On the Demand for Earnings Quality: Implications for Fundamental Analysis in China

It was reported that Chinese fund managers are patiently planning for the long-term withexpectations that Chinas market conditions will improve, recognizing that regulators continueto take steps to improve corporate transparency. This paper discusses the relevance of highquality publicly available earnings information, how accounting standards influence thequality of reported earnings, and how capital market participants act as monitoring forcesfor earnings quality. Using the U.S. market as a benchmark, this paper considers earningsquality characteristics and monitoring forces in the context of the Chinese market. Myoverarching premise is that high quality analysis of high quality accounting information iscrucial for the efficient flow of resources through a capital market. Thus it is instrumentalto the growth of Chinas financial market and its economy. To this end, the paper summarizespotential impediments to high quality earnings and high quality analysis in China.