The China puzzle:Opportunities for accounting research☆

Suresh Radhakrishnan

Jindal Schoolof M anagement,University of Texas at Dallas,USA

The China puzzle:Opportunities for accounting research☆

Suresh Radhakrishnan

Jindal Schoolof M anagement,University of Texas at Dallas,USA

A R T IC L E I N F O

Article history:

A vailab le online 7 January 2014

How can China achieve phenomenal econom ic grow th despitewhat is considered as“weak”institutions inmarket-based econom ies?Xu(2011)provides a framework to understand this puzzle.Specif cally,he suggests that China’s institutional framework of Regionally Decentralized Authoritarian regime was likely responsib le for the phenomenal econom ic grow th despite what is considered“weak”institutions for market-based econom ies.W hile recent accounting research p rovides insights into the relationship between agency issues,and accounting and control system s in the China context,accounting researchers can use the institutional feature o f RDAs to provide insights into the ro le of accounting and control system s in non-market-based settings.

?2014 Production and hosting by Elsevier B.V.on behalf o f China Journalo f Accounting Research.Founded by Sun Yat-sen University and City University o f Hong Kong.

1.Introduction

Accounting research in the context/setting of China has increased in the last decade.This ref ectsboth the importance o f China asa global econom ic force and China being an interesting setting for p roviding insights into the ro le o f accounting.The call for papers for this symposium nicely summarizes the latter point by stating:“Ownership structure,the incentives o f managers and auditors,board m onitoring,enforcement,and o ther institu tional features of the econom y all have an im portant im pact on f nancial repo rting outcom es. It is also conceivab le that accoun ting standards and these institu tional featu res com p lem en t each o ther in determ ining accounting quality.Asian-Pacif c econom ies,including China,o fer an ideal setting to exam ine these important issues given the relatively weak legal protection and en forcement in these econom ies.”Inshort,China p rovides an in teresting setting because exam ining its evo lu tion from a p resum ably“weak”institutional and market-based regime to strong,one can p rovide important insights into accounting issues.M y objective in this article is to broaden this perspective by directing attention to the fact thatmechanisms that enab led China to succeed econom ically,did so despitewhatwe term as“weak”institutions.The institutional features that enabled such phenomenal econom ic grow th wou ld have necessarily relied on accounting and contro lsystems.Assuch,exam ining the roleo f accounting and controlsystems in the institutional framework prior to and during China’s transition to amarket-based economy would help expand our insights.For this purpose,Id raw on the framework in the econom ics literature that shows the unique institutional features in China that possibly contributed to its econom ic success(Xu,2011).

2.The China puzzle

China’s GDP has grown from US$1325 Billion in 2001 to US$7318 billion in 2011,which represents a year-over-year grow th rate of rough ly 19%;the stock market capitalization increased from US$524 Billion in 2001 to US$3389 in 2011,representing a year-over-year grow th rate o f 21%;the value of stocks traded increased from US$449 Billion in 2001 to US$7671 in 2011,representing a year-over-year grow th rate o f 33%(see Tab le 1).Thesestatistics indicatenotonly a tremendousgrow th in econom ic activity,butalso a concerted move toward a market-based economy.

Conventional wisdom in econom ics suggests that the government should protect p rivate p roperty rights, enforce contracts,and separate itself from business enterprise(North,1990;Acemoglu and Robinson, 2012).In con trast to this conventionalw isdom,the Chinese governm ent conducts and d irects business developm ent.Not surp risingly,China ranks below average on its institutionalm akeup o f rule o f law and governance quality(A llen et al.,2005).Thus,based on conventional w isdom,China’s institutions are weak,so much so that the institutional in frastructure shou ld not have supported the phenomenal econom ic grow th and themove toward amarket-based economy.This isa seem ing puzzle that is referred to as the China puzzle by Xu(2011)who states,“This incredib le contrast between poor institutionsand China’s spectacu lar performance challenges our general understanding of the mechanics of institutions and our understanding of institutional quality.”

