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MAJ
25,8
792
Received 24 February 2010
Reviewed 20 April 2010
Accepted 22 May 2010
Managerial Auditing Journal
Vol. 25 No. 8, 2010
pp. 792-813
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686901011069551
Value relevance of accounting
information in China pre- and
post-2001 accounting reforms
Keryn Chalmers, Farshid Navissi and Wen Qu
Monash University, Caulfield East, Australia
Abstract
Purpose – This paper aims to investigate whether the accounting reform in China has improved the
relevance of China’s accounting information. It seeks to investigate the association between earnings
and book value of equity to share returns before and after the introduction of the Accounting System
for Business Enterprises (ASBE) in 2001 for A- and A&B-share firms.
Design/methodology/approach – The paper employs the return regression model. The pre-ASBE
period is designated as 1997 through to 2000, and the post-ASBE period is designated as 2002 through
to 2004. All firms listed on the Chinese stock market during the investigation period constitute
the sample.
Findings – It is found that accounting information better explains share returns for both A-share
firms and A&B-share firms in the post-ASBE period. The paper also finds that the book value of
equity for A&B-share firms is incrementally value relevant to that of A-share firms in the
post-ASBE period.
Research limitations/implications – Further studies will contribute to understanding how
governance mechanisms and liquidity influence the association between accounting information and
share returns in the Chinese A-share market.
Practical implications – The findings provide empirical evidence regarding the relevance of
accounting information in emerging markets.
Originality/value – The paper contributes to the extant value relevance literature by investigating
time periods surrounding the issue of ASBE in 2001 in the Chinese stock market.
Keywords China, Accounting standards, Governance, Stock markets
Paper type Research paper
I. Introduction
A critical challenge for any economy is the allocation of savings to investment
opportunities. Economies that do this well can exploit new business ideas to spur
innovation and create jobs and wealth at a rapid pace (Palepu et al., 2004). Given
information asymmetry, matching savings to business opportunities is complicated
because firms typically have better information than investors on the value of business
investment opportunities. Financial information therefore plays a significant role in the
efficient functioning of the capital markets through the operations of the financial and
information intermediaries. A key function of information intermediaries involves
The authors are grateful to two anonymous reviewers for their valuable comments to the
prior version of this paper. Comments received from the participants at Accounting and
Finance Association of Australia and New Zealand Conference in Gold Coast, Australia, 2007,
are highly appreciated.
analysis of financial statements, which requires an understanding of the influence of the Value relevance
accounting system on the quality of financial information reported by firms. Accounting in China
standards play a significant role in providing information that is relevant and reliable so
that investors can use the information in their securities pricing decisions. Financial
reporting reforms, through the application of more rigorous accounting standards, can
therefore be considered as important pillars of any economic reforms that aim at more
efficient functioning of the capital markets. 793
The relevance of accounting information in the developed markets has been well
documented since the seminal work of Ball and Brown (1968). The role of accounting
information in securities pricing in the emerging markets, however, continues to remain
an empirical issue. The purpose of our study is to investigate whether China’s
accounting reforms, in particular the new Accounting System for Business Enterprises
(ASBE) effective from January 1, 2001, has contributed to the efficiency of the capital
markets in China through the production of more relevant and reliable accounting
information. The purported benefits flowing from the substantial financial
reporting reform motivates our study. Factors contributing to the need for, and pace
of, accounting reform include the reactivation of China’s capital market and China’s
WTO accession. One criterion for the admission of China to WTO was improving the
quality and transparency in the financial reports of publicly listed companies to
facilitate market efficiency and thus safeguard the foreign investments.
Our study focuses on firms issuing A-shares (A-share firms) and firms issuing both
A and B-shares (A&B-share firms) in the Chinese A-market[1]. Voting rights and
liquidation preferences are similar for both A- and B-shares. However, there are
differential financial reporting requirements for A- and A&B-share firms and trading
restrictions apply to A-shares[2]. For A-share firms, the accounting information is
prepared under national accounting standards (China-GAAP) and audited by mostly
local CPA firms whereas the accounting information for firms with B-shares must
be prepared under international accounting standards (IAS-GAAP) and audited by a
Big-N audit firm. Thus, for firms with both A- and B-shares, China-GAAP and IAS-GAAP
reports are produced for the A- and B-share parts, respectively. As required by the Chinese
Securities Regulatory Commission (CSRC), reconciliation information on the two sets of
accounting information is released only to the A-share investors. Thus, prior to 2001, only
listed firms with shares issued to foreign investors (B-share firms and A&B-share firms)
were required to prepare financial reports following international accounting and auditing
standards (IAS-GAAP).
The perception of IAS-GAAP being of a higher quality than China-GAAP and the
need for acquiesce to WTO demands, contributed to a decision by the Ministry of
Finance (MOF) to initiate a process of revising existing, and issuing, new local
accounting standards more consistent with IAS-GAAP. The implied assumption in the
decision to promulgate local accounting standards more consistent with IAS-GAAP
was that IAS-GAAP provides more value relevant financial information to investors
and hence reduces the information asymmetry between investors and firms.
Prior studies (Bao and Chow, 1999; Chen, G., et al., 2002; Hu, 2002; Sami and Zhou, 2004;
Lin and Chen, 2005) have examined the relevance of accounting information in China in
various time periods prior to 2001. These studies focus on comparing the association
between aggregate accounting information and stock prices for firms preparing
financial reports using both China-GAAP and IAS-GAAP (e.g. A&B-share firms).
MAJ The results from these studies are inconclusive. Some studies report that earnings and
25,8 book value of equity under IAS-GAAP are more value relevant than China-GAAP
earnings and book value of equity (Bao and Chow, 1999; Sami and Zhou, 2004).
Other studies however, suggest that accounting numbers based on China-GAAP are more
value relevant in the Chinese stock market (Hu, 2002; Lin and Chen, 2005). More recent
empirical research (Liu and Liu, 2007) suggest that there is no difference in the value
794 relevance of accounting information for A&B-share firms and firms issuing only A-shares
(e.g. A-share firms).
Our study contributes to the extant value relevance literature in emerging markets by
investigating time periods surrounding the issue of ASBE in 2001. Given that the
improvement in the quality of financial statements occurs gradually through the
introduction of more stringent accounting rules and investor familiarity with new rules,
our study investigates the value relevance of accounting information in the years
surrounding the year 2001 in which a significant regulatory accounting change occurred.
This cut-off year also includes the period prior to and after China’s accession to the WTO
and the period prior to and after corporate governance reforms[3]. WTO accession became
a significant impetus for the Chinese Government to speed up its international accounting
standard harmonization process. The commitment under the Accession Protocol was for
China to apply and administer in a uniform, impartial and reasonable manner all its laws,
regulations and other measures and to improve the transparency and provision of accurate
and reliable information to other WTO members, individuals and enterprises (WTO,
2001). The primary purpose of corporate governance reform, initiated by the CSRC is to
protect investors’ interest by improve information disclosure. Further, 2001 marks the
year designated as China’s stock market transition from bullish to bearish. In a bearish
market, investors intend to value firms based on their historical resources (book value of
equity) more than firms’ performance (EPS) (Liu and Liu, 2007).
The new ASBE more closely aligned China’s accounting practices with
international practices. Ip and Noronha (2007) compare the financial statements
issued by firms simultaneously listed in Mainland China and Hong Kong[4] for the
year 2004. Their findings suggest that although some differences remained between
the new ASBE and IAS-GAAP[5], most financial figures prepared under the new
ASBE and IAS-GAAP do not show any significant variance. Their results reveal a
remarkable progress made in the ASBE 2001 in respect of international accounting
standard harmonization. Since A&B-share firms were already employing IAS-GAAP
prior to 2001, the new regulatory change is not expected to have a significant impact on
the quality of financial statements of A&B-share firms in the post-2001 period.
Any change in the quality of financial statements of A-share firms, however, depends
primarily upon whether the IAS-GAAP-based financial statements are superior to the
China-GAAP-based financial statements and/or whether investors in stock in China
believe in the superiority of the IAS-GAAP and understand its application. The latter is
more crucial because if investors do not perceive the new standards as more relevant,
or if they find them more difficult and costly to use, then they are likely to rely on other
information sources for their investment decisions. This is especially true in the
Chinese market, which is dominated by small and short-term investors who care most
about stock liquidity. Asset pricing factors in the Chinese market are also to some
extent different from those in developed markets. Eun and Huang (2007) examine the
pricing mechanism in China and report several key institutional characteristics of the
Chinese stock markets. Their investigation suggests that the Chinese stock markets are Value relevance
dominated by numerous retail investors who are neither well informed nor protected. in China
It appears that at least 90 percent of turnover on the stock exchanges is due to retail
investors’ trades. Eun and Huang’s (2007) findings indicate that stock on the Chinese
stock exchanges are priced according to total, rather than market, risk. Further,
they find that liquidity of stock is the feature that attracts investors because they are
short-term investors. These characteristics can affect investors’ decisions concerning 795
what information to use when making investment decisions.
Our results using pooled cross sectional and year-by-year regressions for the
Chinese A-market, suggest that accounting reform has contributed to the production of
information that is more value relevant. We assess value relevance by regressing share
returns (RET) on earnings per share (EPS) and book value of equity per share (BVE).
The model explains a higher proportion of the variance for both A- and A&B-share
firms’ share returns in the post-ASBE period relative to the pre-ASBE period. We find
accounting information better explains share returns for both A-share firms and
A&B-share firms in the post-ASBE period. We also find that the book value of equity
for A&B-share firms is incrementally value relevant to that of A-share firms in the
post-ASBE period.
The remainder of this study is organized as follows. Section II provides a background
on the historical development of accounting standards in China. Section III discusses the
model and data. Results are reported in Section IV. Section V summarizes the study.

