08)

E

t

2.24

3.11

0.01

1.81

0.59

0.67

2.67

 

(4.89)

(4.98)

(1.79)

(3.35)

(2.23)

(3.03)

(1.95)

E

t+ 1

0.21 ( 0.43)

0.48 ( 0.80)

0.01 ( 0.02)

0.03

1.25

1.09

2.33

 

(0.17)

(3.63)

(3.30)

(2.88)

RET A +1

t

0.15 ( 2.64)

0.13 ( 2.54)

0.08 ( 1.39)

0.06 ( 1.11)

0.08 ( 2.09)

0.05 ( 1.38)

0.17 ( 2.94)

GW

 

0.10

0.10

0.0003

0.001 ( 1.71)

0.001

0.0003 ( 1.96)

0.01

 

(2.68)

(3.59)

(0.78)

(2.12)

(1.36)

LOSS

 

0.02 ( 0.28)

0.06

0.03

0.01

0.03 ( 0.82)

0.01 ( 0.40)

0.20

 

(0.69)

(0.38)

(0.19)

(1.58)

RISK

 

0.80 ( 092)

0.33

0.91 ( 1.11)

1.60 ( 2.01)

0.10 ( 2.20)

0.07 ( 1.66)

0.43

 

(0.34)

(0.88)

SIZE

 

0.17 ( 1.34)

0.22 ( 1.73)

0.34 ( 4.09)

0.32 ( 3.58)

0.03

0.06

0.04

 

(0.86)

(1.54)

(0.65)

PERSIST

0.01

0.03 ( 0.37)

0.06 ( 0.66)

0.02 ( 0.37)

0.01

0.01

0.12

(0.09)

(0.33)

(0.27)

(1.09)

STATE

0.27 ( 0.85)

0.31 ( 0.86)

0.22

0.12

0.06

0.07

0.15

(1.10)

(0.74)

(0.60)

(0.76)

(0.74)

PUBLIC

0.39 ( 0.53)

0.57 ( 0.82) 0.48 ( 1.47)

0.09

0.01 ( 0.03) 0.91 ( 2.99)

0.08

0.12

0.45

(0.48)

(0.57)

(0.79)

(1.50)

INSTITU

0.38

1.12 ( 3.91)

0.12 ( 0.98)

0.11 ( 0.90)

0.31

( 1.28)

(1.09)

MANUF

0.01

0.04

0.09

0.04

0.003 ( 0.11)

0.01 ( 0.24)

0.07

(0.23)

(0.57)

(1.95)

(1.00)

(1.62)

VOLUME

0.47

0.46

0.50

0.39

0.03

0.03

0.14 ( 1.82)

(0.29)

(1.98)

(3.91)

(3.39)

(1.48)

(1.39)

YEAR Adj R 2

YES

YES

YES

YES

YES

YES

YES

0.63

0.63

0.56

0.59

0.47

0.47

0.36

Note: YEAR is year dummy variables. Other variables are defined in Table 2 . All of the t statistics are adjusted for Whites’ (1980) unbiased covariance to correct for heteroskedasticity. Significant at the 1% level. Significant at the 5% level. Significant at the 10% level.

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

157

Table 5

Regressions

b 10 LOSS þ b 11 RISK þ b 12 SIZE þ b 13 PERSIST t þ b 14 STATE t þ b 15 PUBLIC t þ b 16 INSTITU t þ b 17 MANUF t þ b 18 VOLUME t þ e ð 2Þ .

results.

RET A ¼ a þ b 0 E PRC

t

t

1

þ

b 1 E PRC þ b 2 E PRC

þ1

t

þ b 3 RET A þ1 þ b 4 POST þ b 5 POST E PRC þ b 6 POST E PRC þ b 7 POST E PRC þ b 8 POST RET A þ 1 þ b 9 GW þ

t

t

1

t

t

þ1

t

t

 

Pre-/Post-harmonization (1) 1994–1997 vs. 1998–2005

Pre-/Post-convergence (2) 2001–2005 vs. 2007–2009

Intercept

0.15

0.08 ( 0.72)

( 0.45)

 

E PRC

1

t

1.35 ( 1.42)

0.27 ( 1.84)

PRC

E

t

1.78

0.83

 

(4.48)

(3.37)

E

PRC

0.43

0.55

t

+1

 

(1.01)

(1.97)

 

RET A +1

t

0.07 ( 1.42)

0.09

 

(4.25)

 

Post

0.09 ( 1.81)

0.17

 

(3.92)

