The main purpose of this thesis is to provide a better understanding of the nature of accounting information reliability by measuring the relation between the informativeness of earnings and corporate governance based on the Chinese context with its unique political, social, cultural and economic environment and large sample size. In particular, mainland China has a distinct two-tier board structure comprising a supervisor board including employee representatives and board of directors of whom at least one third are independent directors. The objective of this thesis is to investigate accounting information reliability and corporate governance by addressing three predominant empirical research questions in three studies. The first empirical study aims to examine the impact of board composition and independence on earnings management in mainland China through investigating whether independent directors and supervisors are effective at restraining earnings management. In fulfilling this research aim and objective, the following research questions are developed: Hypothesis la: Firms with a greater number of independent directors will constrain earnings management.
Hypothesis lb: Firms with a greater number of supervisors will constrain earnings management.
Hypothesis 2a: Firms with a greater number of independent directors with financial/accounting expertise will reduce their engagement in earnings management.
Hypothesis 2b: Firms with a greater number of supervisors with financial/accounting expertise will reduce their engagement in earnings management.
Hypothesis 3a: Firms with a greater number of independent directors with official backgrounds will be more likely to engage in earnings management.
Hypothesis 3b: Firms with a great number of supervisors with official background will be more likely to engage in earnings management.
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There is a debate whether SOEs have more incentives to manipulate earnings than in non- state-owned enterprises Non-SOEs. According to financial distress theory, the incentives for Non-SOEs to manipulate earnings are stronger than in SOEs, since SOEs have the advantage to receive financial subsidies from government while Non-SOEs face more financing constraints. The agency theory, however, argues that state ownership in SOEs creates incentives and regulatory backing for self-serving purposes, thus motivating SOEs to manipulate accounting numbers. The political cost hypothesis complements the agency theory and illustrates that SOEs’ managers would manipulate accounting numbers in response to government intervention. When the government aims to expropriate the benefits of firms, SOEs would report conservatively to disguise the profits. However, when the government impels firms to enhance performance via stringent government regulations, SOEs would report aggressively to meet specific thresholds. To fully capture the earnings attributes, the second study investigates the quality of reported earnings in China from the perspective of both accounting-based (including accrual quality, persistence, predictability and smoothness) and market-based earnings attributes (including value relevance, timeliness, and conservatism and earnings response coefficient). The objective of this investigation is to compare the difference in earnings quality between State-Owned and Non-State-Owned enterprises through tracking the ultimate controllers instead to grade government intervention. This study tests whether analysts' forecasts are more accurate than forecasts based on time- series predicted statistics with random walk. It further detects how the explanatory power of the earnings/returns relation is enhanced by varying the return interval (13-month, 15-month and 18-month return windows respectively). In fulfilling this research aim and objective, the following research questions are developed:
Ho: There is no difference in the quality of reported accounting information between state- owned listed and non-state-owned listed firms.
H1: State-owned listed firms have higher quality of reported accounting information than the Non-state-owned listed firms.
The third empirical study aims to detect whether managers intend to manipulate earnings via discretionary accruals in order to just meet or beat consensus analyst forecasts on the basis of analysts forecast error (analysts-based unexpected earnings). Management judgment with respect to determining earnings is often associated with discretionary accruals. Sine managers may use these discretionary accrual choices in an opportunistic manner (perhaps to increase
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their own compensation or conceal poor performance) or they may use this discretion to improve the informational value of earnings (perhaps to communicate to investors the long- term performance of the firm). In any case, discretionary accruals are often used as a measure of earnings quality (e.g., Dechow and Dichev, 2002; Francis et al., 2004). Assuming that firms intend to meet or beat market expectations, one would expect that results improve when utilizing a forecast proxy that better represents these expectations. This study improves upon previous studies by considering firms’ earnings management with respect to analysts’ forecasts. Analysts are hypothesized to understand these earnings management practices and incorporate firms’ expected behavior into their forecasts so that the managers try to slightly beat forecasts or maximize positive earnings surprises. Hence, the following research questions are developed:
H0: Managers tend to use discretionary accruals to meet or beat analyst forecast. H1: Managers do not tend to use discretionary accruals to meet or beat analyst forecast.