II. Historical development of accounting standards in China

Economic reform in China has led to significant growth with GDP averaging
7.8 percent per annum over the period 1997-2001 (World Bank Report, 2003).
The economy has grown even faster since China joined the WTO in 2001 and its capital
markets have been reactivated with GDP growth averaging approximately 9 percent
per year (OECD, 2005).
The development of China’s stock exchanges was pivotal to the privatization of the
country’s state-owned enterprises. Since their establishments, the Shanghai and
Shenzhen Stock Exchanges have become the largest in the emerging markets with
1,408 firms listed at the end of 2006 with a total market capitalization of RMB 8 trillion
Yuan (equivalent of US$1 trillion).
The current financial accounting regulatory framework in China has been established
as a result of a comprehensive accounting system reform launched by the Chinese
Government to align financial accounting practices in China with internationally accepted
norms. In response to the rapidly changing business environment and the need to create a
more attractive business environment for foreign investment, the MOF formulated the
Accounting System for Sino-Foreign Joint Venture Enterprises in 1985. This regulation
was widely regarded as the first attempt to harmonize Chinese accounting practices with
international practices (Chow et al., 1995). The information demands of foreign investors
led to some alignment of Chinese accounting with IAS-GAAP. However, convergence of
accounting standards was limited and application of accounting regulations was narrow
in scope (Zhang, 2007).
In 1992, the MOF issued the first national regulation, the Accounting System for
Experimental Listed Companies[6] to specifically address financial accounting
requirements for listed firms. The system stipulated in detail the general principles
MAJ of accounting as well as the accounting for assets, liabilities, shareholders’ equity,
25,8 expenses, operating incomes, profits, and profit distributions[7]. Accounting items and
accounting statements were standardized as were auditing procedures and tasks.
Further, the regulation stipulated the format and content of public accounting
statements of listed companies.
In July 1993, the Accounting Standards for Business Enterprises (ASBE (1993))
796 became operative and was regarded as a conceptual framework for financial reporting in
China. ASBE (1993) regulated the production of accounting information and formalized
accounting standards (Davidson et al., 1996). In addition to recognising the information
needs of the main user, the state government, ASBE (1993) also acknowledged that the
information needs of investors, creditors and other relevant parties must be satisfied.
ASBE (1993) contributed to the harmonization of Chinese accounting systems with
IAS-GAAP and incorporated some features, which allegedly made the financial
statements more relevant for foreign investors. The theoretical underpinnings of the
new accounting practices were congruent with that of accounting concepts adopted by
the International Accounting Standard Board (IASB), Financial Accounting Standards
Board and other international standard setters (Tang and Lau, 2000).
In early 1998, MOF promulgated the Accounting Regulation for Listed Companies,
aimed at eliminating further divergences between ASBE (1993) and IAS-GAAP. New
accounting standards, developed with reference to IAS-GAAP, made significant changes
in accounting for bad debt allowances, inventory, investments, organization costs,
revenue recognition, and business combinations[8]. The Chinese Government claimed
that the 1998 regulation was in harmony with IAS GAAP. However, the empirical results
cannot lend a strong support to this claim with evidence not supporting the 1998
regulation as having significantly reduced the gap between Chinese GAAP earnings and
IAS GAAP earnings (Chen, S., et al., 2002).
In January 2001, concurrent with the issue of new accounting standards (intangible
assets, borrowing costs, and leases) and revisions to five existing standards (debt
restructuring, non-monetary transactions, accounting policies, cash flow statements,
and investments), was the MOF’s promulgation of the new ASBE.
Several disreputable financial scandals occurred between late 1990s and early 2000s[9]
and damaged the creditability of the Chinese stock market and weakened public investors’
confidence on the financial information provided to the market. The need to attract foreign
investment and further develop the Chinese stock market motivated the Chinese
Government to enhance the reputation of the Chinese stock market among international
investment community. The new ASBE was seen as a response to the “accounting
information crisis” caused by misleading financial reporting (Xiao et al., 2004).
The ASBE functioned as a comprehensive financial reporting framework,
emphasising principles such as substance over form, consistency, timeliness, accrual
basis, prudence, materiality, and transparency. It is much more consistent with
international practice than the prior accounting regulations. The definitions of financial
statement elements are the same as that in the International Accounting Standard Board
(IASB) Framework. Another significant change mirroring IAS-GAAP included the
requirement to recognize impairment losses on assets. Further, listed firms were
required to follow one unified financial accounting system rather than industry-specific
regulations. ASBE contributes to the MOF’s objectives that include improving the
quality of financial reporting of business enterprises in China, fostering investors’
confidence in financial information, increasing transparency of financial reporting, and Value relevance
harmonizing with IAS-GAAP (Wei, 2001). in China
III. Literature review
Value relevance studies usually examine the power of accounting earnings and book
value of equity in explaining share prices (Collins et al., 1997). While some researchers
focus on the association between the accounting earnings and stock returns (Ball and 797
Brown, 1968; Collins and Kothari, 1989; Kothari and Zimmerman, 1995; Kothari, 2001),
others investigate the association between book value and market value of equity
(Barth, 1991; Shelvin, 1991). These studies view the value relevance of the accounting
earnings and the book value of equity as alternative approaches to valuation model,