3.The institutional structure of China’s economic success

Broad ly speak ing,institu tions refer to m echanism s that coo rdinate econom ic activities and thus govern the incentives o f agen ts(Coase,1992;Stiglitz,2002;Hurw icz,2007).No rth(1990)defnes institu tions as“ruleso f the game in a society or,m ore form ally,the humanly devised constraints that shape hum an interaction.”The key aspects embedded in these def nitions are that institutions are a set of rules chosen by society,and in an econom ic sense,these rules facilitate exchange.Coase(1937,1991,1992)in his discourse on theboundariesof the f rm andmarkets–where do f rmsend andm arketsbegin–p roposes that institutionsact ascoordination mechanisms to facilitate exchange;when markets cannot do the job of coordination well enough,then the coordination occurs in f rms(see also W illiamson,1985,2002).As to which coordinationmechanism isbetter suited for a particular activity is referred to,under the omnibus fuzzy term ino logy o f“transactions costs.”Under this broad view of institutions,Xu(2011)argues that it would not have been possible for China to achieve such phenom enal grow th w ithout ef ective coord ination m echanism s o r institutions.W hat was the institu tional structure that enabled China’s phenom enalgrow th?Xu(2011)outlines the salien t aspectso f China’s institu tional feature that enab led the phenom enal econom ic grow th.

While institutions in most partso f theworld–the Americas,A frica,Australia,South,and Far East Asia–are greatly in fuenced by the Western governance systems due to co lonization,China has a 2000 year-o ld imperial history thatwas not directly inf uenced by the European institutions.The structure that prevailed during the imperial regime provides the pillars o f the institutional framework that guided the transition to China’smarket-based economy.Xu(2011)refers to the institutionalstructure as theRegionally Decentralized Authoritarian(RDA)regime.The RDA regim e features a combination o f a highly decentralized decisionmaking w ith respect to econom ic resources;a highly centralized decision-making w ith respect to po licy and personnel.

Table 1 Ch ina’s economy and stock m arket.Source:The conference board,totaleconom y database.

On the one hand,econom ic decision rights are decentralized and delegated to sub-national governm ents. Regionaleconom ies–p rovinces,municipalities,and counties–are responsib le for initiating and coordinating econom ic activity by p roviding pub lic services and enforcing laws w ithin their jurisdictions.On the other hand,sub-national government of cials are appointed,promoted,and rotated by the center,which helps to p rovide high-powered incentives for regional of cials to fo llow the central government’s policiesand achieve econom ic performance.This institutional feature is diferent from centrally-p lanned structuresuch as the erstwhile Soviet Unionwheredecision-makingwascentralized.This institutionalsetup isdiferent from federalism as in the U.S.,because the regional of cials are not accountable to the local constituents and citizens.

The institutional structu rem akes China sim ilar to a large conglom erate du ring itsm ove toward a m arketbased system:referred to in the rest of the paper as China Inc.Sim ilar to the headquarters of a conglom erate, China Inc.,provides high-powered incentives fo r sub-national governm ent leaders,i.e.,d ivision m anagers through personnel decisions.Sim ilar to divisionso f a conglom erate,the sub-national governmentshave decision rights over resources such as land,enterprises,fnancial resources,energy,and raw materials.They initiate,negotiate,implement,divert,and resist reforms,policies,ru les,and laws.They d riveor hamper regional/ national econom ic development and macroeconom ic conditions.They compete to achieve econom ic success and initiate experimentsw ith new reforms.Theorganizationalsetup of China Inc.fo llows the general precep t espoused inmanagerialaccounting textbookssuch as Zimmerman(1997)and accounting theory such as Sunder(1997)that decision-m aking should be delegated to the locusof in formation and expertise.Accordingly,it is interesting to exam ine what contro l and coordination mechanisms helped achieve China’s phenomenal grow th,i.e.,the success of a conglom erate.

W hile we have som e understand ing on the role of accoun ting in arm s-length contracting and equity m arkets,or at least a fram ewo rk fo r understand ing the role of accounting in m arket-based econom ic settings, China Inc.providesan excellent setting to exam ine the ro le o f accounting in a diferent framework o f institutions thatwere efective in achieving China’s econom ic grow th?Even though capitalm arkets or labor and p roductmarketsmay not have existed in China Inc.,accounting and controlmechanisms should have necessarily existed to help coordinate activities under decentralized decision-m aking.

4.The focus of China accounting research

Ashighlighted by the call for papers of the CJAR sym posium,research in accounting focuses on China’s transition to am arket econom y wherein regulato ry changes that facilitate transition from the trad itional Chinese institu tions to W estern ones that are suited for m arket econom ies are exam ined.Chen and Schipper (2008)highlight the focuso f China based accounting research very aptly in the follow ing way:“Recen tly published Chinese accounting research has addressed the causes and consequences o f issues related to auditorindependence,causesand consequences of related-party transactions(fo r exam p le,the extraction of resou rces from a listed f rm bymeansof“tunneling”),earningsm anagement and accounting implementations,the governance of listed Chinese f rms including ownership structure and executive turnover.Because of the focuson corporate governance,accounting research in China currently has closer ties to corporation f nance than does accounting research in the U.S.”They then go onto point the potential research questions that State Owned Enterprises(SOEs)and the privatization o f these enterprises p rovide.