Post E PRC

t

1

0.19

0.35 ( 0.17)

(0.95)

Post E PRC

t

0.57 ( 2.46)

0.81

(0.64)

Post E PRC

t

+1

0.20 ( 0.82)

1.41

(1.73)

Post RET A +1

t

0.12

0.21 ( 3.12)

(2.46)

 

GW

0.002

0.01

 

(2.39)

(1.79)

 

LOSS

0.08

0.09

 

(1.20)

(1.39)

 

RISK

0.11 ( 1.91)

0.08 ( 3.95)

SIZE

0.07 ( 1.52)

0.03

 

(1.09)

PERSIST

0.01 ( 0.25)

0.01

(0.13)

 

STATE

0.03

0.06 ( 0.53)

 

(0.25)

PUBLIC

0.13 ( 0.80)

0.33

(2.39)

INSTITU

0.19 ( 1.19)

0.09

(0.52)

MANUF

0.01 ( 0.24)

0.03

(1.28)

VOLUME

0.09

0.03 ( 2.71)

(7.40)

Adjusted R 2 Observations

0.19

0.23

727

575

Note: POST in column (1) is coded as 1 for the harmonization period (1998–2005), 0 otherwise (1994–1997). POST in column (2) is coded as 1 for the post-convergence period (2007–2009), 0 otherwise (2001–2005). Other variables are defined in Table 2 . The t statistics are adjusted for Whites’ (1980) unbiased covariance to correct for heteroskedasticity. Significant at the 0.01 level. Significant at the 0.05 level. Significant at the 0.1 level.

that in the pre-harmonization period, IFRS earnings are recognized on a slightly timelier basis than PRC GAAP earnings. We

, and E PRC are all negative, but insignificant. Consistent with the literature, RET t +1 is

find that the coefficients of E IFRS

t þ 1 ; E PRC

þ 1

; E IFRS

t

A

t

1

t

1

negative and significant at the 1% and 5% level, respectively. Table 4 also shows that both the IFRS and PRC GAAP models

appear to have the same R-squared value of 63%, indicating that both PRC GAAP and IFRS earnings are equally useful for the A-share market.

158

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

The result for the initial harmonization period (i.e., 1998–2000) shows that ERC is positive and significant at the 10% level when earnings are reported under PRC GAAP; whereas, ERC is positive and significant at the 1% level when earnings are reported under IFRS. This finding is generally consistent with previous studies ( Bao and Chow, 1999; Sami and Zhou, 2004; Liu and Liu, 2007 ), in that IFRS earnings have higher quality (i.e., a higher ERC) than PRC GAAP. Although only past IFRS earnings are negative and significant, both future earnings and returns are insignificant. The adjusted R -squares of A- shares for PRC GAAP and IFRS information are similar (56% and 59%, respectively), indicating that there is no significant dif- ference in the explanatory power of PRC GAAP and IFRS earnings. 6 The result for the further harmonization period (i.e., 2001–2005) shows that both the coefficients of E IFRS (0.67) and E PRC (0.59) are positive and significant at the 1% and 5% level, respectively. Moreover, both the coefficients of E IFRS and E PRC are

t

t

þ 1

t

þ 1

t

positive and significant at the 1% level, with the coefficient of E PRC (1.25) being greater than that of E IFRS (1.09). These findings

t

þ 1

t

þ 1

suggest that earnings reported under PRC GAAP are recognized on a less timely basis than earnings reported under IFRS. Furthermore, the result for the convergence period (2007–2009) shows that the coefficient of E PRC (2.67) is positive and

t

significant at the 10% level, while the coefficient of E PRC (2.33) is positive and significant at the 1% level, indicating that the

t

þ 1

timeliness of recognizing earnings worsened (i.e., FERC increases to 2.33 in the convergence period from 1.25 in the harmo- nization period) after PRC GAAP converged with IFRS from 2007. A possible explanation for the high E PRC in both the further

t

þ 1

harmonization and convergence periods is that Chinese stock markets are emerging and immature markets with insufficient market infrastructure to support a greater use of fair value accounting ( He et al., 2012 ). Together, we find that earnings reported under PRC GAAP have a lower ERC compared to earnings reported under IFRS during the pre-harmonization, initial, and further harmonization periods, but have a higher FERC in the further harmoniza- tion period. We also find that FERC of PRC GAAP earnings further increases from 1.25 to 2.33 in the convergence period. Overall, the above results support H1. Table 5 presents the regression results derived from Eq. (2) . Only PRC GAAP earnings are examined and reported in this table. When examining the effect of harmonization with IFRS, we find that the coefficient of POST E PRC is negative and sig- nificant ( 0.57, t = 2.46, p = 0.014), which indicates that the ERC under PRC GAAP is lower in the post-harmonization period

