The Role of Accounting Accruals in Chinese Firms
12 Pages Posted: 19 May 2014
Date Written: April 8, 2014
Cheng and Li (2013) investigate whether income smoothing improves earnings informativeness for Chinese firms by replicating the research design of Tucker and Zarowin (2006). The results suggest that the relation still holds for a more recent sample of US firms but the relation is different for Chinese firms. These results are interesting and the authors argue that the poorer information environment in China is a possible culprit for the different results. This discussion raises the issue of what role accruals play in Chinese accounting. I replicate the study by Dechow (1994) in the Chinese market and find evidence consistent with the prediction that earnings exhibit less short-term noise than cash flows and greater associations with stock prices as performance benchmark. These findings are indicative of accruals playing a similar role for Chinese firms as for US firms, also but draw attention to some unresolved questions and areas for future research.
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