The spillover effect of disclosure rules and materiality thresholds: Evidence from profit warnings issued in Hong Kong market

Dual-listed firms simultaneously follow the relevant rules in their home country and in their cross-listed country. In contrast, other firms only listed in the cross-listed country are only subject to the local regulations. Previous literature has found evidence that cross-listing can improve firms’ information transparency because of more stringent listing rules in the cross-listed country. The existing research, however, has not paid enough attention to the potential influence of dual-listed firms and their home country institutional factors (e.g. unique disclosure policies) on other firms only listed in the cross-listed country (i.e. spillover effect). In the Hong Kong market, Chinese dual-listed firms are under the mandatory profit warning regulation of mainland China, but other firms listed only in Hong Kong only need to follow the voluntary disclosure rule of the Hong Kong Stock Exchange. Such a setting provides us with the opportunity to investigate a spillover effect, i.e. whether these Chinese dual-listed firms influence their peers only listed in Hong Kong to release profit warnings. We find that firms only listed in Hong Kong are more likely to issue profit warnings if their Chinese dual-listed peers have also issued warnings. We further find that this spillover effect increases with the market capitalization of Chinese dual-listed firms and increases with the market share of these firms before they dominate the industry. Lastly, due to an underlying duty to disclose material information in Hong Kong, the spillover effect is weaker for firms with large earnings surprises.     

Momentum strategies and stock returns: Chinese evidence

This paper investigates the profitability of momentum investment strategies for equities listed in the Shanghai Stock Exchange. We also investigate the role of trading volume to examine whether there is any relationship between stock returns and past trading volume for Chinese equities. We find evidence of substantial momentum profits during the period 1995 to 2005 and that momentum is a pervasive feature of stock returns for the market investigated in this paper.Our findings suggest that investors can generate superior returns by investing in strategies unrelated to market movements. We also investigate the potential of past volume to explain momentum profits, and find no strong link between past volume and momentum profits. Our findings also show a strong momentum effect around earnings announcements but the magnitude of these returns is small in relation to the average monthly returns earned in the early months following portfolio formation.     

Trading volume and short-horizon contrarian profits: Evidence from the Malaysian market

We provide evidence on short-term predictability of stock returns on the Malaysian stock market. We examine the relation between return predictability and the level of trading activity. This is particularly relevant in emerging stock markets, where thin trading is more pervasive. We find that the returns from a contrarian portfolio strategy are positively related to the level of trading activity in the securities. Specifically, the contrarian profits on actively and frequently traded securities are significantly higher than that generated from the low trading activity securities. We find that the differential behavior of high- and low-volume securities is not subsumed by the size effect, although for the small firms, the volume–predictability relation is most pronounced. We also suggest that the price patterns may be related to the institutional arrangement in the Malaysian stock market.     

Disruption and stock markets: Evidence from Hong Kong

We examine the impact of disruption on stock markets using the 2019 Hong Kong protests for identification. We find that greater protest intensity corresponds to higher bid–ask spreads, lower trading volume, and greater return volatility for dual-listed Chinese firms’ Hong Kong (H) shares but not their home (A) shares. We also document negative abnormal returns only for these firms’ H-shares around major protest events, which shortly after exhibit reversal. Next, we validate our main findings by documenting similar results using Hong Kong-listed firms only. Overall, we provide new evidence highlighting the impact of protest-induced disruption on financial markets.     

Auditor choice and accruals patterns of cross-listed firms

We examine the association between auditor choice and the accruals patterns of Chinese listed firms that cross-list in Hong Kong. Our evidence suggests that the clients of Big 4 auditors report lower unsigned discretionary accruals relative to the clients of non-Big 4 auditors. Further, we find that cross-listed firms with non-Big 4 auditors are more likely to understate their earnings and experience larger reversals of accruals in the future than cross-listed firms with Big 4 auditors. These findings suggest that Big 4 auditors play a meaningful role in improving earnings quality for cross-listed firms, which helps to explain why cross-listed firms have higher earnings quality than their domestic counterparts, as documented in the previous literature.     

