A Research on the Effect of Corporate Governance on Earnings Quality in Chinese Listed Companies

Abstract: Since Berle and Mean(1932) consider separation hypothesis between the ownership and controlling right and the investigation of agency theory about theory of the firm by Jensen and Meckling(1976),the method of separation of ownership and controlling right is widely adopted by some modern companies. In addition,in the wave of some large financial frauds,the well corporate structure has become a highly attentive issue.This study argues that whether the quality of corporate governance structure of a well-established company is able to enhance the earnings quality.This study investigates the effect of quality of corporate governance on the earnings quality in Chinese listed companies by an empirical research.The sample of companies is from 2005 to 2006 fiscal year.It's including many observations to use multiple regression model for empirical analysis.Based on the revised return models and using the data of 2005 and 2006 of China A-share stock markets,the empirical results present the following findings:(1) The quality of corporate governance has a significant effect on the earnings quality,and the Earnings Response Coefficients of firms with high quality governance are significantly bigger than those of firms with poor quality governance;(2) The change of earnings for high quality governance firms is more value-relevant than that of firms with poor quality governance.The findings support that,in the case of asymmetrical information between the executive and investors,the quality of corporate governance is essential to the earnings quality.This research result can help regulator reconsider the relationship between the quality of corporate governance structure and the earnings quality.It aslo can help outside investors to do investment decision, could reduce the information asymmetry and avoid questions of adverse selection…
Key words: Corporate Governance Quality; Earnings Quality ; Earnings Response Coefficient

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