Fair value and mispricing: how domestic earnings transparency of listed firms leads to global financial stability

Abstract

Corporate governance and earning transparency have gained the abundant attention of accounting researchers worldwide. Based on the A-share listed companies in Shanghai and Shenzhen stock markets from 2001 to 2016, this study explores the impact of earnings transparency and changes in fair value of the 2017 China's new edition of accounting standard on stock mispricing. The results show that: (1) earnings transparency is negatively correlated with stock mispricing, and the higher the transparency of earnings disclosed in financial statements, the lower the level of stock mispricing; (2) the new accounting standards introduced in 2007 follow up the trend of the unification of global accounting standards, and the new accounting standards can moderate the effect of earnings transparency on stock market mispricing; (3) one of the changes directly related to accounting earnings in the new accounting standards is the presentation of changes in fair value gains and losses which influences global financial stability. The change leads to a recalculation of earnings and earnings transparency in accordance with the new accounting standards. The study finds that earnings transparency is more effective in lowering the level of stock mispricing after deducting changes in fair value gains and losses.