under the assumption of a complete and perfect market (Sami and Zhou, 2004). In an
imperfect market, however, the more effective research design includes modelling the
market value of equity as a function of accounting earnings and the book value of
equity (Collins et al., 1997; Penman, 1998; Barth et al., 1998; Balsam and Lipka, 1998).
The value relevance of accounting information in the Chinese stock market has
attracted research attention since the late 1990s (Haw et al., 1999; Bao and Chow, 1999;
Chen et al., 2001; Hu, 2002; Chen, S., et al., 2002; Sami and Zhou, 2004). These studies
have capitalised on the distinctive attribute of the Chinese stock market, namely that a
firm may issue both A-shares (domestic investors) and B-shares (foreign investors)
shares. A firm with B-shares must produce both IAS-GAAP and China-GAAP
financial reports. Hence, studies have investigated the value relevance of accounting
information in the A- and B-share market (Haw et al., 1999; Chen et al., 2001; Sami and
Zhou, 2004) and compared the value relevance of IAS-GAAP and China-GAAP for
B-shares (Bao and Chow, 1999; Hu, 2002).
Collectively, an increasing association between the accounting information and
stock returns is found in the A-share market (Haw et al., 1999; Chen et al., 2001) Lack of
alternative information source such as earnings forecast and financial analysis and,
the Chinese Government’s continuous efforts in establishing the financial accounting
regulatory environment since the beginning of 1990s may explain such findings
(Chen et al., 2001). Recent studies, however, report a decline in the value relevance
of accounting information over time, especially since 1996 (Hu, 2002; Sami and
Zhou, 2004). A possible explanation may be that A-share market investors need more
time to become familiar with the new accounting standards implemented during the
period of 1996-1999. Studies consistently report that the accounting information and
share prices are more closely associated in the B-share market relative to A-share
market (Bao and Chow, 1999; Chen, S., et al., 2002). While the association has
strengthened in the A-share market, it has remained relatively constant in the
B-share market.
Firms issuing A&B-shares are required to prepare two sets of financial statements:
one based on China-GAAP and the other based on IAS-GAAP. Studies focused on
B-share issuing firms try to assess which one of these two competing sets of accounting
information is more closely associated with the share prices. Bao and Chow (1999) report
that earnings and book value of equity based on IAS-GAAP have greater information
content than those based on China-GAAP and their yearly regression analysis also
suggests that the explanatory power of these earnings and book values for share prices
increased over time. However, the opposite result is documented by Hu (2002). Evidence
MAJ from Shanghai Stock Exchange shows that China-GAAP amounts are more highly
25,8 associated with the share prices than IAS-GAAP amounts and the explanatory power of
these earnings for share prices, however, has decreased over time.
The preceding discussion shows prior studies focus on the comparison between the
value relevance between A- and B-share markets. Our study investigates whether the
new ASBE has improved the relevance of accounting information in China. Premised
798 on IAS-GAAP being superior to China-GAAP[10], we propose the accounting reforms
aligning China-GAAP with IAS-GAAP create a more transparent financial reporting
environment producing information that is more relevant and reliable. Accordingly,
we predict that the association between earnings, book value of equity and share
price is stronger in the post-ASBE period relative to the pre-ASBE period. Further,
the association between earnings, book value of equity and share price for A-share
firms is not different to that of A&B-share firms in the post-ASBE period.

IV. Model and data

Model
We employ the following multiple regression model to examine the value relevance of
accounting information for A- and A&B-share listed firms in China in the pre- and
post-ASBE periods:

RET it ¼ a þ b1 EPS it þ b2 BVE it þ b3 SHARE it þ b4 EPS it * SHARE it

ð1Þ
þ b5 BVE it * SHARE it þ b6 LEV it þ b7 CF it þit y

where:
RETit ¼ return for firm i for the 12-month period t ending on the last
Friday three months after fiscal-year-end.
EPSit ¼ earnings per share for firm i in time t.
BVEit ¼ book value of equity per share for firm i at time t.
SHAREit ¼ a categorical variable coded as 1 if firm i in time t is an A-share
firm, else coded as zero for A&B-share firms.
EPS it *SHARE it ¼ an interactive term representing the incremental value
relevance of earnings of A-share versus A&B-share firms.
BVE it *SHARE it ¼ an interactive term representing the incremental value
relevance of book value of equity of A-share versus
A&B-share firms.
LEVit ¼ ratio of debt to equity (leverage) for firm i at time t.
CFit ¼ operating cash flow per share for firm i in time t.
y ¼ error term.
The interactive variables (EPS * SHARE and BVE * SHARE) capture the incremental
effect of the value relevance of earnings and book value of equity for A- and
A&B-share firms. Given that SHARE is used as a dummy variable by coding A-share
firms as 1 and A&B-share firms as 0, a negative (positive) and significant coefficient
for each interactive variable will indicate that the earnings and book value of equity of Value relevance
A&B-share (A-share) firms have incrementally more value-relevance. Leverage and in China
operating cash flow in the model are employed to control for other factors with
potential undue effect on the results. Prior literature show a firm’s operating cash flow
and financial leverage are closely associated with stock returns (Charitou et al., 2000;
Cheng and Yang, 2003; Dimitroy and Jain, 2006).
799
Data
The data includes accounting variables from annual reports and market-based data for the
period 1997-2004. The MOF issued ASBE in January 2001. Therefore, the pre-ASBE
period is designated as 1997 through to 2000, and the post-ASBE period is designated as
2002 through to 2004. The market-based data and accounting variables are sourced from
DataStream. We use all firms listed on the Shanghai and Shenzhen Stock Exchanges
during the investigation period. This results in the number of observations ranging for
various empirical tests[11]. All variables were winsorized at the first and 99th percentiles.

