Financial Reporting Practices of China's Listed Firms

type="main"> The long-term success of financial markets depends on the widespread availability of reasonably detailed and reliable financial information. Individual investors depend critically upon companies' regulatory filings and voluntary disclosures to assess their long-run risks, payoffs, and, ultimately, their intrinsic values. However, a recent string of accounting frauds involving Chinese firms listed on overseas markets has drawn attention to the accounting and governance risks associated with investing in Chinese firms. This article provides a brief overview of the information environment of Chinese capital markets and the primary forces that affect the incentives of Chinese listed companies to provide timely and accurate financial reports. The evidence reviewed here indicates that the adoption of world-class standards and regulation, although necessary, is not sufficient to generate incentives for transparency. The long-term health of China's capital markets will also depend upon other reforms that are designed to accomplish the following: (1) improve the protection of investor rights through an effective, independent judiciary court system that promotes civil lawsuits, and through credible regulatory enforcement; (2) strengthen market development activity, especially with respect to foreign investors; and (3) limit political rent-seeking behavior and deter politicized business decisions, especially in China's state-owned enterprises. Together, such reforms have the potential to improve corporate governance in China and better align the incentives of the state and majority shareholders with those of minority shareholders, while increasing the ability of accounting to serve a contracting function and the demand for timely information for valuation purposes.