Do IFRS Based Earning Announcements Have More Information Content than Chinese GAAP Based Earnings Announcements for Small and Medium Sized Firms?

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Roundtable 2: Financial Accounting I

Abstract

This paper investigates if the adoption of International Financial Reporting Standards (IFRS) in
China resulted in better information quality for small and medium sized public firms. China
transitioned from local Chinese GAAP to IFRS in 2007. Mostly medium and small sized firms
list in the Shenzhen stock exchange and retail investors primarily participate in this stock
exchange. Using event study methodology, our paper investigates in an inter-country test if the
information content of earnings announcements increased for small and medium sized firms
listed in Shenzhen stock exchange as compared to firms listed in the Canadian stock exchanges
after the adoption of IFRS in China. Canadian stock exchanges’ listings are made up of mostly
medium and small sized firms and retail investors play an active role in the Canadian stock
exchanges. We argue based on prior literature that Chinese economic and political institutions
are weak when it comes to providing managers incentives to be more transparent and these
incentives are more likely to be weaker for small and medium based firms. Overall, our paper
finds evidence that abnormal return volatility and abnormal trading volume significantly
increased for firms listed in the Shenzhen stock exchange as compared to Canadian public firms
in the post-IFRS adoption period. However, based on our quartile test, we found that much of the
consistent increase in the abnormal return volatility and abnormal trading volume for Shenzhen
exchange firms is coming from the largest firms (quartile 4) in the post-IFRS period, consistent
the argument that investors are more likely to find more comparable and value relevant
information using IFRS earnings announcements for larger and medium size Chinese firms listed
on the Shenzhen exchanges as they are likely to operate in the foreign markets with many
comparable firms across industry and in many countries as compared to smaller sized firms
which most likely operate locally.

Author

• Shahid Khan, Penn State University - Berks