The impact of earnings quality on the value relevance of earnings of PRC listed companies

Pao Yue-kong Library Electronic Theses Database

The impact of earnings quality on the value relevance of earnings of PRC listed companies

 

Author: Au, Mo-ying Mary
Title: The impact of earnings quality on the value relevance of earnings of PRC listed companies
Degree: D.Acc.
Year: 2007
Subject: Hong Kong Polytechnic University -- Dissertations.
Corporation profits -- China.
Corporations -- China -- Accounting.
Stock price forecasting -- China.
Department: Graduate School of Business
Pages: ix, 133 leaves ; 31 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2088944
URI: http://theses.lib.polyu.edu.hk/handle/200/1340
Abstract: In view of China's progress in complying with WTO regulations and the geographical proximity between Shenzhen and Hong Kong, the Chinese Government is increasing its attention on the Southern China region. More and more economic incentives are now being introduced in the Southern China provinces relative to their counterparts in the Eastern or Northern China. A notable example is the introduction of CEPA in Southern China and economic reforms that follow. Undoubtedly, Southern China will grow in economic importance within Greater China, and especially its stock market. On 15th February 2006, 39 new or revised Chinese Accounting Standards for Business Enterprises were released by the Ministry of Finance in Beijing. On the same day, 48 new or revised Auditing Standards were introduced. With better developed accounting standards and a strong commitment from the Chinese Government to foster the growth of stock markets, there is no surprise that there is an increase in foreign investors (including Hong Kong residents) on the Shenzhen Stock Exchange. Since earnings quality has an impact on the value relevance of earnings of PRC listed companies, I decided to conduct this thesis. Using financial results from a sample of the listed companies on the Shenzhen Stock Exchange (A-shares) for the years from 2000 to 2004, I document the relations between different degrees of earnings quality and value relevance of earnings of these companies. Analyses are done on a per-annum basis and by industry. The results show that in general, earnings persistence earnings predictability and earnings smoothness are value relevant but the magnitude of their impacts deviates year by year and across different industries. The deviation by industries provides regulators with useful information which may influence their setting industry-specific accounting standards and related rules and regulations. Under undeflated price and earnings levels, earnings persistence is found to have a significant impact on value relevance of earnings for Commerce, Conglomerates and Properties industries. The impact on value relevance of earnings persistence for Properties industry is reduced after considering firm size and gearing. For earnings predictability, it has a significant impact on value relevance of earnings for Commerce, Conglomerates and Industrial companies. Again the impact on Conglomerates and Industrial companies is reduced after controlling for firm size and gearing. For earnings smoothness that is derived from the time series properties of earnings, the impact is found to be significant for Commerce, Conglomerates and Utilities industries. Such impact has been reduced after considering firm size and gearing for Conglomerates industry. For earnings smoothness derived from the relationship between cash flows and income, the impact is found to be significant for Properties industry. Under deflated price and earnings levels and after controlling for firm size and gearing, the impact of earnings predictability and earnings smoothness (derived from the relationship between cash flows and income) on the value relevance of earnings is found to be significant for the Conglomerates industry. This implies that for companies in the Conglomerates industry, the relationship between earnings predictability (and also earnings smoothness) and value relevance of earnings exists even after controlling for firm size, gearing ratio and price levels.

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