[Published Articles] [Working Papers]  [Research Methods]  [Other Links]

· My page on SSRN: http://ssrn.com/author=345330

· Google Scholar: links to my papers

Published Articles

This paper compares the relative effectiveness of two measures by which the Chinese government attempted to improve the monitoring of listed companies: shifting the ownership of state shares from government agencies (GAs) to the corporate form of state-owned enterprises (SOEs), and strengthening corporate governance through statutory regulations and guidelines. The results show that SOEs are better able than GAs to monitor top executives, as indicated by a higher sensitivity of top executive turnover to firm performance. However, corporate governance mechanisms have no significant impact on the sensitivity of top executive turnover to firm performance. This study suggests that incentives for controlling shareholders are more important than governance mechanisms in replacing executives due to poor performance in a transitional economy such as China’s, where institutions that support governance mechanisms are still being developed.

 

This figure plots the three major types of shareholders in China’s listed companies from 1994 to 2004: government agencies (GAs) and corporate form of state-owned enterprises (SOEs), which both hold state-owned shares, and legal persons (LPs) who hold legal-person shares. The sample includes all of the companies that are listed on the Shanghai and Shenzhen stock exchanges, excluding those that only issued foreign currency denominated shares.
 

· “Tunneling as an Incentive for Earnings Management during the IPO Process in China”. with Joseph Aharony and Hongqi Yuan. Journal of Accounting and Public Policy, volume 29, issue 1, pages 1-26 (2010). Download PDF

Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999 to 2001, we show that related party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China’s capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders’ rights.

An early version of this article was profiled in The Straits Times. Click here to view the newspaper article.
 

· "Causes and Consequences of manipulation of Asset Revaluation during the IPO Process in  China". with Hongqi Yuan and Jing Yang. China Accounting and Finance Review, Vol 10 (3), 2008, Pages 90-111.

Using a sample of 267 companies from Shanghai Stock Exchange and Shenzhen Stock Exchange between 1997 and 2002, we examine the causes and consequences of the controlling shareholders’ manipulation of assets revaluation in the IPO restructuring process. We show that (1) controlling shareholders have strong incentive to manipulate asset revaluation to gain larger share of ownership with less capital injection. The manipulation is even more serious in companies which were wholly owned by controlling shareholders before IPO restructuring; (2) companies’ post-IPO accounting and stock performance are negatively associated with the abnormal asset revaluation rate during the IPO process. This article provides additional evidence of expropriation of minority shareholders by controlling shareholders and shows negative consequences of the opportunistic behavior.

· "Accounting-Based Regulation in Emerging Markets: The Case of China's Seasonal Equity Offerings". with Kevin Chen. The International Journal of Accounting, Vol 42 (3), 2007, Pages 221-236. Download PDF

In China, listed companies are required to achieve a minimum return on equity (ROE) before they can apply for permission to issue additional shares through seasoned equity offerings (SEO). We document two benefits of this accounting-based regulation in China. First, this regulation limited the increase in the supply of shares and the dilution to existing share prices. The Chinese stock market thus reacted positively to the announcement of this accounting-based regulation. Moreover, investors’ reaction to SEO announcements is less negative when there was an accounting-based regulation than when the regulation was absent. The second benefit is that the regulation reduces adverse selection in SEO, as shown by the finding that prior to this regulation, firms below the ROE threshold underperformed the market after SEO, much like what has been observed in other markets; while those above the threshold outperformed the market. Thus, although positive accounting theory predicts that regulations based on accounting numbers create incentives for managers to manipulate these accounting numbers, accounting-based regulations in China seem to serve some useful purposes.

The figure plots the cumulative abnormal returns surrounding seasonal equity offering (SEO) proposal announcements. The sample consists of 120 announcements made by China’s listed companies that have a minimum ROE of 10% prior to their announcement year. The announcements are categorized into two groups, before July 2002 when there is no accounting-based regulation on SEO application and after July 2002 when there is a strong accounting-based regulation. The horizontal axis denotes the event day relative to the announcement day, and the vertical axis denotes the value of CARs.

This article was profiled in Knowledge @ SMU. Click here to view the report.

· "Costs and Benefits of Accounting-Based Regulation in Emerging Capital Markets,” article contributed to QFinance, a dynamic and comprehensive financial knowledge base and reference source compiled by leading financial practitioners, visionaries, writers and educators and published by Bloomsbury Publishing Plc. Click here to read more.

· "Governance Role of Different Types of State-Share Holders: Evidence from China’s Listed Companies". A thesis submitted to the Hong Kong University of Science and Technology (HKUST) in partial fulfillment of the requirements for the Degree of Doctor of Philosophy in Accounting. Email me to get the thesis

Working Papers

· "Market Segmentation, Liquidity, and the Pricing of Earnings: A Comparison of China’s Floating and Non-floating Shares." with Kevin Chen and Hongqi Yuan

Before the share structure reform that was completed in 2007, China’s listed companies had two classes of stock: floating shares that are traded on the stock market and non-floating shares that can only be transferred between government agencies or corporations. The reform made both classes floating and provides a setting in which shares are subject to different liquidity constraint. We show that the severity of this constraint is inversely related to the extent to which earnings information is reflected in the share prices. Specifically, before the reform, the transfer prices of non-floating shares involving government do not reflect earnings information at all. Earnings are priced only in the transfers between private entities. However, perhaps due to the illiquidity of shares, the weight of earnings in valuation is much less in transfer prices than in the market prices of floating shares. After the reform, however, both types of transfer reflect earnings information, and its weights is similar to that found in the market prices. Thus, China's unique setting shows that share liquidity affects the way earnings are priced in stock, other than the level of price.