China providesan excellent setting to exam ine the ro leof accounting and agency issues.Agency issuesarise from the separation o f ownership and control,referred to as the Type Iagency p roblem)and arise from the con f ict between controlling and non-controlling shareho lders,referred to as the Type IIagency p roblem(see A liet al.,2007).The con trast between State Owned En terprises(SOEs)and non-SOEs provides an excellent setting to exam ine Type IIagency p rob lem s.China research has used the diferen tial severity o f agency problem s to exam ine its ef ects on earningsm anagem ent and accounting quality(fo r exam p le,see Jian and W ong, 2010;Chen and Yuan,2004;Chen etal.,2010b,2011;Fan etal.,2012;Haw etal.,2011;Haw etal.,2005;K im etal.,2011).China research hasused the emerging auditing and pub lic accounting setting to p rovide interesting insights into the interactionsbetween agency issuesand auditquality/auditor independence(see for example,Chen et al.,2010a,2010c,2000;DeFond et al.,2000;W ang et al.,2008;Fan and Wong,2005;Gu l et al., 2009;Choiet al.,2010;Yang,forthcom ing).Overall,China accounting research provides usefu l insights into how agency issues are related to fnancial reporting quality and audit quality.

Even though in thenextsection,Iprovideother possibleavenues for China accounting research,the focusof exam iningagency issuesisstillnascentandhasthepotentialto contributemanym oreinsights.In addition,China providesa setting to exam ine the developm ent ofm arkets in fast-fo rward.Specif cally,the developm ent of the private auditm arketwhere consolidation,scaling-up,and gaining expertise occurred in a relatively short span of timeprovidesan interestingavenue to gain insightsinto theevolution o f theauditservicesm arket–specif cally theef ectso fmarket concentration on auditquality and audit fees(for example,seeChan andW u,2011).

5.Further opportunities for accounting research in China

This section outlines research questions thatw illhelp usenhance ou r understanding o f the ro le o f accoun ting in non-m arket-based settings.In our tradition of research silos,these questions likely belong to the gen re ofmanagerial accounting.The questionsmay not have the same appeal asmanagerialopportunism,and how bettermarket-based institutions help“prevent”or“stop”such opportunism.The Chinese setting could help usunderstand forcesand empirically test insights from analytical studies.We have considerab le insights from game-theory based studies into the role o f accounting in market-based versus implicit contract-based institutional settings(see G lover,2012;Baldenius,2008;Ederhof et al.,2010;Ewert and W agenho fer,2011; Kanodia,2006;A rya and M ittendorf,2010;Liang,2010).A lso,as Chen and Schipper(2008)posit,analytical modeling of forces particu larly relevant for the China setting cou ld provide usw ith more insights.

Thesestudiesshou ld utilizea combination o fmethods–archivalempirical,feld-study empirical,analytical and case study,and/o r a com bination ofm ethods so as to p rovide us w ith insights as well as highlight new areas o fm anagem ent accounting and institu tional research.

5.1.Commitment to enforcing contractswithout laws1These categories are notm utually exclusive.I provide the categories to b ring to fore themu ltifaceted and rich context.

China had no“efective”commercial code for contracting up until the 1990sand no formal p rivate property protection lawsup until 2004.Theoretically,during this period,ownership o f shares in enterpriseswou ld hold little water,and as such,the valuation and stock returns that are used in em p irical tests were based on belief that such private p roperty pro tection law s would be enacted and en forced.Sim ilarly,custom ers contracted w ith suppliersw ithout the framework o f a uniform comm ercial code,under the belief that informal institutionswere ef ective in im plementing contracts.D id it imp ly that China had no institutions in the broad sense?The answer is an unequivocal no.Xu(2011)states that RDAs exercised sem iformal and informalp rotection o f p rivate p roperty and contract enfo rcem en tm echanism s thatwere p rim arily based either on the rich history of China or by social norms.These informal institutions are generally ignored by accounting research.2Thismalaise isnot typical to accounting research.Xu(2011)pointsout that cross-country studies that include China in theeconom ics literature and states,“according to some“standard”policy advice,thesemore informal institutionsm ight be regarded as obstacles that should be rep laced by“standard”institutions as quick ly as possible,even though setting up“standard”institutionsmay be very dif cult, tim e-consum ing,or even counter-productive under certain political cond itions.”Basu(2012)em phasizes about how accounting research has been in fuenced by the econom icsor fnance literature.And as such it isnot surprising thatwe are ardent followersofmain-stream cross-country econom ics research aswell.Exam ining the role of these institutions can help p rovide useful insights into comm itment,rules, and standards.Som e broad research questions are as follows:

