2.1. Background of SOE Reforms in China
In the historical process of China’s economic development, which is affected by the planned economy system, SOEs have occupied a vital position in every area. It can be seen that SOEs are the product of a planned economy and have been undertaking all the pressure from China’s economic development, playing a crucial role in the socialist economic development in China [
3]. To protect the stability and controllability of SOEs, it was difficult for non-state-owned capital to participate in their management. In this regard, there are two opposing views regarding the higher level of state ownership of SOEs.
From one perspective, this deficiency of SOEs has led to severe related transactions and tunneling problems. Reference [
10] find that cross-shareholdings and pyramidal-holding structures are very common in the Asian market, which in turn leads to controlling shareholders gaining significant control over a small capital expenditure, exacerbating the tunneling effect. In the same manner, the problem caused by the dominant share of government leads SOEs not to maximize enterprise value as the ultimate goal of the organization. For instance, Ref. [
11] show that the connected transactions between Chinese listed companies and state-owned parent companies damage the value of listed companies and the average value loss accounts for 34% of the value of connected transactions. The related transactions include the high-priced buying of the parent company’s inferior assets and providing a guarantee for the parent company with a high cash dividend. The political goals of state-owned shareholders make their intervention in the allocation of corporate resources deviate from the maximization of profits and damage the performance of enterprises [
12]. Thus, the conservative business approach and lack of innovation of SOEs led to a decline in competitiveness in the markets, a slowdown in the promotion of economic growth, and a loss of vitality. Moreover, studies suggest that the accounting quality of SOEs is generally worse than that of other privately owned enterprises [
4,
5,
6].
Conversely, because state-owned shareholders have the support of the central and local government departments, or their subordinate relevant state-owned assets supervision and administration institution, the development of SOEs enjoys the government’s massive subsidies and support. By being deeply involved in the management of SOEs and supporting their operational decisions, the government enjoys benefits from their growth, such as tax payments [
13]. Thus, the relationship between SOEs and the government is difficult to separate. Moreover, Ref. [
7] suggest that SOEs controlled by state ownership invest in more innovative projects and are less engaged in earnings management. Therefore, to summarize, there are both positive and negative views on the accounting quality of SOEs.
To enhance the internal governance structure of SOEs, the Chinese government has continued to implement various regulations to reform them. First, considering SOEs have many drawbacks in the original planned economic system, after the reform and opening-up, the Chinese government had attached the importance of promoting the structural transformation of the economic system. This was done in order to enable SOEs to better serve the development of China’s economic construction, recovering the positive promotion of the economy and the vitality of the pillar industry. In addition, the Chinese government has accelerated the construction of a modern enterprise system for SOEs, promoted a series of company systems and shareholding system reforms, and established an enterprise system with clear property rights and individual rights and responsibilities. In 2003, the State Council of China established the State-owned Assets Supervision and Administration Commission to manage the rational allocation of resources for state-owned assets, ensure the security of state-owned assets, and promote the development of the state-owned economy.
Second, accounting quality is an essential indicator for evaluating accounting information quality. Financial report disclosure is a critical means of providing company performance and management information to external investors [
14,
15]. The China Securities Regulatory Commission implemented requirements for the quality of accounting information. In 2007, it promulgated and implemented the Administrative Measures for Information Disclosure of Listed Company, requiring improvement in the quality of accounting information of listed companies and guaranteeing the stable operation of SOEs.
Third, the senior executives of SOEs are appointed by the national government and are loyal performers of the government’s political goals [
16]. Meanwhile, the motivation for political promotion also forces the senior executives of SOEs to attract more attention from their superiors by expanding the scale of enterprises and enhancing their competitiveness [
17]. However, because of the political background and imperfect incentive system, senior executives of SOEs used their political and strategic superiority to enhance their compensation, causing massive losses of state-owned assets. In the absence of an incentive mechanism to satisfy personal self-interest, executives in SOEs take advantage of the information that other shareholders cannot obtain from the internal system. To prevent this, in 2009, the Chinese government promulgated regulations stipulating the salaries of senior executives of SOEs. The guidance emphasized that the executives’ salary should not exceed 30 times that of the average salary of employees, thus limiting the salary incentive of executives.
Lastly, but mostly related to our study, in 2013, the 18th Central Committee of the Chinese Communist Party promulgated policies to support a large number of private capital developments and the introduction of foreign capital. In particular, the Decision of the Central Committee of the Communist Party of China published a policy document named Decision on Major Issues Concerning Comprehensively Deepening Reforms that states that the reform of mixed-ownership is the first goal of SOE reform. By doing so, the Chinese government expects an improvement in the accounting quality of SOEs. In particular, it allows non-state-owned capital to participate in order to make full use of the decisive role of the market in resource allocation, actively developing a mixed-ownership economy. The sixth point of the document clearly states, “Actively develops a diversified ownership economy. Diversified ownership integrated by state, collective, and private capital is the prime method for materializing the basic economic system, helping improve functions, increasing value, and promoting the competitiveness of state capital. Allow more SOEs and other ownership enterprises develop into mixed-ownership enterprises. Non-state shares will be allowed in state capital investment projects.”
Consistent with the recent reform, previous studies on this reform emphasize that mixed-ownership is the dominant organizational and implemental form of establishing a modern SOE system [
18,
19]. For instance, Ref. [
19] view that the introduction of non-state-owned capital can solve the problem of combining state-owned capital with the market economy. It can realize the transformation of governance structure from administrative governance to economic governance, which can promote the separation of government and enterprise.