The Role of International Accounting Standards in Transitional Economies: A Study of the People's Republic of China

Abstract

This paper examines the usefulness of International Accounting Standards (IAS) in a transitional economy, the People's Republic of China (PRC). Using a sample of firms that provide financial reports under both IAS and more rigid local PRC standards, we conclude that information produced using IAS is no more useful than that prepared using Chinese standards. First, there is no difference in the explanatory power of IAS and PRC accruals for future cash flows. Second, for stocks that can only be owned by international investors, IAS and PRC earnings and accruals have a similar association with annual stock returns. Finally, for stocks that can be owned only by domestic investors, PRC earnings have a higher relation with annual stock returns than IAS earnings. We argue that one explanation for the failure of IAS data to dominate PRC data is the absence of effective controls and infrastructure in China to monitor the additional reporting judgment available to managers under IAS.

JEL Classification: G12, M41, M44, M47