Foreign trade and accounting quality = 对外贸易与会计信息质量

Abstract

 This thesis attempts to investigate the effects of foreign trade on firms’ accounting quality. Theoretical implications derived from perspectives of the customer-supplier relationship and cross-border transactions, as well as intuitions originated from practical management experiences, lead to the development of the main hypothesis that firms with a higher level of foreign trade have a greater accounting quality. More specifically, this thesis contends that the desire to alleviate information asymmetry from cross-border trading partners would drive the domestic firm to enhance financial reporting integrity and transparency. By using the performance-matched discretionary accruals and the probability of firms reporting small positive earnings as two proxies for accounting quality, this thesis finds strong evidence consistent with the main hypothesis that firms’ foreign trade activities help improve financial reporting quality, as evidenced by a significantly lower level of discretionary accruals and a reduced likelihood of reporting a small profit. This thesis further develops a comprehensive set of cross-sectional hypotheses that explore how the positive relationship between foreign trade and accounting quality varies with a number of country-level, industry-level, as well as firm-level characteristics. The empirical findings suggest that the main results are concentrated in firms whose trading partners’ home countries have a higher level of financial reporting quality and disclosure requirement; in firms that operate in a more developed market or a more competitive industry; as well as in firms that are controlled by non-state-owned shareholders or have a diverse ownership structure, that have a more independent board of directors, no CEO duality, or a higher managerial ownership, and that are covered by more financial analysts or media. In addition to the above cross-sectional analyses that can articulate to the underlying mechanisms, this thesis explores two possible direct channels through which foreign trade improves accounting quality. The results suggest that institutional holdings and external auditors can be two underlying channels by showing that foreign trade activities significantly increase the institutional ownership and the likelihood of appointing a high-quality external auditor. Finally, to alleviate the endogeneity concern, this thesis constructs four instrumental variables and applies the two-stage least squares approach to reinforce the impacts of foreign trade activities on accounting quality. The findings of this thesis articulate to the potential favorable effects of foreign trade on accounting quality, thus contributing to the literature by complementing prior studies that mainly examine socioeconomic consequences, and offering helpful implications to investors, firm management, and policy-makers.