V. Results
Descriptive statistics
Descriptive statistics for variables used in the regression models are reported in
Tables I-IV. Table I reports pooled descriptive statistics for all firms (A- and A&B-share
firms) in the pre- and post-ASBE periods.
The mean earnings performance (EPS) has declined from 0.139 in the pre-ASBE to
0.102 in the post-ASBE period. The mean market capitalization is also lower for the
pooled sample in the post-ASBE period relative to the pre-ASBE period. The mean
book value of equity per share has increased by 0.295 in the post-ASBE period. There
is also evidence of an increase of 0.032 in leverage (LEV) and 0.107 in cash flows per
share (CF) in the post relative to pre-ASBE period. The mean return (RET) is 26.4 and
2 17.4 percent in the pre- and post-ASBE period, respectively. This suggests that share
prices have generally fallen in the post-ASBE period[12].

Pre-ASBE Post-ASBE
Variable Mean Median SD n Mean Median SD n

EPS 0.139 0.160 0.231 2,135 0.102 0.124 0.342 3,468

BVE 1.962 1.861 0.924 2,075 2.257 2.158 1.017 3,574
CF 0.147 0.123 0.377 1,797 0.254 0.219 0.512 3,515
LEV 0.452 0.451 0.185 2,260 0.484 0.489 0.193 3,575
MKTCAP 14.630 14.830 1.290 1,802 14.434 14.392 0.997 3,376
RET 0.264 0.230 0.442 1,683 20.174 2 0.189 0.272 3,192
Notes: Where A-share represents firms that only have domestic shareholders and prepare financial
statements using China-GAAP; A&B-share represents firms that have foreign shareholders and
prepare financial statements using China-GAAP and IAS-GAAP; pre-ASBE is the time period 1997
through to 2000 representing a period prior to the application of the ASBE; post-ASBE is the time Table I.
period 2002 through to 2004 representing a period subsequent to the application of the ASBE; EPS is Descriptive statistics on
earnings per share; BVE is book value of equity per share; CF is operating cash flow per share; LEV is firm characteristics for
a ratio of debt to equity (leverage) representing financial risk; MKTCAP is natural logarithm of market pooled A- and A&B-share
capitalization; RET represents share return for the 12-month period ending on the last Friday in the firms in the pre- and
third month after a firm’s fiscal-year-end post-ASBE periods
MAJ
Panel A: descriptive statistics on A-share firm characteristics
25,8 Pre-ASBE Post-ASBE
Variable Mean Median SD n Mean Median SD n
EPS 0.147 0.167 0.220 1,888 0.104 0.125 0.332 3,162
BVE 1.961 1.857 0.931 1,824 2.275 2.166 1.015 3,268
CF 0.150 0.125 0.376 1,599 0.252 0.219 0.512 3,209
800 LEV 0.452 0.451 0.184 2,009 0.481 0.484 0.192 3,269
MKTCAP 15.020 14.949 0.691 1,551 14.553 14.449 0.870 3,070
RET 0.298 0.248 0.374 1,438 2 0.178 2 0.188 0.262 2,886
Panel B: descriptive statistics on pre- and post-ASBE comparisons of A-share firm characteristics
t-stat p-value (two tailed)
EPS 4.97 0.000
BVE 10.90 0.000
CF 7.10 0.000
LEV 5.41 0.000
MKTCAP 18.38 0.000
RET 48.61 0.000
Notes: Where A-share represents firms that only have domestic shareholders and prepare financial
statements using China-GAAP; pre-ASBE is the time period 1997 through to 2000 representing a
period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004
Table II. representing a period subsequent to the application of the ASBE; EPS is earnings per share; BVE is
Descriptive statistics book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to equity
for A-share firm (leverage) representing financial risk; MKTCAP is natural logarithm of market capitalization; RET
characteristics in the pre- represents share return for the 12-month period ending on the last Friday in the third month after a
and post-ASBE periods firm’s fiscal-year-end

Table II reports the statistics for A-share firms in the pre- and post-ASBE periods.
The statistics for each variable are reported in Panel A and the results from
comparisons of variables in the pre- and post-ASBE periods are reported in Panel B.
The results reported in Table II indicate that firm characteristics for A-share firms
have significantly changed from the pre- to the post-ASBE period. On average,
earnings have declined and book value of equity is higher. More specifically, the
earning performance (EPS) for A-share firms falls from 0.147 in the pre-ASBE period to
0.104 in the post-ASBE period. This significant decrease in EPS could be attributed to
more stringent accounting standards on recognition of revenues and expenses in the
post-ASBE period. The book value of equity (BVE) increases to 2.275 in the post-ASBE
period from 1.961 in the pre-ASBE period. This could be attributable to lower dividend
payouts in the post-ASBE period. The cash flow per share (CF) has increased as has
leverage (LEV). Consistent with the pooled sample results reported in Table I, the share
returns (RET) for A-shares are significantly lower in the post-ASBE period relative to
the pre-ASBE period. The mean RET is 2 0.178 in the post-ASBE period relative
to 0.298 in the pre-ASBE period. The differences in the pre- and post-ASBE period
A-share firm characteristics are significant at the 1 percent level.
In Table III, we report descriptive statistics on each variable (Panel A) and on
comparisons of variables (Panel B) in the pre- and post-ASBE periods for A&B-share
firms.
The statistics reported in Table III indicate no evidence of a significant change in
the earnings performance (EPS)[13] or book value of equity (BVE) of A&B-share firms
 Value relevance
Panel A: descriptive statistics on A&B-share firm characteristics
Pre-ASBE Post-ASBE in China
Variable Mean Median SD n Mean Median SD n
EPS 0.077 0.119 0.297 247 0.074 0.110 0.435 306
BVE 1.966 1.892 0.873 251 2.061 1.949 1.019 306
CF 0.121 0.112 0.379 198 0.274 0.215 0.512 306
LEV 0.458 0.446 0.189 251 0.542 0.514 0.201 306 801
MKTCAP 12.240 12.331 1.532 251 13.239 13.148 1.350 306
RET 0.061 2 0.285 0.686 245 20.136 20.201 0.352 306
Panel B: descriptive statistics on pre- and post-ASBE comparisons of A&B-share firm characteristics
t-stat p-value (two tailed)
EPS 0.10 0.919
BVE 1.16 0.245
CF 3.60 0.000
LEV 3.95 0.000
MKTCAP 8.17 0.000
RET 4.37 0.000
Notes: Where A&B-share represents firms that have foreign shareholders and prepare financial
statements using China-GAAP and IAS-GAAP; pre-ASBE is the time period 1997 through to 2000
representing a period prior to the application of the ASBE; post-ASBE is the time period 2002 through
to 2004 representing a period subsequent to the application of the ASBE; EPS is earnings per share; Table III.
BVE is book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to Descriptive statistics on
equity (leverage) representing financial risk; MKTCAP is natural logarithm of market capitalization; A&B-share firm
RET represents share return for the 12-month period ending on the last Friday in the third month after characteristics in the pre-
a firm’s fiscal-year-end and post-ASBE periods

