Projects per year
Exploiting the convergence of tax-based accounting standards to the judgement-based International Financial Reporting Standards (IFRS) as an information shock, this study examines whether the decrease in book-tax conformity improves earnings informativeness in China from the book-tax tradeoff perspective. Using A-share firms which experience this drastic regulatory change as the treatment firms and B-share firms which are not subject to such change as the benchmark firms, we find a significant decrease in the earnings informativeness for A-share firms but not B-share firms, and that the decrease is most pronounced for firms with strong financial reporting incentives. Additional analyses reveal that the decreases in earnings informativeness are due to financial reporting changes rather than changes in economic conditions. Our results shed light on the importance of considering underlying institutional factors in assessing the impact of changes in financial reporting on earnings quality.
Bibliographical noteFunding Information:
We are grateful to the editors, associate editor (Martin Jacob), and two anonymous referees for their very constructive comments and suggestions. K. Hung Chan acknowledges partial financial support for this work by the Research Grant Council (RGC) of Hong Kong (project number UGC/FDS11/B03/18), Kenny Z. Lin acknowledges partial financial support from Lingnan University (grant number DR15A2) and Pauline W. Wong acknowledges partial financial support from Hang Seng University of Hong Kong (grant number URC-CRF-1516-06). All errors remain our own.
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- Book-tax conformity
- book-tax tradeoff
- earnings informativeness