A Study On Determinants Of Accounting Transparency

Improving accounting transparency of listed companies has been discussed over decades both by academia and practitioners. Sorting out the determinants of accounting transparency will be helpful to solve the problem. The author studies the determinants of accounting transparency on the background of China's institution in this paper. Firstly the author constructs three accounting transparency indices using two earning quality attributes and the sum of them, which can measure the accounting transparency from the views of short-term, long-term and overall tendency seperately. Secondly, the author analyzes the fundamental factors influencing accounting transparency based on the underlying theories of information economics, incomplete contract and investor protection, and then groups these factors into internal and external ones. Thirdly, this paper tests the effects of the institutional environment, the external governance mechanisms, effectiveness of Board, and ownership structure on accounting transparency respectively using the data of China's listed companies. Finally, all these internal and external factors are tested under a unified framework using factor analysis, in order to find out the dominant factors influencing the accounting transparency of China's listed companies.The main conclusions of this paper are as follows:For the relationship between institutional environment, external governance mechanisms and accounting transparency, the results indicate that the supervision of markets, the implementation of accounting standards and creditors'constrains do play an important role in enhancing accounting transparency in China. Although the independent auditors can improve accounting transparency of listed companies in the long run, there may exist short-term "conspiracy" between auditors and listed companies. Accounting transparency of listed companies in monopolistic industries is higher than that of listed companies in competitive industries. But the regional difference of the institutional environment is not a significant influencing factor on accounting transparency.For the relationship between effectiveness of the Board of Directors and accounting transparency, the empirical evidence shows that on one hand, the duality of chairman and CEO, and the diligence of directors can improve the accounting transparency, and under an effective external governance environment, the accounting transparency will be increased if the CEO works in shareholders'enterprises at the same time; on the other hand, independent directors play a limited role and the existing of auditor committee reduces accounting transparency, which means that it fails to perform the duties of "reviewing company's financial information and its disclosure".For the relationship between the ownership structure and accounting transparency, the test results show that the correlation between accounting transparency and the equity ratio of the first major shareholder is negative, and other shareholders can oversight the first major shareholder in some extent, but such influence is not stable. More corporate shares help to improve accounting transparency; and the accounting transparency decrease if the first major shareholders are State owners, which is evident in the long run.Through the principal component analysis and regression tests, the author finds that external governance mechanisms are the dominant factors of accounting transparency; the function of the board of directors as an principle internal control mechanism is weak in some extent; inappropriate ownership structure is an important factor leading to low-level accounting transparency; and the macro-environment has little effect on accounting transparency.The main academic contributions of this paper are provided as follows. Firstly, the accounting transparency indicies chosen and constructed in this paper can measure accounting transparency from the angles of overall quality, short-term and long-term tendency seperately. Secondly, the determinants of accounting transparency are grouped into external and internal ones, and the influences of institutional environment, external governance mechanisms, effectiveness of Board, and ownership structure on accounting transparency are tested on China's institutional background. Finally, putting all the factors into a unified framework and using principal component analysis and regression test, the paper finds that the influencing effect of external factors is strong and the internal ones is weak, and dominance of state shares has negative effect and macro-environment system has weak effect on accounting transparency.However, the paper has two main limitations. Firstly, the measurement methods of accounting transparency need to be improved, especially by adding more earning quality attributes into the index to make it more comprehensive and accurate. Secondly, this paper does not consider the dynamic character of accounting disclosure; therefore, in the future we can use a dynamic model to study the problem of accounting transparency.