The Impacts of Enforcement Actions on Corporate Reporting Policy: Evidence From China

ABSTRACT This paper examines the impact of enforcement actions on corporate reporting policy in China. Using a sample of Chinese listed firms and a difference‐in‐differences design, we test how enforcement actions against corporate fraud reshape corporate reporting policy, focusing on accounting conservatism in both sanctioned firms and their peers. We find that sanctioned firms become less conservative in financial reporting after enforcement, suggesting that managers perceive the costs of conservative reporting to exceed its benefits. In contrast, peer firms become more conservative, consistent with deterrence‐based spillovers. Additional analyses show that sanctioned firms are more likely to change CEOs following enforcement, revealing that career concerns are likely to drive the observed decline in conservatism among sanctioned firms. Overall, this paper sheds important light on the impact of enforcement actions on corporate reporting policy through the lens of accounting conservatism.