Does policy uncertainty affect earnings quality? Evidence from China
by Sang Ho Kim; Yohan An
International Journal of Managerial and Financial Accounting (IJMFA), Vol. 16, No. 1, 2024

Abstract: This study investigates the effects of policy uncertainty (PU) on earnings quality in Chinese firms. It is known that high uncertainty in economic policy has a detrimental effect on the overall economy and affects individual firms' investment decisions as well as cost of capital. Although a number of studies have examined the relationship between financial reporting quality and PU, most findings concern advanced economies or international settings, providing little insight for emerging markets. This study demonstrates that earnings quality deteriorates as PU increases in China because managers have an incentive to intervene in the financial reporting process to alleviate the adverse impact driven by a rise in PU. In addition, we found that Chinese firms are likely to respond heterogeneously to changes in PU, depending on their ownership and industry types.

Online publication date: Wed, 06-Dec-2023

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