Which Information Channel Reduces Mispricing the Most? 

-- A Comparison among Mandatory Disclosure, Voluntary Disclosure, and Information Intermediaries (Dissertation)


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, forthcoming

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.

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. 

Information in CEOs’ Facial Expressions: A First Look with Narasimhan Jegadeesh, Emory University and Joonki Noh, Case Western Reserve University

We investigate whether CEOs’ facial expressions during their CNBC and Bloomberg interviews convey value-relevant information to financial markets. We employ a commercial software to quantify CEOs’ basic emotions revealed through their facial expressions. We find that negative emotions are correlated with abnormal stock returns and trading volume over the next one to two days after air dates. We also find that positive emotions are associated with firms’ cumulative abnormal returns over next 180 trading days, while negative emotions are associated with firms’ one- and two-quarter(s)-ahead earnings. Taken together, our evidence suggests that CEOs’ emotions captured by their facial expressions in the televised interviews can convey value-relevant information about their firms to markets, and investors react to them.

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.