Conclusion
We examine market reactions to events associated with IFRS convergence progress in China. We document significantly more positive market reactions to these events from the investors of Chinese firms that only issue A-shares and therefore only started reporting under IFRS in 2007. Among these firms, we show that the market reactions are significantly higher for NSOEs than for SOEs. Within this group of NSOEs, firms with higher capital demands are associated with larger market reactions. These market reaction test results indicate that investors believe that mandating IFRS can benefit Chinese listed firms, and especially those that receive less government financial support and have a high demand for investment capital. Additional tests reveal that such firms indeed make use of the opportunity under IFRS to improve their financial reporting quality so as to cater to the information needs of outside equity investors. We also show that the convergence toward IFRS has important consequences for investors in terms of incremental value relevance among firms with incentives for more transparent financial reporting. Instead of being merely a political decision in response to the thrust of international accounting harmonization, IFRS convergence in China helps to strengthen corporate accounting quality and reporting incentives.
Our findings have three implications. First, investors believe that mandating IFRS in China enables firms that require external capital but have a disadvantage in acquiring it to attract outside investors. Thus, IFRS can potentially narrow the gap in firm competitiveness for external capital resulting from the varying degree of government support, a characteristic of China’s state capitalism. As China is an increasingly influential player in the world economy, the experience of IFRS in China has useful implications for other emerging economies. Second, to widen the benefits of IFRS in terms of strengthening corporate transparency, further reform may be useful, such as a reduction in the government control of listed firms that impedes firms’ financial reporting incentives. Third, we provide evidence of IFRS benefits in a country with weak institutions and investor protection.
Our findings must be interpreted with caution in light of the following limitation. The methodology used relies on the correct identification of events to draw the inferences, and requires that information be incorporated into stock prices rapidly and without bias (Armstrong et al., 2010). Although we have checked and eliminated confounding events that could contaminate our findings, we caution that our results may still suffer from this potential limitation.
