Asian financial firms and financial crises: A lesson learned?

Abstract

My thesis examines earnings quality (EQ) of Asian financial firms during the Asian financial crisis (AFC) 1997-1999 and the global financial crisis (GFC), 2008-2010. For these firms, I investigate: (a) whether EQ is higher during the GFC than the AFC; (b) whether EQ in high enforcement countries exceeds that of low enforcement countries in both crises; (c) in low enforcement countries, if international agency interventions occurred, whether EQ is higher during the GFC than if no interventions occurred.

My sample consists of firms with SIC codes between 6000-6499 from 10 Asian countries (China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand), comprising on average 880 and 1,124 firm-year observations for banks and other financial firms, respectively. Countries are pooled into high and low enforcement groups, consistent with legal institutions, both law and its enforcement, and financial development of a country affecting the quality of accounting numbers. I treat banks separately from other financial firms, and divide the latter into insurance companies and diversified financial services companies for some hypotheses, sample size permitting. Of the five EQ measures covered, I argue that, during times of financial crisis, conditional conservatism, cash flow predictability and accrual quality are superior EQ measures to earnings persistence and income smoothing. Collectively, the results suggest that banks and other financial firms (insurance and diversified financial services companies) do not learn from their AFC experience and that financial reforms instigated following the AFC are not effective in improving the earnings quality during the GFC, except for cash flow predictability by banks. Evidence further suggests that the financial sector in Asia puts more importance on earnings persistence rather than accounting conservatism during crisis periods, particularly in the regulated bank and insurance companies. However, a sensitivity analysis conducted on financial firms that survived the AFC to the GFC indicates that only financial firms belonging to the high enforcement group report conditionally conservative numbers during the GFC. Despite being rejected by accounting standard-setters as a desirable EQ attribute, conditional conservatism can be an indication of financial strength, especially during uncertain times.