Earnings Quality and Stress Levels of Chinese Listed Companies

This paper investigates the relation between earnings quality and stress levels of Chinese companies listed in Shanghai and Shenzhen stock exchanges from 2003 to 2007 by classifying them as financially stressed and bankrupt (SB), financially stressed and not bankrupt (SNB), and not financially stressed and not bankrupt (NSNB) firms. We measure the earnings quality by four separate attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness. We find that earnings quality levels are parallel to firm's stress levels: the SB firms have the lowest earnings quality measured by each of the four earnings attributes, the SNB firms have a lower earnings quality compared with the SB firms, the NSNB firms have the highest earnings quality. We also find that the earnings quality deteriorated over the study period, the number of SB firms with the lowest earnings quality increased, and the number of NSNB firms with the highest earnings quality decreased for the fiscal years 2003 to 2007