Research On The Capital Market Consequences Of New Accounting Standards For Business Enterprises

In April 2010, and in response to the recommendations of the Financial Stability Board (FSB) and the Group of Twenty (G20) Summit, the Ministry of Finance (MOF) of the People's Republic of China issued a Roadmap for Continuing and Full Convergence of the Chinese Accounting Standards for Business Enterprises with the International Financial Reporting Standards. As discussed in this official document, MOF emphasizes the importance of maintaining and enhancing the high quality of standards, and recognizes that China will make every effort to achieve international convergence.Globalization of the world's capital markets has created a great need for a single set of accounting standards that can be applied around the world. International Accounting Standards Board (IASB), a global recognized leader in bringing about convergence of national accounting standards and International Financial Reporting Standards (IFRS), firmly believes that improvements in accounting standards can help promote global financial stability and sound economic growth by enhancing transparency and comparability, reducing complexity and restoring confidence in financial reporting.Chinese firms have adopted IFRS-based financial reporting accounting standards since 2007. This study examines Chinese capital market reactions associated with the implementation of current Chinese Accounting Standards (CAS) which were issued by the MOF in February 2006. Chinese firms that adopted CAS in the Chinese stock market are selected by comparing their financial information in 2006 and 2009.In the first place, this study provides insight into the capital market consequences from CAS implementation by investigating the value relevance of accounting information and information content of earning announcements of firms before and after the day annual reports release. It is found that an incrementally positive reaction for firms based on the level of the whole Chinese capital market, however, inconsistent with the reaction based on the industry level. Additionally, the impact of implementing CAS on the cost of capital is also examined. It is proved that sample firms had a reduction in the cost of capital with the adoption of CAS. However, because of the differences between industries, not all of industries achieved IASB's goal for the lower cost of capital. Furthermore, this study also tests whether the cost of capital can be explained by differences in the macro factors, such as industry index, oversea market list, and the micro factors, such as shareholder rights, quality of financial position. Finally, advices associated with current CAS's continuing and full convergence with the IFRS are offered.