Does stock market liberalisation reduce earnings management? Evidence from China

Abstract

ABSTRACTThis paper employs the Stock Connect programme to examine the impact of stock market liberalisation on the earnings management activities of listed firms in China. Using the time-varying difference-in-difference model, we find that both accrual-based and real earnings management activities decrease after firms join the Stock Connect programme. This reduction effect disappears once the firms leave the programme. These firms may even resume their earnings management activities. We further find that the participation of international investors, the improvement of the information environment, and the strengthening of monitoring power are potential transmission channels for this reduction effect.KEYWORDS: stock market liberalisationearnings managementcorporate governanceJEL CLASSIFICATION: G15G34M41 Disclosure statementNo potential conflict of interest was reported by the authors.Data availability statementThe data that support the findings of this study are available from CSMAR. Data are available from the authors with the permission of CSMAR.Notes1 A-shares, also called domestic shares, are denominated in Chinese yuan (RMB) and traded on the Shanghai, Shenzhen, or Beijing Stock Exchange. B-shares are denominated in foreign currencies and traded on the Shanghai or Shenzhen Stock Exchange. H-shares are the shares of mainland Chinese firms that are traded on the Hong Kong Stock Exchange (HKEX). The QFII programme allows qualified international institutional investors to invest in A-shares. The RQFII programme further allows qualified international institutional investors to invest in A-shares with offshore RMB. China–Japan ETF connectivity enables the listing of feeder ETFs of ETFs investing in Chinese or Japanese assets.2 Composition of the SC programme: all constituent stocks of the SSE 180 and 380 Indices, the SZSE Component Index, the SZSE Small/Mid Cap Innovation Index with a market capitalisation of at least RMB6 billion, and all other AH shares. AH shares refer to Chinese companies which are dual-listed in the A-share market and the HKEX.Additional informationFundingThis work was supported by the Macau University of Science and Technology Research Funding [Award Number: FRG-23-048-MSB] and Shenzhen Technology University.