Do Auditing Standards Improve the Accounting Disclosure and Information Environment of Public Companies? Evidence from the Emerging Markets in China
Posted: 25 Jul 2008
Date Written: July 1, 2008
In this paper, we investigate the impact of the implementation of a set of new auditing standards in 1996 on the information environment in the emerging markets in China. Because the implementation of such standards can increase the quality and/or quantity of accounting disclosures, it can be conceptualized as an improvement in the information environment of public companies. We investigate the improvement in accounting disclosure and information environment from both the market perspective and the accounting perspective. First, consistent with the information economics literature (e.g., Holthausen and Verrecchia 1990), we find that companies experience a significant increase in trading volume and price volatility subsequent to the implementation of the standards. Second, consistent with the literature on earnings management (e.g., Chen and Yuan 2004; Jian and Wong 2004), we find a decrease in earnings management and hence, an increase in quality of earnings. Finally, we find a decrease in the synchronicity of stock prices and hence, an increase in the quality of firm-specific information available to investors, which is consistent with the literature on price synchronicity (e.g., Morck et al., 2000). Our results have significant implications for standard setters, regulators, researchers, managers and investors in general and those in the emerging markets in particular.
Keywords: accounting disclosure, auditing, information precision, trading volume, price volatility, earnings management, price synchronicity, emerging market
JEL Classification: G10, G14, M49, M41, M43, M45, M47
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