The effect of the split share structure reform on working capital management of Chinese companies

Before the introduction of the Split Share Structure Reform (SSSR) of 2005, a dual stock system characterized Chinese-listed firms. The states owned non-tradable shares and private owners held tradable shares. The dual system generated agency problems because state owners enjoyed all the rights reserved for tradable shares but escaped the stock market risk faced by non-state shareholders. Because executives of state-owned enterprises (SOEs) received rewards based on the book value of assets rather than the market price of shares, they had no incentive to maximize the share price. The SSSR led to the conversion of non-tradable shares to tradable shares, with two major implications: (1) the interests of government and private owners are now more closely aligned and (2) government agents of SOEs are now rewarded and punished based on a firm's market performance. Thus, the expectation is that government agents turn their attention to improving a firm's market performance rather than its book value during the post-reform era. We examine the impact of the SSSR on Chinese firms' investments in working capital. Based on 511 manufacturing firms between 2003 and 2011, we find that the SSSR is associated with significant reductions in working capital investments during the post-reform period. The reduced investment in working capital is associated with improved market performance of these firms.     

Retail investor attention and firms' idiosyncratic risk: Evidence from China

This paper investigates retail investor attention to firms' idiosyncratic risk in China. We use the Baidu search index as a proxy for attention and test its effect on Chinese firms' idiosyncratic risk from 2011 to 2017. Our empirical results suggest investor attention has a positive impact on firms' idiosyncratic risk. This effect is robust to possible endogeneity issues and alternative channels of effects and is stronger for small firms. Additional analysis finds that the effect of our proxy for attention on firms' idiosyncratic risk is stronger than investor sentiment and traditional attention proxies, including announcements, media news, analyst ratings, and brokerage reports. These findings provide evidence of retail investor attention could increase firms' contemporaneous idiosyncratic risk, and decrease firms' subsequent period risk.     

What drives the valuation premium in IPOs versus acquisitions? An empirical analysis

Using a hand-collected data set of private firm acquisitions and IPOs, this paper develops the first empirical analysis in the literature of the “IPO valuation premium puzzle,” which refers to a situation where many private firms choose to be acquired rather than to go public at higher valuations. We also test several new hypotheses regarding a private firm's choice between IPOs and acquisitions. Our analysis of private firm valuations in IPOs and acquisitions indicates that IPO valuation premia disappear for larger VC backed firms after controlling for various observable factors affecting a firm's propensity to choose IPOs over acquisitions. Further, after controlling for the long-run component of the expected payoff to firm insiders from an IPO exit, we find that the IPO valuation premium vanishes even for larger non-VC backed firms and shrinks substantially for smaller firms as well. Our Heckman-style treatment effects regression analysis demonstrates that the above results are robust to controlling for the selection of exit mechanism by firm insiders based on unobservables. Our findings on private firms' choice between IPOs and acquisitions can be summarized as follows. First, firms operating in industries characterized by the absence of a dominant market player (and therefore more viable against product market competition) are more likely to go public rather than to be acquired. Second, more capital intensive firms, those operating in industries characterized by greater private benefits of control, and those which are harder to value by IPO market investors are more likely to go public rather than to be acquired. Third, the likelihood of an IPO over an acquisition is greater for venture backed firms and those characterized by higher pre-exit sales growth.     

Private and Public Merger Waves

We document that public firms participate more than private firms as buyers and sellers of assets in merger waves and their participation is affected more by credit spreads and aggregate market valuation. Public firm acquisitions realize higher gains in productivity, particularly for on‐the‐wave acquisitions and when the acquirer's stock is liquid and highly valued. Our results are not driven solely by public firms' better access to capital. Using productivity data from early in the firm's life, we find that better private firms subsequently select to become public. Initial size and productivity predict asset purchases and sales 10 and more years later.     

Strategic interaction of capital structures: A spatial econometric approach

In this article, we suggest an alternative setting for empirically examining firms' strategic interaction in choosing their capital structure. Following Lyandres (2006)'s theoretical model, this article explicitly focuses on how the competitive interaction in output market may induce a firm to take the rival firms' capital structure into account in deciding its own capital structure. It is also shown that the direction of such strategic response depends on whether the output market competition is in strategic substitutes or in strategic complements. A spatial regression model is introduced to test the relationship between firms' financial choices and their product market strategies. The empirical evidence suggests that inclusion of the spatially lagged term of a firm's leverage could be empirically significant in explaining the optimal choice of a firm's financial structure.     

Rational IPO Waves

We argue that the number of firms going public changes over time in response to time variation in market conditions. We develop a model of optimal initial public offering (IPO) timing in which IPO waves are caused by declines in expected market return, increases in expected aggregate profitability, or increases in prior uncertainty about the average future profitability of IPOs. We test and find support for the model's empirical predictions. For example, we find that IPO waves tend to be preceded by high market returns and followed by low market returns.     

The Valuation of Assets under Moral Hazard

The design of managerial incentive contracts is examined in a setting in which economic agents are risk averse, and the actions of managers can affect asset returns which contain both systematic and idiosyncratic risks. It is shown that in the absence of moral hazard, owners of assets will insure managers against idiosyncratic risks, but with moral hazard, contracts will depend on both systematic and idiosyncratic risks. The traditional recommendation of asset pricing models, namely, to focus only on systematic risks, is thus proved to be valid only when there is no moral hazard. The major empirically testable predictions of the model are (1) managerial incentive contracts will generally depend on systematic as well as idiosyncratic risks, (2) idiosyncratic risks will generally be important in investment decisions, (3) the managers of firms with relatively high levels of idiosyncratic risks will have compensations that are less dependent on their firms' excess returns, and (4) the compensations of managers of larger firms will be relatively more dependent on the excess returns of their firms.     

Internal control effectiveness,textual risk disclosure,and their usefulness: U.S. evidence

This paper investigates the impact of internal control effectiveness (ICE) on the level of textual risk disclosure (TRD; including aggregate risk disclosure and its tone of good news and bad news about risk). Our findings suggest that firms with an ineffective internal control system exhibit significantly lower levels of TRD than firms with effective internal controls. Besides, we show a significant change in TRD behavior provided by managers of firms with recurrent ineffective internal controls. Pursuant to agency theory, this behavior change is prompted to reduce the expected public uncertainty and agency problems. We also investigate the usefulness of ICE reporting and TRD to the market. Results suggest that firms reporting ineffective internal controls are likely to have higher investor-perceived risk than firms reporting effective internal controls. Furthermore, TRD improves firms' market liquidity, and such improvement is principally driven by good news rather than bad news about risk. Collectively, our results fill an apparent gap in the literature on the importance of ICE, as well as the usefulness of the external auditor's attestation on a firm's internal controls and management TRD.     

Suppliers' listing status and trade credit provision

We show that public suppliers extend more trade credit than their private counterparts. The impact of stock market listing on accounts receivable is more pronounced among firms that are financially more constrained or more reliant on external finance. Moreover, firms significantly increase their trade credit provision following equity issuances in stock exchanges. These results are consistent with the argument that stock market listing status improves firms' access to external sources of financing, especially equity capital, thus enhancing their ability to offer more trade credit to customers.