from the pre- to post-ASBE period. This result is expected since these firms were
already using IAS-GAAP in the pre-ASBE period. Cash flows (CF), leverage (LEV) and
market capitalization (MKTCAP) have however, increased significantly. In the period
post 2001, the A&B-share firms are using more debt relative to assets (a debt ratio of
54.2 percent compared to 45.8 percent), generating more cash flow per share (27.4 cents
versus 12.1 cents) and have a higher market capitalization. This could be attributable
to the China’s relaxation of foreign trade and investment restrictions resulting in
greater foreign institutional investors and participation by firms in global markets.
Mirroring the trend in the pre- versus post-ASBE returns for A-share firms, the
mean RET for A&B-share firms has declined from 6.1 percent to a negative return of
13.6 percent.
We further report, in Table IV, descriptive statistics on the comparisons of A- and
A&B-share firms in the pre- and post-ASBE periods.
The evidence in Table IV suggests that in the pre-ASBE period, A-share firms have
significantly higher earnings performance (EPS) than A&B-share firms. In the
post-ASBE period, the higher earnings performance of A-share firms dissipates to a
level resulting in no statistical significant difference in the earnings performance of
A- and A&B-share firms. These results are consistent with China-GAAP and
IAS-GAAP measures of earnings becoming more aligned through the enactment of
ASBE.
Book value of equity (BVE) of A-share firms is similar to that of A&B-share firms in
the pre-ASBE period. However, the mean BVE of A-share firms is significantly higher
 25,8

802
MAJ

Table IV.
Comparison of A-share
versus A&B-share firm

and post-ASBE periods

characteristics in the pre-
Pre-ASBE Post-ASBE
Variable Mean (A-share) Mean (A&B-share) t-statistic p-value (two tailed) Mean (A-share) Mean (A&B-share) t-statistic p-value (two tailed)

EPS 0.147 0.077 4.490 0.000 0.104 0.074 1.490 0.135

BVE 1.961 1.966 0.080 0.932 2.275 2.061 3.52 0.000
CF 0.150 0.121 1.02 0.309 0.252 0.274 0.69 0.488
LEV 0.452 0.458 0.49 0.626 0.481 0.542 3.71 0.000
MKTCAP 15.020 12.24 47.54 0.000 14.553 13.239 23.73 0.000
RET 0.298 0.061 7.91 0.000 20.178 20.136 2.61 0.009
Notes: Where A-share represents firms that only have domestic shareholders and prepare financial statements using China-GAAP; A&B-share
represents firms that have foreign shareholders and prepare financial statements using China-GAAP and IAS-GAAP; pre-ASBE is the time period 1997
through to 2000 representing a period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004 representing a period
subsequent to the application of the ASBE; EPS is earnings per share; BVE is book value of equity per share; CF is operating cash flow per share; LEV is a
ratio of debt to equity (leverage) representing financial risk; MKTCAP is natural logarithm of market capitalization; RET represents share return for the
12-month period ending on the last Friday in the third month after a firm’s fiscal-year-end
than that of A&B-share firms in the post-ASBE period. There is no significant Value relevance
difference in the cash flow per share of A-share firms and A&B-share firms in the in China
pre- and post-ASBE periods. Significant differences in MKTCAP and RET for A- and
A&B-share firms exist in both periods with the MKTCAP being higher for A-share
relative to A&B-share firms in both periods. The RET on A-share firms is higher
(lower) in the pre (post) ASBE period than that for A&B-share firms. A-share firms’
leverage (LEV) is significantly lower than that of A&B-share firms in the post-ASBE 803
period only.
Table V reports the results from tests of value relevance of earnings and book value
of equity for A-share firms in the pre- and post-ASBE periods after controlling for
leverage and cash flow effects.
Table V reports pooled results on the value relevance of EPS and BVE for A-share
firms in the pre- and post-ASBE periods. Panel A, Table V, indicates that both earnings
performance and book value of equity of A-share firms in the pre-ASBE period are
significantly value relevant at the 1 percent level. However, while the EPS coefficient is
positive, the BVE coefficient is negative. The test and control variables collectively
explain 2 percent only of the variation in RET. Earnings performance and book values of
equity in the post-ASBE period are also significantly value relevant although the
parameter estimates for EPS and BVE have declined. The EPS (BVE) coefficient
remains positive (negative). The test and control variables collectively explain 10 percent

Parameter estimate SE t-statistic p-value (two-tailed significance)

Panel A: regression results in the pre-ASBE period

Intercept 0.303 0.049 6.13 0.000
EPS 0.272 0.053 5.10 0.000
BVE 2 0.044 0.015 22.94 0.003
LEV 0.054 0.067 0.80 0.421
CF 2 0.002 0.032 0.05 0.957
n ¼ 1,397
Adjusted R 2 ¼ 0.017
F-value ( p-value) ¼ 7.03 (0.000)
Panel B: regression results in the post-ASBE period
Intercept 2 0.089 0.021 24.32 0.000
EPS 0.225 0.015 14.95 0.000
BVE 2 0.026 0.005 25.10 0.000
LEV 2 0.113 0.026 24.31 0.000
CF 0.042 0.009 4.39 0.000
n ¼ 3183
Adjusted R 2 ¼ 0.102
F-value ( p-value) ¼ 91.39 (0.000)
Notes: Where A-share represents firms that only have domestic shareholders and prepare financial
statements using China-GAAP; pre-ASBE is the time period 1997 through to 2000 representing a Table V.
period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004 Results from pooled
representing a period subsequent to the application of the ASBE; EPS is earnings per share; BVE is regressions of share
book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to equity return on firm
(leverage) representing financial risk; RET represents share return for the 12-month period ending on characteristics for
the last Friday in the third month after a firm’s fiscal-year-end; RET it ¼ a þ b1 EPS it þ b2 BVE it þ A-share firms in the pre-
b3 LEV it þ b4 CF it þ y and post-ASBE periods
MAJ of variation in the RET in the post-ASBE-period suggesting that the associations
25,8 between the test and control variable and share returns have strengthened in the
post-ASBE period. These results may however be subject to issues such as clustering
and extreme value effects. We address these issues in the year-by-year regressions, the
results being reported in Table VI.
The results from year-by-year regressions of value relevance of EPS and BVE for
804 A-share firms are reported in Panels A and B of Table VI. Panel A reports the results of
yearly regressions and Panel B compares the value relevance of EPS and BVE across
1997-2000 with value relevance of EPS and BVE across 2002-2004.
The R 2 for the yearly regressions are higher in each of the post-ASBE years than for
any of the years 1998-2000. It appears that A-share firms experience a modestly
significant increase (t-statistic ¼ 1.88, p-value ¼ 0.111) in the value relevance of EPS,
but no change in the value relevance of BVE (t-statistic ¼ 0.62, p-value ¼ 0.557)
post-ASBE. However, unlike in prior years, BVE is not significantly associated with
share returns in 2003 or 2004. These results suggest that A-share firms’ earnings in
particular are value relevant to investors.
Table VII reports the tests of value relevance of earnings performance and book
value of equity for A&B-share firms in the pre- and post-ASBE periods when
controlling for leverage and cash flow effects.
In Panel A Table VII, the results suggests that neither EPS nor BVE are value
relevant in the pre-ASBE period. These results may reflect the low liquidity of
A&B-share firms in these periods. The value relevance of EPS and BVE increases to a
significant level in the post-ASBE period, with a stronger association between earnings

a b1 b2 b3 b4 n (R 2)