1.W hatwere the informal institutions that acted asa comm itm ent device for buyerscontractingw ith supp liers?D id sub-national governments enab le such coordination?

2.How was reputation for such comm itments formed?If thesewere efective,whatwas the need for uniform commercial codes?

5.2.Deviant behavior and commitment issues

Becker(1974)bringseconom ic analysis to crim e and punishment and shows that the optimal en forcement depends on cost of catching and convicting the of enders,the punishment meted out and the response o f o fenders to the changes in en forcement and punishment.These form part o f social capital.Putnam(1993, p.167)def nes social capital as“featu res o f social organization,such as trust,norm s,and netwo rks,which can im p rove the ef ciency o f society by facilitating coord inated actions.”Pu tnam(1993,p.173)argues,“The denser such networks in a comm unity,them o re likely that its citizens w ill be ab le to cooperate for m utual benef t.”Asa thoughtexercise,one should wonderwhy it is thatwe hear aboutaccounting/audit failureson ly after China has transitioned to using institutions to support themarket-based system.Is it because the institutions thatmete out punishment are not in sync?Is detectingmore accounting failures a hallmark of good institutions?Is detecting more accounting failures indicative o f in formal or traditional institutions in China being adequate tom itigateagency problems?In Putnam’s framework,is it possible that arms-length contractingm akes these networks less denseand assuch thesocialnormsand cooperation formutual benef t doesnot occur?Answers to these questions can p rovide some key insights into the role of accounting3Firth et al.,2012 exam ine the changing legal liab ility of aud itors and its efect on theway aud itors are organized and the accoun ting quality..

Sunder(1997)pointsout that the f rm is“an arena in which self-motivated econom ic agents play bymutually agreed upon o r im p lied ru les to achieve their respective ob jectives.”The com parative advantage of a f rm over fo rm al institutional arrangem ents thatwe observe under arm s-length contracting is in en forcing im p licit contracts.Considering China Inc.asone behemoth f rm,the natural question that arises is that did the inform al and imp lied rules enable enhanced coordination o f activities?The existence o f in formal institutions and the variation across RDAs cou ld provide a rich context o f exam ining the costs and benef ts o f these setups. For examp le,informal institutionsby their very nature cannot be scaled-up.An interesting question to examine is the follow ing:even though market-based institutions facilitate scaling-up operations and thus enhance econom ic grow th,what is the associated costs–is it the additional failures in market-based systems when compared to in formal settings?

5.3.State Owned Enterprises and private small and medium enterprises

Xu and Zhuang(1998)point out that rough ly 2000 counties in China had State Owned Enterprises(SOEs) p roducing agriculturalmachinery,300 counties had steel p lants.Regional SOEs produced 69%of China’s total fertilizer output and 59%o f its total cement;and about 20 p rovinceshad SOEs p roducing automobiles or tractors in the early 1990s.This decentralized production structure and autonomy for decision-makingcreated com petition am ong the SOEs.W hile the cen tralgovernm ent lay out the strategic p lan and vision,the RDAsare allowed to experiment and be innovativew ith respect to the transition to themarket-based economy.Studying the incentive schemes o f prom otions and transfers and their relationship to accounting and other performancem easures w ill p rovide interesting insights.Recent studies provide insights into some o f these aspects.For example,Du et al.(2012)exam ine the evaluationso f SOEs and f nd that the po litical connectionsof SOE,CFOs,geography o f the SOE,and the political rank of the SOE in fuence their evaluations. In addition,studying the failed experimentsaswell as the successful ones cou ld p rovide usw ith insights into the institutions that are necessary or su f cient formarketsand enterp rises.W ereCEOsof SOEs rewarded for experimenting or were they rewarded for bottom-line performance?

