Accounting reforms and conservatism in earnings

Empirical evidence from listed Chinese companies

Sihai Li, Huiying Wu*, Jian Zhang, Parmod Chand

*Corresponding author for this work

Research output: Contribution to journalArticle

3 Citations (Scopus)


We examine the effects of the two major accounting reforms of 2001 and 2007 in China on conservatism in earnings using a variety of measures to ascertain the existence of conservatism and to gauge its degree. Our results provide evidence of different levels of conservatism in financial reporting in China during the period under investigation. We suggest that conservatism has generally existed in financial reporting in China since the 1998 accounting reform. However, the effects of the two accounting reforms on conservatism in earnings vary. Specifically, the 2001 accounting reforms significantly improved conservatism in earnings whereas the 2007 reforms reduced the extent of conservatism in earnings. We also note that conservatism in earnings rebounded following the 2007-09 global financial crisis. Furthermore, the 2001 accounting reforms have a greater positive impact on conservatism in earnings in regions with a lower level of legal protection for investors whereas the negative impact of the 2007 accounting reforms on conservatism in earnings is not affected by the level of legal protection for investors. These results suggest that accounting reforms that restrict managers' abilities to conduct earnings management and improve conservatism in earnings serve as an important substitute mechanism for institutions of investor protection. Our findings provide useful insights into accounting conservatism and have important theoretical and practical implications for accounting regulators, investors, and researchers.

Original languageEnglish
Pages (from-to)32-44
Number of pages13
JournalJournal of International Accounting, Auditing and Taxation
Early online date20 Dec 2017
Publication statusPublished - Mar 2018


  • Accounting convergence
  • Accounting reforms
  • China
  • Conservatism in earnings
  • Legal protection for investors

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