Panel A: year-by-year regression results

1997 2 0.877 (0.032) 0.360 (0.442) 0.316 (0.074) 0.622 (0.215) 0.239 (0.653) 43 (0.162)
1998 2 0.080 (0.447) 0.052 (0.585) 20.063 (0.074) 20.082 (0.562) 0.026 (0.689) 157 (0.023)
1999 0.564 (0.000) 0.339 (0.000) 20.071 (0.002) 0.133 (0.172) 20.006 (0.904) 486 (0.042)
2000 0.268 (0.000) 0.178 (0.006) 20.025 (0.119) 0.038 (0.620) 20.025 (0.464) 711 (0.014)
2001 2 0.122 (0.000) 0.134 (0.000) 20.048 (0.000) 0.044 (0.154) 0.017 (0.193) 957 (0.081)
2002 2 0.060 (0.005) 0.134 (0.000) 20.041 (0.000) 0.008 (0.764) 0.061 (0.000) 1011 (0.108)
2003 2 0.035 (0.309) 0.278 (0.000) 20.003 (0.725) 20.022 (0.611) 0.086 (0.000) 1068 (0.169)
2004 2 0.364 (0.000) 0.207 (0.000) 20.004 (0.549) 20.081 (0.013) 0.046 (0.000) 1104 (0.227)
Panel B: comparison of pre- with post-ASBE for EPS and BVE using yearly regressions
EPS BVE
t-statistic 1.88 0.62
p-value 0.111 0.557
Notes: Panel A reports parameter estimates with p-values (two-tailed significance) in parentheses;
where A-share represents firms that only have domestic shareholders and prepare financial
statements using China-GAAP; pre-ASBE is the time period 1997 through to 2000 representing a
Table VI. period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004
Results from representing a period subsequent to the application of the ASBE; EPS is earnings per share; BVE is
year-by-year regressions book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to equity
of share return on firm (leverage) representing financial risk; RET represents share return for the 12-month period ending on
characteristics for the last Friday in the third month after a firm’s fiscal-year-end; RET it ¼ a þ b1 EPS it þ b2 BVE it þ
A-share firms b3 LEV it þ b4 CF it þ y
 Value relevance
Parameter estimate SE t-statistic p-value (two-tailed significance)
in China
Panel A: regression results in the pre-ASBE period
Intercept 2 0.059 0.214 20.28 0.783
EPS 0.226 0.212 1.07 0.288
BVE 2 0.009 0.068 20.14 0.889
LEV 0.475 0.294 1.62 0.108 805
CF 2 0.014 0.140 20.10 0.919
n ¼ 189
Adjusted R 2 ¼ 0.01
F-value ( p-value) ¼ 0.74 (0.567)
Panel B: regression results in the post-ABE period
Intercept 2 0.215 0.093 22.32 0.021
EPS 0.250 0.046 5.38 0.000
BVE 0.044 0.023 1.88 0.061
LEV 2 0.092 0.111 20.83 0.407
CF 0.065 0.040 1.61 0.108
n ¼ 306
Adjusted R 2 ¼ 0.186
F-value ( p-value) ¼ 18.47 (0.000)
Notes: Where A&B-share represents firms that have foreign shareholders and prepare financial
statements using China-GAAP and IAS-GAAP; pre-ASBE is the time period 1997 through to 2000 Table VII.
representing a period prior to the application of the ASBE; post-ASBE is the time period 2002 Results from regressions
through to 2004 representing a period subsequent to the application of the ASBE; EPS is of share return on firm
earnings per share; BVE is book value of equity per share; CF is operating cash flow per share; LEV is a characteristics for
ratio of debt to equity (leverage) representing financial risk; RET represents share return for A&B-share firms in the
the 12-month period ending on the last Friday in the third month after a firm’s fiscal-year-end; pre- and post-ASBE
RET it ¼ a þ b1 EPS it þ b2 BVE it þ b3 LEV it þ b4 CF it þ y periods

and book value of equity information and share returns for these firms in the
post-period. The variables collectively explain 1 percent (19 percent) of the variation in
the RET in the pre-ASBE (post-ASBE period). It appears that IAS-GAAP information
is more relevant to investors’ decision making in the post-ASBE period. Given that post
2001, domestic investors with foreign currency accounts can own B-shares, these
results could reflect greater investor familiarity with IAS-GAAP accounting given the
alignment of China-GAAP and IAS-GAAP and more liquidity in the B-shares.
We report year-by-year regression of value relevance of EPS and BVE for
A&B-share firms in Table VIII. The results in Table VIII are similar to those that we
previously reported in Table VI for A-share firms. The R 2 for the yearly regressions
are higher in the post-ASBE period than for any of the years 1998-2000. The results in
Panel B suggest differences (no difference) in the value relevance of EPS (BVE) when
compared across the pre- and post- ASBE period. IAS-GAAP EPS is significantly
associated with RET in each of the years from 2001. BVE is insignificant in most years
except for 2003 and 2004. On the whole results from year-by-year regressions suggest
that the period post-ASBE has witnessed improved value relevance of both
China-GAAP and IAS-GAAP EPS. The value relevance of A-share firms’ (A&B-share
firms’) BVE declined (increased) in 2003 and 2004.
We analyse the value relevance of EPS and BVE for A-share versus A&B-share
firms using a more rigorous approach. The results are reported in Table IX. In the
 25,8

806
MAJ

Table VIII.
Results from

A&B-share firms
characteristics for
of share return on firm
year-by-year regressions
a b1 b2 b3 b4 n (R 2)