Sub-national regions developed industry clusters.For exam p le,private sm all and fam ily enterp rises in the town of Datang focus on producing socks,in Shengzhou focus on bu ttons for clothes,in Songxia focus on producing um brellas.There are m any such industry clusters.Liu(2008)show s how the sm all en terprises are important for econom ic grow th,and how the regional and national governments helped develop such industry clusters.It w ill be interesting to exam ine whether the performance evaluation measures used for regional SOEs are partly driven by their role in helping the infrastructure developm ent and p romotion of industry clusters.In essence,are the SOEs a vehicle for supporting regional econom ic development?And if thisquestion isanswered in the af rm ative,cou ld thisbe the reason why their stock performance lagsbehind the non-SOEs.

5.4.Accounting and control systems in conglomerates

Asm entioned earlier,sim ilar to a conglom erate,in China Inc.,the personnel decisions for the RDAswere made by the headquarters/central government.The headquarters could p rovide high-power incentivesbased on promotionsand transfers to other sub-nationalunits so as to transfer know ledge or asa demotion.4O f course,given the extent of corruption itw illbe dif cult to disen tanglewhether them otivating force ism onetary o r non-monetary. Hung et al.(2012)exam ine why SOEs w ith strong political connections aremo re likely to list overseas than non-politically connected SOEsand fnd thatoverseas listing itself appears to be a goal;as such,the bottom-line performancemetricsaremore poor for politically connected than non-politically connected SOEs.Given the econom ic success of China Inc.,many interesting questions related to management contro l systems and incentives can be exam ined in the follow ing broad categories.5Recent studies provide insights in to these aspects.For exam p le,Du et al.(2012)exam ine the evaluations of SOEs and fnd that the political connections of SOE,CFOs,geography of the SOE and the po litical rank of the SOE infuence their evaluations.

1.W hatmeasures of performance are used for performance evaluation and p romotion?

a.W ere theymeasureso f infrastructure,i.e.,institutions that are necessary for transitioning to marketbased economy or were they based on bottom-linemeasures of pro f tability?

b.W ere they ou tpu t,interm ediate o r inpu tm easures?

c.G iven that m ost of the institu tion building exercise would have relied heavily on intangib les and hum an capital,whatm easures were used fo r such in tangibles?

d.W ere there dif erentmeasures at dif erent stages or was there an all-encompassing measure such as GDP or bottom-line for SOEs?

e.For SOEs in particular what type ofmeasureswere used?W ere they based on the concep t of prof ts for the owners?

f.W ere performancemeasuresmore p recise at lower levels than at higher levels of the hierarchy?

g.W ere themeasures sub jective or ob jective?

h.W ere themeasures aggregated or granular?

2.W ere disclosu res o f these perfo rm ance m easu res vo luntary or m andatory?W ere perfo rm ance m easu res changed and m odifed based on the natu re of experim ents?

3.W hat comm itm en tm echanism was in p lace to p rovide cred ibility to the relationship between incentives and measures?Was it im plicit or explicit?

4.How were them easures verif ed?W hat enfo rcem en tm echanism s were in p lace for deviant behavior?

5.W ere princip les of transfer pricing and cost allocation used?If yes,how and why?

6.W ere performancemeasures uniform or were they changed to suit local conditions?

7.How were performance targets set?Were they participative,i.e.,bottom-up or top-down?How are variances of the actuals from the targets dealtw ith for incentives?

The prem ise underlying the questions outlined above may look as if China Inc.’sm anagement control systemswere designed so well such that the costs o f conglom erates were“fu lly”overcome;however,this is not likely to be the case.For example,it is well known that conglomerates are more likely to overinvest (M aksim ovic and Phillips,2002);sim ilar to this,casual em piricism suggests that there are considerable overinvestm en ts–for exam p le,there are ghost cities such as Zhengzhou.Studying these costs o f conglom erates,i.e.,overinvestm ents,wou ld provide in teresting insigh ts for accounting andm anagem en t con trol system s.

6.Conclusion

China p rovidesan excellent setting to exam ine questionson coordination and contro lmechanisms for conglomeratesand provide insights formanagement accounting.Furthermore,gaining insights into the costsand benef tsof informal and formal institutional setup would be important to d raw distinctionsbetween aggregation and disaggregation o f information for planning and contro l purposes.While this w ill be challenging, editors o f journals shou ld be p roactive in encouraging such inquiry.