Choice of foreign listing location: Experience of Chinese firms

At the end of October 2003, there were 237 Chinese firms' listings on various stock exchanges outside of Mainland China. Beyond geographical proximity and other obvious explanations of why Chinese firms prefer listing in Hong Kong more than in the United States, we identify two additional benefits of a Hong Kong listing. We find that Chinese firms listed in Hong Kong have a better information environment than those listed solely in the United States. We also find that the Hong Kong-listed firms are less financially constrained, which may be due to their ability to access the Hong Kong capital market for external financing. The results of our study show that different stock markets offer different benefits as a listing venue and the benefits of foreign listing may depend on the choice of listing location.     

Does bonding really bond? Liability of foreignness and cross-listing of Chinese firms on international stock exchanges

This study examines the relationship between cross-listing and firm valuation in the context of Chinese firms cross-listed on major international exchanges, such as the NASDAQ, New York Stock Exchange (NYSE), Hong Kong Main Board, Hong Kong Growth Enterprise Market (GEM), Singapore Stock Exchange, and London Alternative Investment Market (LAIM). Through the lenses of bonding theory and liability of foreignness-based multinational enterprise theories, two sets of alternative hypotheses are developed and tested using panel data over a period of twelve years during 2001–2012. Contrary to the bonding theory, the results reveal that the firms listed in Mainland China recorded better valuation than the firms cross-listed on the international stock exchanges. The more sophisticated corporate governance mechanisms applied in international stock exchanges do not always entail better firm valuation. Institutional distance, cultural distance and the distance in economic freedom between China and the cross-listing location countries interact with governance variables negatively affecting performance of cross-listed firms. The direct negative impact of the three distance variables on the firm valuation is also statistically significant. The outcome of Chinese firms’ cross-listing behaviours appears to contradict the general bonding theory.     

Underpricing of homecoming A-share IPOs by Chinese firms already listed abroad

Many Chinese firms have pursued overseas listings in Hong Kong or US without being first listed in China’s domestic market, mainly due to the regulatory constraints imposed by the Chinese government. Some of them eventually returned to mainland China through an A-share offering to Chinese investors. This unique feature of cross-listed Chinese stocks offers an experiment field to test some of the conventional theories of initial public offerings (IPOs) underpricing. Homebound IPOs are expected to be less underpriced than domestic only IPOs that are not cross-listed because being already listed in a developed market can mitigate the information asymmetry and issue uncertainty associated with their A-share IPOs. Nevertheless, we find that homecoming A-share IPOs are still substantially underpriced, with an average market adjusted first-day return of 96.53 %. Furthermore, their first-day returns are not significantly different from those of domestic only IPOs once firm- and offer-characteristics are controlled. This is in sharp contrast to the lukewarm aftermarket performance experienced in their overseas debuts. The mean market adjusted first-day return is merely 5.35 % in their US ADR offerings and 11.63 % in their Hong Kong H-share IPOs. Overall, our results suggest the importance of local market structures and norms as influential factors of IPO underpricing.     

Tunneling,propping, and expropriation: evidence from connected party transactions in Hong Kong

We examine a sample of connected transactions between Hong Kong listed companies and their controlling shareholders. We address three questions: What types of connected transactions lead to expropriation of minority shareholders? Which firms are more likely to expropriate? Does the market anticipate the expropriation by firms? On average, firms announcing connected transactions earn significant negative excess returns, significantly lower than firms announcing similar arm's length transactions. We find limited evidence that firms undertaking connected transactions trade at discounted valuations prior to the expropriation, suggesting that investors cannot predict expropriation and revalue firms only when expropriation does occur.     