than in the pre-harmonization period, after controlling for other factors. Moreover, the coefficient of POST E PRC is negative,

t

t

þ 1

but insignificant ( 0.20, t = 0.82, p = 0.411). These findings suggest that harmonization with IFRS does not improve the timeliness of earnings. Therefore, we find no evidence supporting H2. When comparing the further harmonization and convergence periods, we find that the coefficient of POST E PRC (0.81, t = 0.64, p = 0.517) is positive, but insignificant. The coefficient of POST E PRC (1.41, t = 1.73, p = 0.083) is, however, positive and significant at the 10% level, indicating that

t

þ 1

t

the FERC under PRC GAAP is higher in the convergence period than in the further harmonization period. This finding suggests that convergence with IFRS in the Chinese stock market does not seem to have improved the timeliness of recognition of earnings. Therefore, our findings do not support H3. In summary, we do not find supporting evidence that both harmonization and convergence with IFRS in China improved the quality of accounting information.

We also investigate whether the results reported in Table 5 are robust after controlling for the interactions between our main variables of interest and growth, risk, loss making, size, and earnings persistence. Untabulated results show that the coefficient of POST (i.e., 1 during 1998–2005, 0 during 1994–1997) E PRC is negative and significant in 6 out of 10 cases, and that the coefficient of POST E PRC remains insignificant, supporting our prior finding that harmonization with IFRS dur-

t

t

þ 1

ing 1998–2005 did not improve the timeliness of recognition of earnings. We also find that only growth and manufacturing industries are positively and negatively associated with FERC, respectively. Furthermore, untabulated results show that the coefficient of POST (i.e., 1 during 2007–2009, 0 during 2001–2005) E PRC

t

þ 1

is positive and significant in 6 out of 10 cases, and the coefficients on POST E PRC remain insignificant, supporting our prior conclusion that convergence with IFRS does not improve the timeliness of recognition of earnings. We also find that only loss making, risk measured by earnings variability, and earnings persistence are all negatively associated with FERC, which could be caused by the fact that convergence with IFRS in China increased the use of fair value accounting, which would increase earnings volatility ( Ball, 2006 ) and reduce earnings persistence ( Tucker and Zarowin, 2006 ). Interestingly, we find that the unique ownership structure in China, such as state ownership, does not appear to affect FERC.

t

6. Summary and conclusion

This study examines the extent to which a series of harmonization and convergence with IFRS in China affects the time- liness of recognition of earnings. We find that PRC GAAP earnings have a lower ERC than IFRS earnings in the pre-, initial, and further harmonization periods, and that PRC GAAP earnings have a higher FERC in the further harmonization period compared to IFRS earnings. We also find that the ERC of PRC GAAP earnings reduced from the pre-harmonization (1994– 1997) to the initial and further harmonization periods (1998–2005), while the FERC of PRC GAAP remains similar. More importantly, we find that the FERC of PRC GAAP earnings increased from the further harmonization period (2001–2005) to the convergence period (2007–2009). The above results are robust after controlling for other factors that could influence ERC and FERC, such as risk, earnings persistence, growth, size, ownership structure, trading volume, and industry. However,

6 Vuong’s (1989) z-test indicates that the difference in the adjusted R -square is insignificant.

G.S.-h. Wu et al. / Journal of Contemporary Accounting & Economics 10 (2014) 148–159

159

these results need to be viewed with some caution given the relatively small sample size for each of the years under study. Moreover, these results are obtained in the Chinese setting, where legal and institutional arrangements are different, and caution should be exercised in generalizing the results to other countries. Overall, our empirical results indicate that earnings reported under PRC GAAP are generally less timely than earnings reported under IFRS and, more importantly, the timeliness of recognition of earnings reported under PRC GAAP worsened after a series of harmonization and convergence with IFRS. An important implication of this study is that we find that har- monization and convergence with IFRS, instead of a full adoption of IFRS, may not improve the quality of the domestic accounting standards in emerging capital markets. Our results should be of interest to investors, financial analysts, account- ing standards setters, and other users of financial statements.

Acknowledgement

We are grateful for the constructive comments from the anonymous reviewer and the Editor and the participants at the American Accounting Association 2010 annual conference in San Francisco.

References

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