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This paper examines the interaction between corporate governance and earnings as they affect market performance. The research focuses on Chinese capital markets because of their unique characteristics with respect to elements of corporate governance. Specifically, Chinese companies may issue A-shares to Chinese citizens or B-shares to foreign investors and overseas Chinese or Chinese citizens with foreign currency. B-shares produce reports based on International Accounting Standards, have an independent board structure, and use international recognised auditor. Companies with A-shares only use Chinese Accounting Standards, do not have independent boards of directors and use Chinese auditors operating under Chinese audit standards.
The differences in governances characteristic between A-share companies and companies with AB-shares provides a useful site to test the relevance of international governance standards in a developing market. Specifically, a matched pair design using Event Study Methodology provides a comparison between the market responses to an earnings announcement where differences in governance practices exist.
The results indicate that the Chinese stock markets were segmented before the relaxation of restrictions on purchase of B-shares by domestic investors in 2001 and they remained segmented after the regulation change in 2001. Accordingly, the analysis of governance impacts was assessed in these two segments.
The results suggest that corporate governance does not affect market’s reactions to earnings. Investors do not react differently to earnings announcements due to different accounting standards, board structure and audit quality. Contrary to expectation, the earnings response of AB-shares’ is not significantly different from that of A-shares’ earnings response. These findings imply that Chinese listed companies based on Western governance perform no better than Chinese listed companies based on Chinese governance, in terms of the market’s reactions to earnings announcement.
This document has been peer reviewed.