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Revisions about Government Subsidy Disclosures and Investors¡¯ Response to Earnings Reports: Evidence from the 2017 Government Subsidy Disclosures

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  • Xiaoyu Hu
  • Jinying Tang
  • Qun Wang

Abstract

We examine whether the quality of information in earnings reports, as indicated by the earnings response coefficient (ERC) decreases when the measurement and disclosure of government subsidy has been changed by revising accounting standards. According to the old accounting standards in China, the gains from government subsidy should be reflected in ¡°non-operating¡± income. However, the newly revised accounting standards regulates that a part of government subsidy can be reflected in the report item of ¡°other income¡± in under the operating income item. We use 2017 revisions of accounting standards in China as an instrument to capture a change in the position of financial statements where the government subsidy is revealed. Employing a difference-in-differences design and exploiting the adoption of the new accounting standards, we find a statistically and economically significant decrease in ERC for treated firms relative to controlled firms. Our findings represent the first empirical evidence that the change of government disclosures can negatively affect the information content of earnings report.

Suggested Citation

  • Xiaoyu Hu & Jinying Tang & Qun Wang, 2019. "Revisions about Government Subsidy Disclosures and Investors¡¯ Response to Earnings Reports: Evidence from the 2017 Government Subsidy Disclosures," Applied Finance and Accounting, Redfame publishing, vol. 5(2), pages 26-34, August.
    • Handle: RePEc:rfa:afajnl:v:5:y:2019:i:2:p:26-34
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    References listed on IDEAS

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    1. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 6, pages 67-92.
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    3. Landsman, Wayne R. & Maydew, Edward L. & Thornock, Jacob R., 2012. "The information content of annual earnings announcements and mandatory adoption of IFRS," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 34-54.
    4. Jeanjean, Thomas & Stolowy, Hervé, 2008. "Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption," Journal of Accounting and Public Policy, Elsevier, vol. 27(6), pages 480-494.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Earnings Response Coefficient (ERC); government subsidy; accounting standards;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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