THE VALUE OF EARNINGS QUALITY IN EMERGING MARKETS: WHAT CAN WE LEARN FROM DIFFERENT EARNINGS MANAGEMENT APPROACHES?

Liu Wang, Providence College, Providence, RI, USA
Maureen I. Muller-Kahle, The Pennsylvania State University, York, PA, USA
Crystal Jiang, Bryant University, Smithfield, RI, USA

Published in

JOURNAL OF INTERNATIONAL FINANCE AND ECONOMICS
Volume 14, Issue 4, p123-134, October 2014

ABSTRACT

This study investigates whether, and to what extent, corporate transparency and earnings quality are valued in such an emerging market as China where institutional environment is relatively weak and investors are somewhat unsophisticated. Empirical evidence indicates that tunneling based earnings management has a negative impact on firm value, while aggressive accrual management results in a valuation premium. These findings can be well explained within an institutional framework. In an environment with institutional voids and underdeveloped accounting–auditing systems, investors are neither in possession of reliable information nor sophisticated enough to see through accrual-based earnings management. As such, investors tend to value firms based on their perceived earnings quality, such as related-party transactions or tunneling, while accounting-based earnings management is largely undetected in the valuation process.

Keywords

Earnings Quality, Discretionary Accruals, Tunneling, Firm Valuation, Institutional Environment, China


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