Switching to Mainland Auditors and Mainland Accounting/Auditing Standards by Hong Kong Listed H-share Companies: Impacts on Accounting Quality, Value Relevance of Accounting Information, Market Liquidity and Stock Price Synchronicity

Description

Until recently, mainland incorporated companies listed in Hong Kong (H-share companies) had to prepare two sets of financial statements, one set according to Hong Kong accounting and auditing standards and another set of financial statements according to the Mainland standards as required. The listing rules have now been changed to allow H-share companies a choice to either rely solely on mainland accounting standards and auditing firms approved by the Ministry of Finance in the preparation of their financial statements or continue appointing Hong Kong international auditing firms. This study proposes an empirical investigation of consequences of H-share companies’ switching to mainland standards and audit firms. Specifically, we will examine whether switching to mainland auditors impairs earnings quality and the value relevance of accounting information, reduces market liquidity and increases stock price synchronicity.While mainland H-share companies are becoming increasingly important for the Hong Kong stock market and the revised listing rules for H-share companies mark a significant development on the path of integration between Hong Kong and the Mainland, it is critical to ensure that the rule change will not lead to a decline in the quality of financial reporting, investor protection and the quality of the capital market in Hong Kong. By examining whether switching to mainland standards and auditors by H-share companies reduces the quality of financial reporting, creates adverse capital market consequences or comprise investor protection, this study will provide timely feedback to investors and regulators. Findings in this study will also provide valuable insights into whether the Mainland accounting standards and auditing practice are up to the quality comparable to their counterparts in Hong Kong.