Is accounting information value-relevant in the emerging Chinese stock market?

Abstract

This study examines empirically whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be value-relevant. The study is motivated by the market-based value-relevance literature in the U.S. and by the recent developments of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1998 with available data, we obtain evidence of value-relevance in China based on a return and a price model. Specifically, we address three research questions. First, we document that accounting information is value-relevant in the Chinese market according to both the pooled cross-section and time-series regressions or the year-by-year regressions. Second, we further examine whether value-relevance in China changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and liquidity of stock. Third, this study examines two competing explanations about the value-relevance of accounting information between A-share and AB-share companies and finds that investors place more weight on accounting information in A-share companies. Collectively, in this study, we report evidence consistent with the notion that accounting information is value-relevant to investors in the Chinese market despite the young age of the market and the perception of inadequate accounting and financial reporting in China.