The split equity reform and corporate financial transparency in China

Richard Donald Morris

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Auditing, Earnings Management, Governance Corporate Finance and Governance Financial Reporting and XBRL

Abstract

Purpose The purpose of this paper is to report the impact of the Chinese capital market split equity (SE) reform in 2005 on the corporate financial transparency of Chinese listed companies. Design/methodology/approach Using an International Financial Reporting Standards‐based checklist, the paper investigates whether the post‐reform 2005 annual reports of reformed companies improved transparency compared to pre‐reform 2004 reports. The transparency of the reformed companies was also compared to a control group of companies unreformed on December 31, 2005. Findings Results indicate that the SE reform increased corporate disclosures. Reformed companies had higher mandatory and voluntary disclosures in their post‐reform 2005 annual reports compared to their pre‐reform 2004 annual reports. In addition, the improvement in mandatory and voluntary disclosures for reformed companies is greater than that of the unreformed control group. Research limitations/implications The SE reform provides a unique natural experimental setting in which to examine the impact of the SE reform, with its associated change in ownership structure and corporate governance, on corporate disclosure. Practical implications The results of this paper suggest that the SE reform has had a positive effect on corporate financial transparency in China, thereby indicating the positive response to regulation in this emerging market. Further, the results suggest that as the proportion of government ownership falls, management has increased incentive to voluntarily supply additional information to the market. Originality/value The SE reform is unique to China and this paper is the first to report on financial reporting disclosure implications of this reform.

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1992A power primer.1973Job Market Signaling 1985Positive Accounting Theory 1997Disclosure level and the cost of equity capital.2001Financial accounting information and corporate governance 2004What Determines Corporate Transparency?2003Corporate governance and voluntary disclosure 2002A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital

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