Author: Ben Cardwell
“Comment letters are easily accessible to the public and provide a readily available channel for acquiring corporate information, thereby playing an important role in Chinese capital markets.”
“Earnings volatility in China warrants further investigation given the considerable impact on cost of capital, market value, and firm performance.”
"We find that earnings volatility increases with the number of rounds of dialogues between firms and regulators, as well as the number of questions raised in the comment letters, suggesting that more severe issues identified by regulators lead to greater earnings volatility. Moreover, when comment letters are difficult to read, earnings volatility also increases as outsiders interpret this as greater uncertainty."
Firms that receive a comment letter in the Chinese market experience increased earnings volatility and are met with reduced confidence from outsiders, new research from the University of Melbourne’s Faculty of Business and Economics has shown.
The study found that while comment letters in China are used with the goal of smoothing earnings through greater financial oversight, their implementation causes supply chain instability and the reduced use of earnings management for the firm, leading to increased, rather than decreased, earnings volatility.
Led by Associate Professor Bo Qin in collaboration with researchers from the Xi’an Jiaotong University and the University of Auckland, it is among the first to consider the impact of comment letters in the Chinese stock exchange rather than those issued by the SEC in the United States.
Distinct from comment letters issued by the SEC, Chinese comment letters tend to be broader in nature and seek to address concerns over a firm’s operations beyond its information disclosure.“Our findings reveal an unintended consequence of the comment letter process in China,” said Associate Professor Bo Qin. “While aimed at improving earnings quality, the letters ultimately make earnings more volatile for firms.”
As a result, the research suggests that investors in China are often deterred from considering firms that have been issued a comment letter and are therefore experiencing increased earnings volatility.
Yao, Y., Li, B., Qin, B., & Yang, X. (2025). Taming the dragon: stock exchange comment letters and earnings volatility. Accounting and Business Research, 55(4), 355-388.
DOI: 10.1080/00014788.2024.2361607
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