Does the mandatory disclosure of audit information affect analysts' information acquisition?

This paper explores the effect of public information on analysts' information acquisition. By introducing the implementation of the Key Audit Matters (KAM) Disclosure Standards for China's firms cross-listed in Hong Kong in 2017, we present evidence that KAM disclosure reduces analysts' firm visits, which is an important channel of information acquisition. The effect is particularly pronounced for firms with audit partner rotation and low institutional ownership. KAM disclosure by industrial leaders has a spillover effect on analyst visits for peer firms. Disclosure also improves the frequency and quality of analysts' forecasts and firms' information environments, indicating that KAMs are informative and audit information is an important determinant of analysts' information acquisition. Our study reveals the real effect of KAM disclosure on analyst decisions, which may be of interest to regulators concerned with the mandatory disclosure of audit information and capital market efficiency.     

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.     

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.     

Contrarian investment strategies work better for dually-traded stocks: Evidence from Hong Kong

We investigate the profitability of contrarian investment strategies for equities listed on the Hong Kong Stock Exchange (HKEX), which are separated into cross-listed firms and firms listed only in Hong Kong. We also investigate the relationship between stock returns and past trading volume for these equities. We report significantly higher contrarian profits for the period investigated and find that this is a persistent feature of stock returns for cross-listed companies. We also document that contrarian portfolios earn returns as high as 8.01% per month for the dually-traded companies and just 1.83% for only HKEX-listed firms. We find that volume has only a limited ability to explain contrarian profits. All extreme profits disappeared after adjusting for the Fama and French three-factor model.     

Positive spillover effect and audit quality: a study of cancelling China’s dual audit system

The mandatory dual‐audit and dual‐reporting system (DADRS) for mainland Chinese firms cross‐listed in Hong Kong (AH firms) was abolished in 2010. This study quantifies a positive spillover effect from Hong Kong‐based auditors in the DADRS and examines whether and to what extent this affects the audit quality of AH firms. We find that AH firms exposed to a stronger positive spillover effect have higher audit quality, and the loss of this effect drives the declining audit quality of AH firms after they cancelled the DADRS. This study is among the first empirical works on this research topic.     

International variations in ESG disclosure – Do cross-listed companies care more?

We study the quantity of ESG disclosure of 1,963 large-cap companies headquartered in 49 countries. Using the Bloomberg ESG disclosure score as the measure of disclosure quantity, we find that firm characteristics explain most of the variation in firms' ESG disclosure, whereas variations in country factors such as corruption and political rights explain less. We empirically examine and extend the theoretical framework of the liability of foreignness in capital markets. Our results support the notion that cross-listed firms disclose more ESG data than those only listed in their home market to mitigate the liability of foreignness in external capital markets. We also find that an increased percentage of foreign ownership does not augment ESG disclosure. Companies which opt to increase foreign equity ownership at home do not encounter the challenges of foreignness. Our findings suggest that cross-listed status is likely to reduce the importance of country factors for variations in ESG disclosure quantity.     

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.     

Does Cross-Listing Really Enhance Market Efficiency for Stocks Listed in the Home Market? The Perspective of Noise Trading in the Chinese Stock Market

The investor recognition hypothesis and the bonding hypothesis, which help us understand the market quality of stocks that are cross-listed on different stock markets, imply improved market efficiency after cross-listing because of increased investor participation. However, the noise trading of inexperienced investors in the Chinese stock market negatively affects market efficiency. By employing propensity score matching and multivariate regression analysis, we show that the increased individual investor participation actually lowers market efficiency in their home market after cross-listing. This effect is more evident for stocks that were either listed first on the Chinese stock market or listed on the Chinese stock market and the Hong Kong stock exchange (SEHK) on the same date than for stocks that were listed first on the SEHK.     

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.     

Investor legal protection and earnings management: A study of Chinese H-shares and Hong Kong shares

Under the unique “one country, two systems” arrangement, the more stringent investor protection rules in Hong Kong are not enforceable in firms that are incorporated in China but listed on the Hong Kong stock exchange (H-shares). As such, H-shares and other local Hong Kong firms are subject to different investor protection regimes in the same stock market. We find that H-shares are associated with higher earnings management than local Hong Kong firms after controlling for disparity in economic development, types of controlling shareholders and other factors. More importantly, this relationship is weaker after China implemented the Securities Law in 1999. The results are robust after considering the dual-listing status of H-shares and board characteristics. These results provide direct evidence showing the effect of investor legal protection on financial reporting quality.     

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.     

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.     

The impact of country institutional factors on firm disclosure: Cybersecurity disclosures in Chinese cross-listed firms

This paper explores differences in qualitative disclosures between Chinese firms that cross-list in the US and their US domestic counterparts that reflect firm-level cybersecurity awareness. Consistent with the strong regulatory framework in China externalizing cybersecurity and thus reducing the need to disclose individual company cybersecurity awareness, we find that relative to their US domestic counterparts, Chinese cross-listed firms in the US provide less cybersecurity disclosure. However, market valuation of these cybersecurity disclosures is higher for Chinese cross-listed firms, suggesting that the market more favorably views Chinese firm disclosures that communicate a greater level of internalized cybersecurity awareness. We also explore the effect of institutional setting on market valuation of cybersecurity awareness through an event study surrounding the arrest of Huawei’s CFO. This event highlighted cybersecurity weaknesses at Huawei, potentially more generally challenging the effectiveness of Chinese cybersecurity policies. We find a negative stock market reaction to the event, but only for our Chinese sample. These results provide evidence that the market’s view of company cybersecurity awareness is sensitive to changes in perceptions of companies’ institutional setting.     