Panel A: year-by-year regression results

1997 20.879 (0.076) 1.058 (0.105) 0.091 (0.697) 0.731 (0.267) 0.159 (0.808) 20 (0.321)
1998 20.389 (0.000) 0.025 (0.685) 20.027 (0.236) 20.033 (0.733) 0.062 (0.156) 79 (0.051)
1999 0.949 (0.000) 0.107 (0.609) 20.131 (0.036) 0.001 (0.998) 20.082 (0.486) 79 (0.082)
2000 20.050 (0.828) 20.141 (0.623) 0.039 (0.537) 0.069 (0.815) 20.109 (0.415) 97 (0.012)
2001 20.219 (0.031) 0.158 (0.011) 20.001 (0.962) 0.149 (0.221) 20.032 (0.499) 103 (0.089)
2002 20.168 (0.005) 0.128 (0.000) 20.012 (0.459) 20.032 (0.671) 0.103 (0.002) 102 (0.278)
2003 22.385 (0.163) 0.299 (0.001) 0.114 (0.009) 0.105 (0.597) 0.104 (0.214) 102 (0.289)
2004 20.449 (0.003) 0.248 (0.000) 0.054 (0.112) 20.101 (0.553) 0.099 (0.043) 102 (0.365)
Panel B: comparison of pre- with post-ASBE for EPS and BVE using yearly regressions
EPS BVE
t-statistic 3.39 0.04
p-value 0.014 0.972
Notes: Panel A reports parameter estimates with p-values (two-tailed significance) in parentheses; where A&B-share represents firms that have foreign
shareholders and prepare financial statements using China-GAAP and IAS-GAAP; pre-ASBE is the time period 1997 through to 2000 representing a
period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004 representing a period subsequent to the application of
the ASBE; EPS is earnings per share; BVE is book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to equity (leverage)
representing financial risk; RET represents share return for the 12-month period ending on the last Friday in the third month after a firm’s fiscal-year-end;
RET itþ3 ¼ a þ b1 EPS it þ b2 BVE it þ b3 LEV it þ b4 CF it þ y
 Value relevance
Parameter estimate SE t-statistic p-value (two tailed)
in China
Panel A: regression results in pre-ASBE
Intercept 0.2649 0.190 1.39 0.164
EPS 0.195 0.110 1.76 0.077
BVE 20.083 0.024 2 3.38 0.000
SHARE 0.518 0.085 6.05 0.000 807
EPS *SHARE 0.088 0.119 0.74 0.457
BVE *SHARE 0.044 0.022 1.98 0.048
LEV 0.055 0.066 0.83 0.404
CF 0.001 0.032 0.05 0.958
n ¼ 1397
2
Adjusted R ¼ 0.02
F-value ( p-value) ¼ 5.82 (0.000)
Panel B: regression results in post-ASBE
Intercept 22.154 0.068 2 31.23 0.000
EPS 0.124 0.031 3.98 0.000
BVE 0.067 0.007 8.81 0.000
SHARE 0.091 0.035 2.55 0.010
EPS *SHARE 0.009 0.033 0.29 0.774
BVE *SHARE 20.097 0.006 2 14.83 0.000
LEV 20.009 0.023 2 0.42 0.675
CF 0.003 0.008 0.42 0.675
n ¼ 3183
Adjusted R 2 ¼ 0.31
F-value ( p-value) ¼ 210.67 (0.000)
Notes: Where A-share represents firms that only have domestic shareholders and prepare financial
statements using China-GAAP; pre-ASBE is the time period 1997 through to 2000 representing a
period prior to the application of the ASBE; post-ASBE is the time period 2002 through to 2004
representing a period subsequent to the application of the ASBE; EPS is earnings per share; BVE is Table IX.
book value of equity per share; CF is operating cash flow per share; LEV is a ratio of debt to equity Regressions of share
(leverage) representing financial risk; RET represents share return for the 12-month period ending on return on firm
the last Friday in the third month after a firm’s fiscal-year-end; SHAREit is a categorical variable characteristics using
coded as 1 if firm i in time t is an A-share firm, else coded as zero; EPS it *SHARE it ¼ an interactive interactive variables
term representing the incremental value relevance of earnings of A-share versus A&B-share firms; representing share type
BVE it *SHARE it ¼ an interactive term representing the incremental value relevance of book value of and EPS and BVE in the
equity of A-share versus A&B-share firms:RET itþ3 ¼ a þ b1 EPS it þ b2 BVE it þ b3 SHARE it þ pre- and post-ASBE
b4 EPS it *SHARE it þ b5BVE it *SHARE it þ b6 LEV it þ b7CF it þ y periods

regression model, we use the interaction of earnings performance and book value of
equity with the type of share (EPS * SHARE and BVE * SHARE) to capture the
incremental effect of the value relevance of earnings and book value of equity of A- and
A&B-share firms. We run the tests for both pre- and post-ASBE periods. Given that we
code A-share firms as 1 and A&B-share firms as 0, a positive and significant coefficient
for each interactive variable will indicate that the value relevance of EPS and BVE for
A-share firms is higher than that of A&B-share firms.
The results in the pre-ASBE period (Panel A) show positive coefficients on the
variables of interest (EPS * SHARE and BVE * SHARE) suggesting the incremental
value relevance of earnings and book value of equity is higher for A-shares than
A&B-share firms. However, this is statistically only significant for book value of
equity. The R 2 for this model is 0.02.
MAJ The post-ASBE period results for the model testing the incremental value
25,8 relevance of accounting numbers for A-share versus A&B-share firms are reported in
Panel B. The coefficient on the EPS * SHARE remains positive but is insignificant,
suggesting that there is no difference is the incremental value relevance of EPS for A- and
A&B-share firms in the post-ASBE period. The results for BVE indicate that application
of IAS-GAAP aligned China-GAAP has resulted in the value relevance of book value
808 of equity of A-share firms no longer being higher than that of A&B-share firms.
The coefficient on BVE * SHARE is negative (compared to being positive in the
pre-period) and is statistically significant. This suggests that post-ASBE, investors relied
more on BVE information produced under IAS-GAAP for A&B-share firms relative to
China-GAAP for A-share firms for investment decisions.
The association between earnings, book value of equity and share returns has
strengthened in the post-ASBE period. The R 2 for the model reported in Panel A of
Table IX (pre-ASBE period) is 0.02. This compares with an R 2 of 0.31 is the post-ASBE
period. In summary, our results indicate that in the pre-ASBE period, investors perceive
the accounting information of A-share firms to have higher relevance for investment
decision making. However, the value relevance of BVE for A-share firms relative to
A&B-share firms has declined in the post-ASBE period.
The implication of our results is that China’s accounting reforms have contributed to
the efficiency of the capital markets in China through the production of more relevant
accounting information. The enhanced relevance may be attributable to greater
conservatism and more unification in the financial accounting system. When considering
the results, one needs to be aware of the unique characteristics of investors in this
emerging market. The capital market is relatively young, the accounting and legal
systems are still in the reform process, there is poor application and enforcement of IAS
aligned China-GAAP and retail investors trading on the China stock exchanges have a
short-term horizon.

