The Impact of Standard Setting on Relevance and Reliability of Accounting Information: Lower of Cost or Market Accounting Reforms in China

摘要

During the period from 1998 to 2000, China implemented several new asset write-down regulations that mandate lower of cost or market accounting (LCM) for most non-cash assets. This is a study of the relevance and reliability of those regulations for investors in China. The study measures the association of net asset value with market value of equity and the association of accounting income with stock return, on both a historical cost accounting (HCA) basis and on an LCM basis. A fixed-effects model controlling both year and firm effects is used in a balanced panel sample. The panel regressions show high levels of explanatory power. LCM values can be relevant but may be measured with sufficient error that they do not improve the prediction of firm values. Reliability is measured using non-nested, overlapping model comparison tests (J and Cox). The paper also considers whether discretionary motivations influence the amount of write-down. The study supports the relevance of LCM reforms, but finds that reliability is not increased over HCA during the period under study. Reliability appears to be reduced by the voluntary nature of LCM provisions during part of the period and by the effects of opportunism for some firms in the sample.