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“Avoiding China’s Capital Market: Evidence from Hong Kong-Listed Red-chips and P-chips ” with Weishi Jia and Grace Pownall, Journal of International Accounting Research, 2018
The purpose of this paper is to explore the puzzle of why so many Chinese firms eschew listings in China. Hundreds of firms founded in China have reorganized themselves as overseas corporations and listed on the Hong Kong Stock Exchange. These firms are called Red-chips if they are state-owned enterprises (SOEs) and P-chips if they are not state-owned (Non-SOEs). To examine the rationale behind the listing decisions of P-chips and Red-chips, we compare the characteristics of Red-chips (P-chips) with SOEs (Non-SOEs) listed on China stock exchanges. We find that SOEs are more likely to list in China. Moreover, while we do not observe any significant difference between the performance of Hong Kong-listed and Mainland-listed SOEs, we find Non-SOEs that are listed in Hong Kong are significantly more profitable than those listed in China. We then explore three possible explanations for why Chinese firms, especially Non-SOEs, may prefer to be listed in Hong Kong: (a) to facilitate personal wealth transfers out of China; (b) to increase access to debt capital; and (c) to facilitate more efficient stock price formation. We find that all three of these explanations have statistical support.
“Does the Market Punish the Many for the Sins of the Few? The Contagion Effect of Accounting Restatement for Foreign Firms Listed in the U.S.” with Weishi Jia, Journal of Accounting Auditing and Finance, 2017
In this article, we study the contagion effects of accounting restatements issued by foreign firms traded in the United States. Specifically, we predict and find that accounting restatements that negatively affect the share prices of the restating foreign firms raise investor concerns that nonrestating foreign firms from the same home countries have similar accounting issues, and therefore induce a negative stock market reaction to nonrestating home country peer firms. We refer to this as a restatement-induced home country contagion effect. On average, nonrestating home country peer firms experience a negative stock market return of approximately −0.69% over a 3-day window around the restatement announcement. Moreover, we hypothesize and show that the strength of the home market rule of law (ROL) affects investor assessment of the likelihood that peer firms have similar accounting issues, and therefore affects the magnitude of the contagion. Specifically, nonrestating home country peer firms from countries with weak ROL experience an average stock price decline of approximately −1.32%, whereas peer firms from strong ROL countries experience an average negative return of only −0.26% over the 3-day window around the restatement. These results suggest that restatements filed by weak ROL firms are perceived to be more “contagious” than those filed by strong ROL firms.
Selected Working Papers
“Comparing GAAP to NIPA Earnings ” (2018) coauthored with Ilia Dichev, Emory University
The U.S. Bureau of Economic Analysis produces a measure of aggregate corporate profits (NIPA earnings), which is an integral component of the accounting for GDP. Interesting features of NIPA earnings include consistent accounting rules over time, and determination with little or no managerial discretion. Thus, NIPA earnings provide a useful benchmark for GAAP earnings, especially in parsing out the effects of real-economy vs. the accounting in explaining the documented great temporal increase in volatility and decline in persistence of GAAP earnings. Using a sample of aggregate GAAP and NIPA earnings over 1950-2016, the main findings are as follows. GAAP and NIPA earnings are in remarkable sync in the early years, with similar means and standard deviations, and with earnings changes correlating at 0.90 during 1950-1983. This close relation substantially deteriorates, however, during the second half of the sample, 1984-2016. While the behavior of NIPA earnings remains roughly the same, the volatility of GAAP earnings increases ten-fold, and the correlation between GAAP and NIPA earnings changes falls to 0.39. Additional tests reveal that the increase in the volatility of GAAP earnings is mostly due to rapid earnings reversals, and especially the effect of large transient items during economic downturns. The frequency and severity of such downturns, however, are roughly the same across the two examined periods. In addition, there is little change in the properties of aggregate cash flow from operations and revenue over time. Overall, this evidence suggests that in addition to changes in the real economy, changing GAAP rules and their application are significant factors in the changing properties of GAAP earnings.
“Rumor Mill or Crowd Wisdom? The Effects of Social Media in the Presence of False Rumors ” (2018) coauthored with Weishi Jia, Cleveland State University and Giulia Redigolo, ESADE Business School and Susan Shu, Boston College
We study whether social media activities distort the price discovery of potentially false information. We focus on merger rumors, where most do not materialize. We find that rumors accompanied by greater twitter activities are less likely to be accurate while eliciting greater market reaction. Among falsely rumored targets, rumor-period tweet volume appears to distort the immediate market reaction and prolong the price discovery. Such behavior is more pronounced among targets with low institutional ownership and rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market’s discovery of potentially false information.