Stock price reaction to profit warnings: the role of time-varying betas

This study investigates the role of time-varying betas, event-induced variance and conditional heteroskedasticity in the estimation of abnormal returns around important news announcements. Our analysis is based on the stock price reaction to profit warnings issued by a sample of firms listed on the Hong Kong Stock Exchange. The standard event study methodology indicates the presence of price reversal patterns following both positive and negative warnings. However, incorporating time-varying betas, event-induced variance and conditional heteroskedasticity in the modelling process results in post-negative-warning price patterns that are consistent with the predictions of the efficient market hypothesis. These adjustments also cause the statistical significance of some post-positive-warning cumulative abnormal returns to disappear and their magnitude to drop to an extent that minor transaction costs would eliminate the profitability of the contrarian strategy.     

Does Trading Volume Contain Information to Predict Stock Returns? Evidence from China's Stock Markets

This paper examines empirical contemporaneous and causal relationships between trading volume, stock returns and return volatility in China's four stock exchanges and across these markets. We find that trading volume does not Granger-cause stock market returns on each of the markets. As for the cross-market causal relationship in China's stock markets, there is evidence of a feedback relationship in returns between Shanghai A and Shenzhen B stocks, and between Shanghai B and Shenzhen B stocks. Shanghai B return helps predict the return of Shenzhen A stocks. Shanghai A volume Granger-causes return of Shenzhen B. Shenzhen B volume helps predict the return of Shanghai B stocks. This paper also investigates the causal relationship among these three variables between China's stock markets and the US stock market and between China and Hong Kong. We find that US return helps predict returns of Shanghai A and Shanghai B stocks. US and Hong Kong volumes do not Granger-cause either return or volatility in China's stock markets. In short, information contained in returns, volatility, and volume from financial markets in the US and Hong Kong has very weak predictive power for Chinese financial market variables.     

How cross-listings from an emerging economy affect the host market?

We study the impact of mainland Chinese listings in Hong Kong on the quality and development of the Hong Kong equity market. At the macro-level, we find that the increasing presence of mainland Chinese stocks in Hong Kong increases the size, trading volume, and its link with the China and world markets but reduces the overall volatility of the Hong Kong stock market. At the firm level, the increase affects the market quality, resulting in lower turnover rate, higher Amihud illiquidity ratio, and higher spread for non-mainland Chinese firms. Furthermore, such an increase in presence causes Hong Kong stocks to move in a more synchronized way and reduces these firms investment sensitivity to stock price movement, implying deterioration in the information environment. As a whole, the increasing presence of Chinese companies in Hong Kong brings benefits to the Hong Kong market, yet not without cost.     

Does Cross-Listing Benefit the Shareholders? Evidence from Companies in the GCC Countries?

The goal of this study is to estimate the impact of cross-listing on stock returns, on liquidity, and on risk. A sample of 24 companies from the Gulf Cooperation Council countries which cross-listed their stocks in a foreign market over the period 2000–2010 were chosen for study. An event study estimating abnormal returns related to the cross-listing event as well as parametric and nonparametric tests find that there is (1) a significant abnormal return of about 6 % that lasts until 6 days after the cross-listing day and starts fading away thereafter (2) a significant increase in liquidity during the event period for most firms and (3) on average a decrease in risk. Our results also suggest that cross-listing had a small impact on market risk measured by the average beta but led to a decrease in the total risk measured by standard deviation of returns and a decrease in the potential loss measured by the average value at risk at the 5 % confidence. Additionally, an analysis based on the foreign market of secondary listing suggests that the benefit of cross-listing varies with the market of secondary listing. The positive abnormal return is more obvious for companies that cross-listed in Kuwait, Bahrain, and London. The most obvious increase in liquidity is for firms that cross-listed in London or in Bahrain and the biggest decrease in risk is for companies that cross-listed in London. We conclude overall that cross-listing in London benefits the shareholders the most as it leads to positive significant abnormal returns, an increase in liquidity, and a decrease in risk.     