Acknowledgements

This paper isbased on my talk at the China Journalo f Accounting Research Symposium,2013 in Zhuhai, China.Iam grateful to Professor Xijia Su,and editors of the journal Professor Qiang Cheng and Professor DonghuiW u for the opportunity to w rite this paper.

Acem oglu,D.,Robinson,J.,2012.W hy N ations Fail:The Origins of Power,Prosperity,and Poverty.Random House,N ew York.

A llen,F.,Qian,J.,Qian,M.,2005.Law,fnance and econom ic grow th in China.Journal of Financial Econom ics 77,57–116.

Ali,A.,Chen,T.,Radhak rishnan,S.,2007.Corporate disclosures by family f rm s.Journal of Accounting and Economics 44,238–286.

Arya,A.,M ittendorf,B.,2010.Inputmarketsand the strategic organization of the f rm.Foundationsand Trends in Accounting 5,1–97.

Baldenius,T.,2008.Internal pricing.Foundations and Trends in A ccounting 3,223–313.

Basu,S.,2012.H ow can accounting researchers becom emo re innovative?Accounting H orizons 26,851–870.

Chan,K.H.,Wu,D.,2011.Aggregate quasi rentsand auditor independence:evidence from audit f rm mergers in China.Contemporary Accounting Research 28,175–213.

Chen,Q.,Schipper,K.,2008.Future directions for Chinese accounting research.China Journal of A ccounting Research 1,1–10.

Chen,K.C.W.,Yuan,H.,2004.Earningsmanagement and capital resourceallocation:evidence from Ch ina’saccounting-based regulation o f rights issues.The Accounting Review 79,645–665.

Chen,S.,Sun,S.Y.J.,Wu,D.,2010a.Client im portance,institutional im provements,and auditquality in China:an o f ce and individual auditor level analysis.The A ccounting Review 85,127–158.

Chen,C.J.P.,Su,X.,Zhao,R.,2000.An emergingmarket’s reaction to in itialmod ifed audit opin ions:evidence from the shanghaistock exchange.Contem porary Accounting Research 17,429–455.

Chen,C.J.P.,Su,X.,W u,X.,2010.Auditor changes follow ing a Big 4mergerwith a localChinese f rms:a case study.Auditing:A Journal o f Practice and Theory,29:41–72.

Chen,H.,Chen,J.Z.,Lobo,G.J.,W ang,Y.,2010c.Association between borrower and lender state ownership and accoun ting conservatism.Journal of Accounting Research 48,973–1014.

Chen,H.,Chen,J.Z.,Lobo,G.J.,W ang,Y.,2011.Efects of auditquality on earningsmanagementand cost of equity capital:evidence from China.Contemporary Accounting Research 28,892–925.

Choi,J.,K im,C.F.,K im,J.,Zang,Y.,2010.Audit of ce size,aud it quality,and audit p ricing.Auditing:A Journal of Practice and Theory,29:73–97.

Coase,R.H.,1937.The nature of the f rm.Econom ica 4,386–405.

Coase,R.H.,1991.The nature of the f rm:origin,meaning,and in fuence.In:W illiam son,O.,W inter,S.(Eds.),The Nature of the Firm: O rigins,Evolution and D evelopm ent.Oxford Un iversity Press,N ew York,pp.34–74.

Coase,R.H.,1992.The institutional structure of production.American Econom ic Review 82,713–719.

Du,F.,Tang,G.,Young,S.M.,2012.Infuence activities and favoritism in sub jective perform ance evaluation:evidence from Chinese State-Owned En terprises.The A ccoun ting Review 87,1555–1588.

DeFond,M.L.,Wong,T.J.,Li,S.,2000.The impactof imp roved auditor independence on auditmarket concentration in China.Journal o f Accounting and Econom ics28,269–305.

Ederhof,M.,Rajan,M.V.,Reichelstein,S.,2010.D iscretion in m anagerialbonus pools.Foundations and Trends in A ccounting 5,243–316.

Ewert,R.,W agenhofer,A.,2011.Earningsmanagement,conservatism,and earningsquality.Foundations and Trends in Accounting 6, 65–186.

Fan,J.P.,W ong,T.J.,2005.D o external audito rs perform a co rporate governance ro le in em erging m arkets?Evidence from East Asia. Journal of A ccounting Research 43,35–72.

Fan,J.P.H.,Wong,T.J.,Zhang,T.,2012.Founder succession and accounting properties.Contem porary Accounting Research 29,283–311.

