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The IUP Journal of Corporate Governance
Corporate Governance and Earnings Quality: Evidence from China
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The present paper examines the association between corporate governance and earnings quality using the Corporate Governance in Finance (CGF) Index in China. Using a sample of 4,455 Chinese firms for fiscal years 2012 and 2014, the paper finds that firms with a higher CGF Index and more effective internal control have higher earnings response coefficients, their earnings are more persistent and more predictable in determining future cash flow, and they engage less in accrual and real earnings management activities. The paper suggests that earnings quality for the sample of Chinese firms is linked to corporate governance and internal control measures, which has implications for firms in other emerging markets.

 
 
 

Corporate governance has played and will continue to play an important role in the quality of financial reports and the efficiency of financial markets (Brockett and Rezaee, 2012). Each country has its own corporate governance measures that are shaped by its economic, cultural, political, and legal circumstances. Corporate governance measures can be established at a corporate level or at a national level, often with the integration of both levels. The corporate governance system of a country and its internal and external mechanisms are determined by a number of interrelated factors, including political infrastructure, cultural norms, legal system, ownership structures, market environment, level of economic development, and its ethical standards (Rezaee, 2007). Literature in accounting and finance examines the relationship between the legal protection of investors and the development of financial markets and corporate governance and concludes that the legal system is an important and integral component of corporate governance. Thus, better legal systemsa contribute to better market liquidity (LaPorta et al., 1997). The worldwide responses to recent corporate scandals and the 2007-2009 global financial crises promote convergence in corporate governance across borders (Brockett and Rezaee, 2012). Convergence is particularly vital in the areas of investor rights and protections, board responsibilities, and financial disclosures. While total convergence in corporate governance reform may not be feasible, corporate governance best practices should be promoted to improve efficiency and liquidity in the global capital markets.

 
 
 

Corporate Governance Journal,Corporate Governance and Earnings Quality,Corporate Governance in Finance (CGF) Index in China, Institutional Background and Settings in China.