This paper reports the results of an empirical examination of the difference between earnings based on Chinese GAAP and those based on International Accounting Standards (IAS). Specifically, the study determines how current Chinese accounting standards are different from the IAS, whether these differences are systematically biased toward under‐ or overstated earnings, and which items from the financial statements contributed most to these differences. The findings suggest that reported accounting earnings based on current Chinese GAAP are significantly different from those based on IAS. On average, the reported earnings determined under the Chinese GAAP are 20–30 percent higher than earnings reported under IAS. After restatement, 15 percent of the B‐share companies changed from a reported profit to a reported loss. The findings suggest that the differences between the two sets of earnings are caused by differences in accounting standards and financial rules, opportunistic applications of Chinese GAAP, and unusual market‐wide events. An analysis of recently promulgated accounting standards indicates that the difference between the two sets of accounting earnings is likely to be significantly reduced from those reported for 1998 as a result.

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