Overseas listing as a policy tool: Evidence from China’s H-shares

We investigate why the Chinese government chooses to perform share issue privatization (SIP) of its state-owned enterprises (SOEs) in Hong Kong, despite the benefit of facilitating the domestic stock market development if performing SIP in China (Subrahmanyam and Titman, 1999) and the higher cost to list in Hong Kong. We address this issue by arguing that the positive effect of SIPs on the development of the domestic market may have limitations, especially when the domestic market is not well developed and cannot absorb rapid and large-scale SIP activities. To maintain domestic market order, it may be optimal to carry out SIP in overseas markets. Furthermore, by listing shares in developed overseas markets, SOEs from the less developed countries could leverage on the overseas markets’ better accounting, governance, and legal standards. By examining a sample of 92 Chinese firms listed in Hong Kong and the relevant control samples of purely domestically listed Chinese firms during the period of 1993–2006, we find supporting evidence for both arguments.     

Cross‐listings and dividend size and stability: evidence from China

We investigate the relationship between cross‐listings and dividend policy. We find that Chinese cross‐listed firms have lower and more stable dividends than their non‐cross‐listed peers, and that dividends become more stable the longer a company has been cross‐listed. We also find the strength of the cross‐listing/dividend policy relationship varies based on the market where the shares are cross‐listed. The strength of the relationship varies from B‐shares (least strong) to Hong Kong shares (stronger) to American Depository Receipts (strongest). Our results indicate cross‐listings may influence both dividend size and stability, and that this influence can vary by the type of cross‐listing.     

Voluntary disclosure practices by foreign firms cross-listed in the United States

This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.     

Multiple Large Shareholders and Financial Reporting Quality: Evidence from China

In this paper, we examine the effect of multiple large shareholders (MLS) on financial reporting quality. Using a sample of Chinese listed firms over the period 2007–2018, we find that firms with MLS tend to have lower financial reporting quality. Our findings are robust to an array of robustness tests, including controlling for possible omitted variables, a Heckman two-step sample selection model, and a difference-in-differences analysis based on a propensity score matched sample. We further show that the effect of MLS on financial reporting quality is attenuated for firms followed by more analysts, cross-listed on the Hong Kong Stock Exchange, and held by institutional blockholders. Finally, we find that agency problems appear to be the possible underlying mechanisms through which MLS lower financial reporting quality.     

Trading gap in holidays and price transmission: Evidence from cross-listed stocks on the A-share and H-share markets

Chinese public holidays of differing durations celebrated in mainland China and Hong Kong provide a unique trading gap when the A-share markets are closed but the H-share market is not. In this study, we examine how these non-overlapping trading gaps caused by holidays affect price transmission between cross-listed stocks in the A-share and H-share markets. We find that the price movements of H-shares during trading gaps are positively associated with post-holiday drifts in the A-share markets. This positive association is stronger when the length of non-overlapping holidays is longer, and when firms have a weaker connection to Hong Kong market. Moreover, our evidence reveals that investor distraction rather than sentiment during holiday periods may be the reason for this positive association. Finally, our results show that a portfolio trading strategy based on our findings can be profitable, indicating the economic magnitude of our findings.     

Peer R&D disclosure and corporate innovation: Evidence from American depositary receipt firms

In this paper, we examine the effect of peer research and development (R&D) disclosures on corporate innovation. R&D disclosures can generate externalities for related firms, enabling those firms to better infer a project's likely payoffs and thus prioritize projects with higher net present values. We use a sample of foreign firms cross-listed on U.S. exchanges to investigate whether U.S. peer firms experience externalities from the cross-listing firm's R&D disclosures. We find that R&D disclosures by cross-listing firms are associated with greater innovation for industry peers in the U.S. market, especially when product market competition is high. The effect also varies with the home country's legal protection systems, disclosure environments, and accounting reporting rules. Cross-sectional analyses indicate that the externalities are more pronounced in industries or firms that rely more on external financing and firms subject to higher financial constraints; disclosures of higher quality appear to promote innovation by ameliorating financing frictions. Overall, this study provides evidence of R&D disclosure as an industry-wide determinant of innovation, thereby contributing to literature on the real effects of peer disclosures.     

Tunneling and propping up: An analysis of related party transactions by Chinese listed companies

We examine a sample of related party transactions between Chinese publicly listed firms and their controlling shareholders during 2001–2002. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. On balance, there seems to be more tunneling than propping up. Both types of firms have larger state ownership compared to the rest of the Chinese market but firms that are propped up are larger and have larger state ownership than firms subject to tunneling. Propped up firms are more likely to have foreign shareholders and to be cross-listed abroad compared to firms that are subject to tunneling. Propped up firms also tend to have worse operating performance in the fiscal year preceding the announcement of the related party transaction. Finally, we find that related party transactions representing tunneling are accompanied by significantly less information disclosure compared to related party transactions representing propping.