Special treatment regulation in China: Potential unintended consequences

Emerald Group Publishing Ltd.
Publication Type:
Journal Article
Asian Review of Accounting, 2009, 17 (3), pp. 198 - 211
Issue Date:
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Purpose The purpose of this paper is to trace the behaviour of Chinese companies receiving a special treatment (ST) designation in order to determine the extent to which the application of this regulation may have led companies to engage in activities conducive to the removal of the ST designation. In particular, the paper examines evidence of opinion shopping or earnings manipulation by these companies. Design/methodology/approach Empirical analysis of annual report databases for Chinese-listed companies, including statistical significance testing relating to ST companies. Findings Most ST companies have removed the ST status by the third year after the initial ST designation. Compared to non-ST companies, ST companies losing the ST status are more likely to engage in practices indicating earnings manipulation. Also, compared to non-ST companies, ST companies are more likely to change auditors after an initial or second year of ST designation. However, while this behaviour suggests opinion shopping, auditor switching for the ST companies is not associated with losses becoming profits nor with improved audit opinions.
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