How are political connections valued in China? Evidence from market reaction to CEO succession

Using a sample of listed Chinese firms between 2000 and 2010, the paper analyzes the stock market reaction to CEO succession. We document significantly positive cumulative abnormal returns when CEO succession is accompanied with increased political connections. We also show that the market reaction to political connections is significantly stronger for external successors and for poorly performing firms, while it is significantly weaker for firms in high-tech industries and firms located in more developed regions. Finally we find that political connections are valued significantly less in state owned enterprises than in privately controlled firms. Our findings suggest that Chinese investors do value political connections, and such valuation is conditioned by successor origin, prior firm performance, industry, region, and ownership structure.     

What do private firms do after losing political capital? Evidence from China

This paper studies the real effects of losing political capital by exploiting exogenous shocks from the sudden deaths of politically connected independent directors in Chinese firms. Using difference-in-differences estimation, we find that upon losing political capital, a firm boosts its physical capital expenditures by 28%, or 2.93 percentage points, which is an order of magnitude larger than estimates from the United States. The loss of political capital leads to a decrease in the economic benefits a firm can obtain, in terms of bank loans, tax benefits, and government subsidies, and an increase in its production costs. Our evidence suggests that private firms use physical capital investment as a substitute for political capital.     

Do financial analysts compel firms to make accounting decisions? Evidence from goodwill impairments

Review of Accounting Studies - This paper examines whether financial analysts’ presence compels recognition of goodwill impairments. Analysts could impact managers’ impairment decisions...     

How do agency problems affect firm value? – Evidence from China

Using newly available data, we examine the effects of the agency conflicts between ultimate controlling shareholders and minority shareholders in China's publicly listed firms between 2004 and 2009. We measure the severity of these agency problems by the excess control rights of the ultimate controlling shareholders. We show that higher excess control rights are associated with significantly lower firm value. We identify two channels through which the excess control rights affect firm value: (1) related-party loan guarantees, and (2) legal violations. We find that higher excess control rights are associated with significantly larger amounts of related-party loan guarantees (scaled by assets) for non-state and private firms, but not for state-owned firms. We find that, for non-state and private firms, the excess controls rights are associated with (1) significantly higher probability that the firm will issue value-destroying related-party loan guarantees and (2) significantly worse stock market reactions to the announcements of related-party loan guarantees. However, these results do not hold for state-owned firms. We also find that higher excess control rights are associated with significantly higher probability, frequency and severity of legal violations for non-state and private firms, but not for state-owned firms.     

How do firms react to the prohibition of long-lived asset impairment reversals? Evidence from China

New Chinese Accounting Standards (CAS) released on February 15, 2006, prohibit the reversal of long-lived asset impairments, effective for reporting periods beginning January 1, 2007 and later. This development in the Chinese market provides a unique experimental setting to directly investigate how firms react to the ban on previously-allowed long-lived asset impairment reversals, especially firms that use impairment charges as “cookie jar reserves.” By contrasting write-off recognition and reversal across the pre- and post- new CAS announcement regimes, we show that firms listed on Chinese stock exchanges recognized less impairment charges during the “transition” period—after announcement of the new standard and before the effective date—than in pre-announcement periods. Meanwhile, firms with substantial previous write-downs reversed more impairment charges to achieve their earnings targets in the transition period. The new CAS also constraints “big bath” reporting by loss firms. As US GAAP prohibits these reversals and IFRS allows them, our empirical evidence depicts firms’ possible reactions in other regimes contemplating doing away with such reversals.     

How do stocks react to extreme market events? Evidence from Brazil

This paper studies the short-term (21 trading days) behavior of Brazilian stocks in the event of extreme movements in the Brazilian market index. Using cumulative abnormal returns, we find that stocks tend to overreact after both positive and negative events, as well as global and domestic shocks. Interestingly, this behavior is particularly intense when the events are not clustered. This counterintuitive finding can be explained by the Contrast Hypothesis, since shocks during calm circumstances can be viewed by investors as more surprising. In fact, when we split events according to market volatility, we document a stronger overreaction when volatility is low.     

