Is Accounting Information Value Relevant in the Emerging Chinese Stock Market?

Abstract

This study provides an empirical examination of whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be useful in stock valuation. The study is motivated by the market-based value relevance literature in the U.S. and by the recent development of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1997 with available data, we obtain evidence of value relevance of accounting information in China based on a return and a price model. Specifically, we address three research questions in this study. First, we document that accounting information is value relevant in the Chinese market according to either the pooled cross-section and time-series regressions or the year-by-year regressions. Secondly, we further examine whether value relevance changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and percentage of public holding. Finally, this study finds that the Chinese stock market perceives accounting information to be more value relevant for firms issuing both A- and B-shares than for firms issuing only A-share. Collectively, in this study, we report fairly convincing evidence 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. The implications of our results are discussed in the paper.

JEL Classification: M41, G12