Does the Convergence of IFRS Enhance Value Relevance? Evidence from A- and B-Share Markets in China

Abstract

Using a sample of Chinese firms that issue A-shares based on Chinese accounting standards (CAS) and firms that issue B-shares based on the International Financial Reporting Standards (IFRS), this study investigated whether the convergence of CAS with the IFRS has enhanced value relevance from 2003 to 2013. The B-share firms were used to control the impact of the non-accounting standards. I first estimated the price-levels models and the lagged-price-deflated return models for the relation between market values and accounting numbers and then compared the informative contents for the pre-convergence period (2003-2006) to those for the post-convergence period (2010–2013). I then examined value relevance measured by explanatory powers and pricing errors over time. The study documents significant increase in the contents of A-shares’ financial information after the convergence. While the A-share’s value relevance measured by explanatory powers is increasing over time, the value relevance measured by pricing errors is decreasing. These findings suggest that even though the CAS-based accounting numbers (earnings and book values) and the reconciliation of accounting numbers from CAS to IFRS have incremental information contents, their value relevances in relation to the A-shares proxy for pricing errors are decreasing after the convergence with the same trends in the IFRS-based accounting numbers.