VI. Conclusion
This paper investigates the value relevance of earnings and book value of equity for
firms listed in China’s A-market. The study examines the value relevance of accounting
numbers in the pre- and post-ASBE periods for A- and A&B-share firms. A-share firms
are required to adhere to China-GAAP for the preparation of financial statements while
A&B-share firms prepare statements using both IAS-GAAP and China-GAAP.
A&B-share firms are audited by the international audit firms whereas A-share firms are
audited by local Chinese audit firms.
We find that China-GAAP accounting information is value relevant in both the pre- and
post-ASBE period. For A&B-share firms, IAS-GAAP accounting information is
associated with returns in the post-ASBE period only. This suggests that in the
post-ASBE period, investors have become more familiar with IAS-GAAP and its
relevance for decision making is enhanced.
As predicted, the statistical association between accounting information and returns
increases for A- and A&B-share firms in the post-ASBE period, suggesting that
investors’ reliance on the accounting information for investment decisions is greater. Our
findings indicate that investors in the pre- ASBE period do (do not) regard the
earnings (book value of equity) of A-share firms, relative to A&B-share firms, more
relevant for their securities’ pricing decisions. The association between earnings and
share return for A-share firms is not different to that of A&B-share firms in the Value relevance
post-ASBE period. While the association between book value of equity and share return in China
is different, it is higher for A&B-share firms.
We find that the efforts in improving China’s accounting standards and aligning them
with IAS-GAAP appear to have resulted in improved value relevance of accounting
information. However, the association between EPS, BVE and share prices for A-share
firms relative to A&B-share firms has declined in the post-ASBE period. In particular, the 809
book value of equity has gained value relevance for A&B-shares post-ASBE and has
incremental value relevance relative to China-GAAP book value of equity.
The findings of our study have several implications. First, they contribute to the
evidence regarding the relevance of accounting information in emerging markets.
Second, both earnings and book value of equity are value relevant for both A- and
A&B-share firms with their value relevance being higher in a period characterised by
accounting standards more aligned with IAS-GAAP, showing investors have gained
an increased understanding and confidence in the integrity of information provided
under IAS-GAAP and audited by international auditing firms. Third, the time period
covered by our study, also indicates how accounting information relevance changes
with market conditions. Investors focus more on the net value of firms’ resources (BVE)
in a bearish market relative to firms’ performance.
The findings provide valuable reference for policy makers and regulators of the
Chinese stock market as they suggest that the MOF’s announcement[14] to further
converge Chinese accounting standards with international accounting standards is
likely to provide decision-useful accounting information to investors and further
enhance the value relevance of accounting information in China. However, these goals
can only be achieved if the quality of application and enforcement is high and investors
on the Chinese exchanges are conversant with IAS-GAAP and rely on accounting
information in investment decisions.
The adoption of the new ASBE in 2001 was the reason for expecting the value
relevance of accounting information to change. One of the limitations of this study is that
the year 2001 heralded other changes that may also impact on the associations observed.
These changes include domestic investors being able to trade B-shares, corporate
governance reforms and China’s WTO accession. Further studies will contribute to
understanding how governance mechanisms and liquidity influence the association
between accounting information and share returns in the Chinese A-share market.

Notes
1. There are three segments of tradeable shares issued by Chinese firms: A-, B-, and H-shares.
A-shares, quoted in Yuan, are exclusively for Chinese citizens whereas B- and H-shares are
issued to attract foreign capital. The difference is that B-shares are listed and traded on
China’s national exchanges and H-shares are listed in Hong Kong. Firms that issue B-shares
or H-shares can also issue A-shares (dual or cross list). Since 2001, B-shares can also be
issued to domestic investors provided the investor has a foreign currency account.
2. The A-shares can be further broken down into state shares, legal-person shares, tradable
A-shares and employee shares. State shares are owned by either central government or
local government, with the ultimate owner effectively being the State Council of China.
State shares are not tradable on stock exchanges, but transfers between domestic
institutions are permitted with the approval of the CSRC. Legal-person shares are owned by
domestic legal entities and institutions, including stock companies and non-bank financial
MAJ institutions (Xu and Wang, 1997). Legal-person owned shares are also not tradable on the
stock exchanges. They are only allowed to be transferred between institutions. The rationale
25,8 of applying trading restrictions to state-owned shares and legal person shares is to ensure
control of the company remains with state-owned or state-controlled shareholders. Employee
shares represent accumulated profits retained by the pre-initial public-offering entity under
the contract responsibility system and are collectively owned by the employees of the
company. They are not tradable at the time of listing and are managed by an investment
810 management committee or a staff union.
3. In January 2001, the CSRC and the State Economic and Trade Commission jointly issued the
Code of Corporate Governance for Listed Companies in China establishing the basic principles
for corporate governance of listed companies in China, the means for the protection of
investors’ interests and rights, the basic behaviour rules and moral standards for directors,
supervisors, managers and other senior management members of listed companies.
4. Hong Kong Financial Reporting Standards achieved a full convergence with the
International Financial Reporting Standards in 2004.
5. For example, relative to IAS-GAAP, ASBE prevails with the cost basis for asset
measurement, allows periodic major inspection and overhaul costs to be capitalized, permits
deferral of pre-opening and start up costs, classifies impairment losses as non-operating
expenses and permits alternative methods of accounting for income tax.
6. Different English translations of this document result in it also being referred to as The
Accounting System for Experimental Joint Stock Limited Enterprises, The Accounting
System for Companies with Listed Shares, The Accounting Regulation for Experimental
Joint Stock Enterprises, and The Accounting System for Selected Shareholding Companies.
7. The accounting assumptions and principles articulated included business entity, going
concern, accounting period, monetary unit of measurement; accrual accounting, historical
cost, separation of revenue expenditures from capital expenditures, and prudence. The
system also specified the qualitative characteristics of financial information including
truthfulness, legality, relevance, timeliness, comparability, consistency, and materiality.
8. For example: bad debt provisioning changed from an allowance based on a government-
approved percentage to an allowance determined by the firm; inventory measurement
moved from historical cost to the lower of cost or net realizable value; and the requirement to
consolidate changed from a 50 percent ownership threshold to one based on control.
9. Financial scandals occurring between late 1990s and early 2000s included Hongguan Shiye
(1997), Hainan Qiong min run (1999), Xingye Juzhi (2001) and Yinguanxia (2001).
10. Chen et al. (1999) report that the reported earnings based on China-GAAP are 30 percent higher
than earnings reported under IAS-GAAP during 1994-1997 periods. Their results indicate that
compared with IAS-GAAP, China-GAAP tends to be significantly less conservative, resulting in
earnings that are significantly higher than those based on IAS-GAAP.
11. For the purpose of this study, we have included the IAS-GAAP accounting data for
A&B-share firms only.
12. The lower RET in the pre- versus post-ASBE period is consistent with 2001 being regarded
as the benchmark year of China’s stock market transition from a bullish to a bearish market
(Liu and Liu, 2007).
13. We use earnings performance (EPS) based on IAS-GAAP for A&B-share firms in the pre-
and post-ASBE periods.
14. On February 16, 2006, the MOF announced a newer Accounting Standard for Business
Enterprises (revised ASBE). The revised ASBE consists of the ASBE and 38 specific ASBEs
 that are substantially in line with international standards. The new ASBE is expected to Value relevance
provide more decision useful information (MOF Press Release, February 2006).
in China

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Corresponding author 813

Wen Qu can be contacted at: wen.qu@buseco.monash.edu.au

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