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Does internal control quality improve earnings persistence? Evidence from China's a-share market

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  • GONG, Yuanyuan
  • YAN, Yongjun
  • YANG, Nianxiang

Abstract

lWe examine whether the improvement of internal control quality can enhance the earnings persistence after mandatory disclosure of internal control self-evaluation and internal control audit in China's listed companies. We aim to see the economic effect of this policy.lFor a more detailed analysis, we first divide the accounting earnings into cash flows and accruals, then we group the whole sample by ownership structure —— SOEs and Non-SOEs.lWe build the internal control quality comprehensive index from the view of external investors. So only the internal control quality data which can obtained from public is chosen in our modeling.lNot surprisingly, the impact of internal control quality on accruals persistence is stronger than that on cash flows persistence. Investors believe that comparing with cash flows, accruals is easier been manipulated by management. So, higher internal control quality can better improve accounting estimates accuracy and enhance the accruals persistence.lWhat surprising us is that the improvement of internal control quality makes accruals for SOEs more sustainable, and makes cash flows more persistence for non-SOEs.

Suggested Citation

  • GONG, Yuanyuan & YAN, Yongjun & YANG, Nianxiang, 2021. "Does internal control quality improve earnings persistence? Evidence from China's a-share market," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317049
    DOI: 10.1016/j.frl.2020.101890
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    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
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    4. Hanwen Chen & Wang Dong & Hongling Han & Nan Zhou, 2017. "A comprehensive and quantitative internal control index: construction, validation, and impact," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 337-377, August.
    5. Abiot Tessema & Moo Sung Kim & Jagadish Dandu, 2018. "The impact of ownership structure on earnings quality: the case of South Korea," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 15(3), pages 129-141, August.
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    Cited by:

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    2. Jiang, Honglan, 2024. "Market-oriented debt-to-equity swap and enterprise financial performance," Finance Research Letters, Elsevier, vol. 67(PA).

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