· "The Role of Media Coverage in Corporate China". with Kangtao Ye.

We find that Chinese media can still play monitoring role in listed companies although the media is highly controlled by the government. Firms with more media coverage tend to use more effective pay-for-performance compensation packages and are more likely to introduce independent directors and hire good quality auditors. We also document that media coverage can help to prevent occurrence of financial fraud and firms with more media coverage have higher valuation. Our study complements the emerging literature on the monitoring role of media. Our results also give policy implications to Chinese government and other developing markets.

· "Causes and Consequences of Corporate Assets Exchange by China’s Listed Companies." with Hongqi Yuan

China’s listed companies often exchange corporate assets with their unlisted affiliates such as parent companies, which is rarely observed in their American counterparts. We find that listed companies which are incompletely restructured from former state-owned enterprises tend to exchange more profitable assets for less profitable assets (i.e., tunneling). However, when there is a need to avoid reporting losses and to raise additional capital, listed companies tend to exchange less profitable assets for more profitable assets (i.e., propping). We also find that the market reacts indifferently to assets exchange announcement. Finally, we find that assets exchange with tunneling (propping) incentive is associated with detrimental (improved) post-exchange stock performance and financial performance. In summary, this study contributes to the corporate assets literature by identifying two new incentives (tunneling and propping) in the market for corporate assets.

· “Does Debt-IPO by Privately-held Firms Trigger Financial Statement Management?" with Joseph Aharony and Steven Orpurt.

We investigate financial statement management by privately-held firms that only issue debt in an initial public offering (debt-IPO firms). We examine whether, a-priori, managers manage financial ratios important to credit rating agency Standard & Poor’s, attempting to achieve a better credit rating (and presumably decreasing borrowing costs). To this end, we examine whether these ratios are consistently near the worse (better) end of a benchmark sample distribution for a particular credit rating category (e.g. AAA, BBB, etc.) depending upon whether managers’ efforts are (are not) successful in attaining a better credit rating. Only the debt leverage ratios are consistently worse. Examining both accounting earning management via accruals and earnings management via real economic actions for debt-IPO firms in the pre-and post-IPO filing years we find little evidence of financial ratio manipulation. Further, we find that Standard and Poor’s does not assign overly optimistic credit ratings to debt-IPO firms (relative to other firms with debt ratings), presumably to win new business. Financial statement management by debt-IPO firms appears to be contained to the amount of the debt issued, an easily managed and highly transparent activity. We conclude that our results are consistent with the conclusions of Ball and Shivakumar (2005, 2008) and Venkataraman et. al (2008) rather than prior widely cited literature on earnings management in equity-IPO firms (e.g., Teoh, Welch and Wong (1998) and Teoh, Wong and Rao (1998)). That is, firms initially going public with debt face similar demands for higher quality disclosure limiting potential earnings and financial statement management activities in the debt-IPO period.

· "Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China". with Kangtao Ye.

This study provides empirical evidence of agency costs in socialistic internal capital markets. Listed Chinese companies are required to disclose the amount of resources that are reallocated to other firms of the parent company, which provides us with a direct measure of the socialistic subsidization of weak member firms by strong member firms within a business group. We hypothesize that in strong member firms, managerial compensation is less sensitive to firm performance because cross-subsidization increases the noise in performance measures. We also hypothesize that the agency costs of strong firms are positively associated with the amount of resources that are reallocated because of low pay-performance sensitivity and a low incentive to work hard. We document empirical results that are consistent with these two predictions.

Research Methods

· Online statistics textbooks from Vassar College, Rice U, NCSU

· Research Method Knowledge Base from Cornell

· Statistics computing packages (SAS, STATA, S-Plus, etc.) from UCLA, Indiana, SAS.com

· Event study methods from Don Cram, Local Host.

· Excess returns methodology (the basics) from Phillip Daves, Local Host.

· Research data (CRSP, COMPUSTAT, I/B/E/S, etc.) access and analysis from Chicago, Colorado, Columbia, Cornell, Kellogg, Princeton, West Virginia

Other Useful Links

· Fama-French Factors        Finance Site List

· MSN Money Central – also a good source of industry-level and general news

· Financial Data Finder from Ohio State U.

· Report Gallery (U.S. and International Corporate Annual Reports)

· SEC division of enforcement:  http://www.sec.gov/divisions/enforce.shtml

· Comprehensive financial glossary and dictionary

· Comprehensive source for on-line accounting study

· FASB Statements - Full text online!!! http://www.fasb.org/st/

· International Accounting Standards http://www.iasplus.com/index.htm

· Chinese Accounting Standards http://cpa.esnai.com/asp/web/html80/default.asp

· The Online Oxford English Dictionary;  Online Encyclopaedia Britannica; Business Dictionary from Babylon

· EdgarScan from PWC: http://edgarscan.pwcglobal.com/servlets/edgarscan

· See LIVEDGAR for a list and definitions of all SEC forms

· SEC Filings -- Links to EDGAR related

· Fixed Deposit Rates Exchange -- Compare global interest rates

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