Accounting conservatism and stock pricing: an analysis based on China's split‐stock reform

Abstract

PurposeChina's securities market is growing gradually as well as the investors, analysts, intermediates and regulation authorities. Accounting earnings is a key determinant among the factors influencing stock prices, which even overreacts to earnings. Split‐stock reform (all‐circulation reform) in China provides a chance for investors to revaluate the stock prices. The purpose of this paper is to investigate the market reaction during the reform from the perspective of accounting conservatism.Design/methodology/approachUsing the data of companies completing the split‐stock reform, this paper empirically investigates how the accounting conservatism influences the market reaction around re‐open day after the reform.FindingsAccounting information plays its role on stock pricing through the reform of split‐stock reform in the China securities market, evident in the significantly positive relation between the proxies of accounting conservatism and cumulative abnormal returns for one day, three days, ten days and 30 days around re‐open day after the reform. Also, the profitability of listed firms in the past will further improve the positive relation between conservatism and market reaction.Originality/valueThere is ample theoretical work on stock pricing of accounting conservatism but empirical work is scarce, so this paper provides more evidence for the role of stock pricing of accounting conservatism, especially in emerging markets. Second, current research on accounting conservatism in China is focusing on whether conservatism exists and how the conservatism varies; this paper further extends the research field of conservatism from the pricing perspective. Third, researches based on the determinants of stock compensation and market reaction on stock reform lack theoretical analysis, while this paper provides a theory basis for the market reaction during the stock reform.