Financial Reporting Quality and Idiosyncratic Return Volatility: Evidence from China

In this article, we study the relationship between financial reporting quality and idiosyncratic return volatility for publicly listed Chinese companies from 2003 to 2012. First, we find that there is no link between financial reporting quality and total return volatility; however, there is a negative relationship between financial reporting quality and idiosyncratic return volatility. Second, we divide our whole sample into two subsamples according to financial reporting quality and find that the negative relationship between financial reporting quality and idiosyncratic volatility only exists in the subsample with low financial reporting quality. Finally, the results show different patterns of idiosyncratic volatility for Chinese listed companies before and after 2007, when a high-standard accounting system was adopted. The adoption of this high-standard accounting system reduces the negative relationship between idiosyncratic volatility and financial reporting quality.