G lover,J.,2012.Xp licit and im p licit incentives for mu ltip le agents,Foundations and T rends in A ccounting 7,1–71.

Gu l,F.,Sam i,H.,Zhou,H.,2009.Auditor d isaf liation program in China and auditor independence.Auditing:A Journalof Practiceand Theory,28:29–51.

Firth,M.,M o,P.L.L.,Wong,R.M.K.,2012.Auditors’organizational form,legal liability,and reporting conservatism:evidence from China.Contem porary Accounting Research 29,57–93.

Haw,I.,Qi,D.,W u,D.,W u,W.,2005.M arket consequences of earningsmanagement in response to security regulations in Ch ina. Contem porary Accounting Research 22,95–140.

Haw,I.,Ho,S.S.M.,Li,A.Y.,2011.Corporate governance and earnings management by classif cation shifting.Contemporary Accounting Research 28,517–553.

Hung,M.,W ong,T.J.,Zhang,T.,2012.Political considerations in the decision of Chinese SOEs to list in H ong Kong.Journal of Accounting and Econom ics 53,435–449.

Hurw icz, L., 2007. But Who W ill Guard the Guardians? 〈http://nobelprize.org/nobel_prizes/econom ics/laureates/2007/ hurw icz_lecture.pdf〉.

Jian,M.,W ong,T.J.,2010.Propping through related party transactions.Review of A ccounting Studies 15,70–105.

Kanodia,C.,2006.Accounting disclosure and real efects.Foundationsand Trends in Accounting 1,167–258.

Kim,J.,Tsui,J.S.L.,Yi,C.H.,2011.Thevoluntary adoption of International FinancialReporting Standardsand loan contracting around theworld.Review of Accounting Studies 16,779–811.

Liu,X.,2008.SM E developm ent in China:a policy perspective on SM E industrial clustering.In:L im,H.(Ed.),SM E in Asia and G lobalization,ERIA Research Project Report 2007-5,pp.37–68.

Liang,P.J.,2010.An invitation to theory.China Journalo f Accounting Research 3,1–12.

North,C.D.,1990.Institutions,Institutional Change and Econom ic Performance.Cambridge University Press,Cambridge,New York and M elbourne.

Putnam,R.D.,1993.M aking D em ocracy W ork:Civic Traditions in M odern Italy.Princeton U niversity Press,Princeton,N J.

Stiglitz,J.E.,2002.Information and the change in the paradigm in economics.American Econom ic Review 92(3),460–501.

Sunder,S.,1997.Theory o f Accounting and Contro l.South-Western Co llege Publishing,Cincinnati.

W ang,Q.,W ong,T.J.,Xia,L.,2008.State ownership,the institutionalenvironmen t,and aud itor choice:evidence from China.Jou rnalof A ccounting and Econom ics 46,112–134.

W illiam son,O.,1985.The Economic Institutionso f Capitalism.Free Press,New York.

W illiam son,O.,2002.The theory o f the f rm asgovernance structure:from choice to contract.Journalof Econom ic Perspective 16,171–195.

Xu,C.,2011.The fundam en tal institutions of China’s reform s and development.Journalo f Econom ic Literature 49,1076–1151.

Xu,C.,Zhuang,J.,1998.Why China grew:The role of decentralization.In:Boone,P.,Gomulka,S.,Layard,R.(Eds.),Emerging from Communism:Lessons from Russia,China,and Eastern Europe.M IT Press,Cambridge and London,pp.183–212.

Yang,Z.,forthcom ing.Do Political Connections Add Value to Audit Firms?Evidence from IPO Audits in China,Contemporary A ccounting Research.

Zimmerman,J.L.,1997.Accounting for Decision M aking and Control.Irw in/M cG raw-Hill,New York.

E-mail address:sradhakr@utdallas.edu

Produc tion and hos ting by E lsevie r☆This paper is based on my talk at the China Journal of Accounting Research Symposium,2013 in Zhuhai,China.I am grateful to Professor Xijia Su,and editorsof the journal Professor Qiang Cheng and Professor DonghuiWu for the opportunity to w rite this paper.

1755-3091/$-see frontmatter?2014 Production and hosting by Elsevier B.V.on behalf of China Journal of Accounting Research. Founded by Sun Yat-sen U niversity and City U niversity of H ong Kong.

h ttp://dx.doi.org/10.1016/j.cjar.2013.08.001