The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US

This paper uses a natural experiment to measure market response to the adoption of the Sarbanes–Oxley Act (ʽʽSOX"). Because SOX applies to all US public companies, US-based studies have difficulty separating the effects of contemporaneous events. However, controlled analysis is available: SOX applies to some cross-listed firms (those listed on level 2 or 3), but not to others (listed on level 1 or 4). By comparing reactions of SOX-exposed foreign firms to reactions of otherwise similar SOX-unexposed foreign firms, we can test investor beliefs about the costs and benefits of SOX in a way that is not cleanly available for US-based studies. We find that stock prices of foreign firms subject to SOX declined (increased) significantly, compared to cross-listed firms not subject to SOX and to non-cross-listed firms, during key announcements indicating that SOX would (would not) fully apply to cross-listed issuers. In cross-sectional tests, high-disclosing firms and firms from high-disclosing countries experienced the strongest declines, while faster-growing companies experienced weaker declines. This evidence is consistent with the view that investors expected the Sarbanes–Oxley Act to have a net negative effect on cross-listed foreign companies, with high-disclosing and low-growth companies suffering larger net costs, and faster-growing companies suffering smaller costs, particularly when they are located in poorly governed countries.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

跨地上市公司具有较低的权益资本成本吗?——基于“法与金融”的视角

根据法与金融理论,严格的投资者保护制度有助于降低公司的权益资本成本,本文以赴中国香港跨地上市后返回中国大陆发行A股的公司为研究对象,检验其是否因受制于更为严格的投资者保护制度而具有较低的权益资本成本。研究结果表明,在A股市场上,赴港跨地上市公司比其他公司的权益资本成本更低,跨地上市对权益资本成本具有降低作用,且这种降低作用与香港较为严格的投资者保护制度有关。     

Corporate governance and market segmentation: evidence from the price difference between Chinese A and H shares

This paper empirically examines whether the price difference between Chinese A shares, which are traded in the domestic market, and their matching H shares, which are traded in the Hong Kong market, can be explained by firms’ corporate governance characteristics. We find that the A- to H-share price premiums are higher for firms in which the controlling shareholders and corporate insiders have greater potential to expropriate wealth from outside investors. This result is robust when we use a variety of corporate governance variables specific to listed Chinese companies to explain the A-share price premiums and when we control for differences between domestic and foreign investors in required returns, degree of speculative trading, liquidity, information, and demand elasticity. Our findings highlight the important role of corporate governance in explaining the price difference in segmented stock markets.     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

Family control and idiosyncratic volatility: Evidence from listed firms in Hong Kong

Family control of listed firms in Hong Kong is substantively different and materially higher than in the US which could offer different insights into the effects of family ownership on corporate transparency. Using a sample of listed Hong Kong firms and idiosyncratic volatility as a proxy for firm-specific stock price informativeness, we find that family firms exhibit higher idiosyncratic volatility of stock prices than similar non-family firms. Further, the relation between family ownership and idiosyncratic volatility is weaker for firms with higher leverage but stronger in periods before equity issues. Additionally, we find that family firms disclose more information, particularly related to operations, than nonfamily firms in annual reports. These results are consistent with the argument that family firms disclose more information than their nonfamily peers to reassure skeptical outside investors that they are not expropriating their investment.     

The bivariate GARCH approach to investigating the relation between stock returns,trading volume,and return volatility

We use a bivariate GJR-GARCH model to investigate simultaneously the contemporaneous and causal relations between trading volume and stock returns and the causal relation between trading volume and return volatility in a one-step estimation procedure, which leads to the more efficient estimates and is more consistent with finance theory. We apply our approach to ten Asian stock markets: Hong Kong, Japan, Korea, Singapore, Taiwan, China, Indonesia, Malaysia, the Philippines, and Thailand. Our major findings are as follows. First, the contemporaneous relation between stock returns and trading volume and the causal relation from stock returns and trading volume are significant and robust across all sample stock markets. Second, there is a positive bi-directional causality between stock returns and trading volume in Taiwan and China and that between trading volume and return volatility in Japan, Korea, Singapore, and Taiwan. Third, there exists a positive contemporaneous relation between trading volume and return volatility in Hong Kong, Korea, Singapore, China, Indonesia, and Thailand, but a negative one in Japan and Taiwan. Fourth, we find a significant asymmetric effect on return and volume volatilities in all sample countries and in Korea and Thailand, respectively.