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

This study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&A profitability.     

Are non‐audit services associated with firm value? Evidence from financial information system‐related services

The purchase of non‐audit services from incumbent auditors has generated considerable attention. Surprisingly, limited empirical evidence exists on the association of non‐audit services with firm value. Focusing on services related to financial information system (FIS), we find that the market value of equity is greater for firms that purchase FIS‐related services from their incumbent auditors relative to firms that do not. The levels of FIS fees are also positively related to firm value after controlling for total other fees, or total other non‐audit fees. Hence, despite the negative perception associated with non‐audit services, investors regard FIS‐related services as value‐adding activities.     

How do investors underreact to seasoned equity offerings? Evidence from Taiwan's corporate governance evaluation

This study examines whether long-run stock underperformance following seasoned equity offerings (SEOs) differs with a firm's corporate governance practices. We address this issue by using Taiwan's official annual corporate governance evaluation to represent the quality of firm governance. Results show that firms with better governance exhibit positive long-run post-SEO stock performance, whereas those with poor governance continue to be underperforming after SEOs. Our findings reveal that investor’ underreaction to SEOs varies with the levels of corporate governance.     

Do Capital Flows Matter to Stock and House Prices? Evidence from China

This article analyzes the impacts of foreign direct investment (FDI) and short-term capital flows, otherwise known as hot money, on stock and house prices in China. Empirical results, estimated using the local projections approach, reveal that a positive hot money net inflow shock significantly increases stock and house prices and the impacts persist for up to 1–2 months, while a positive FDI net inflow shock contributes significantly to lagged house price appreciation but has no effect on stock prices. This study also identifies negative pass-through effects of FDI net inflows on hot money net inflows and positive pass-through effects of stock prices on house prices.     

How do different performance measures affect managerial time orientation? Empirical evidence from sales managers in the oil and gas industry

This study investigates the relative effect of performance measures on managerial time orientation. We collect survey data on the actual time allocation of sales managers for tasks that affect financial performance on the short-, medium-, and long-term horizons. In addition, we obtain survey data on the specific metrics used by an oil and gas firm and classify them into three groups: traditional accounting (gross margin and budgeted costs), nonfinancial (market share and sales volume), and accounting returns (economic value added — EVA). Based on partial least-squares analysis, our results suggest that, in our setting, both nonfinancial and accounting return measures can supplement traditional accounting metrics to mitigate potential short-term orientation by inducing sales managers to consider mainly not only sales tasks but also investing tasks, which will affect the firm results more than a quarter ahead. In addition, our results imply that accounting return metrics are not better than nonfinancial measures in inducing a longer-term orientation in our research setting.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”     

How quickly do investors react to analyst reports? Evidence from reports released outside trading hours

This study analyzes whether the publication timing of reports released outside trading hours affects subsequent price drift to determine if investors respond immediately to analyst reports. Significant price drifts are observed for revisions in target prices, especially when a report is released within two hours before the market opens. Furthermore, the influence of publication timing is crucial when investors must process information about earnings announcements and multiple reports. Conversely, the influence is irrelevant to the visibility of reports (e.g., broker size and star analyst status). The identified limitation of investors' response is attributable to their limited information-processing capacity.     

Are both managerial morality and talent important to firm performance? Evidence from Chinese public firms

Morality and talent are two important factors to consider when selecting managers. This study examines the relation among managerial morality, talent, and firm performance by manually collecting morality data in a sample of non-financial Chinese public firms during 2008–2018. We find that both managerial morality and talent are important to firm performance. In particular, managerial morality is positively associated with firm performance regardless of ownership or legal environment, but managerial talent is associated with better firm performance only in non-state-owned enterprises and in a strong legal environment. On the other hand, managerial talent cannot improve or may even harm firm performance when managerial morality is low, but managerial talent can improve firm performance when managerial morality is high.     

How do firms overcome financial constraint anxiety to survive in the market? Evidence from large manufacturing data

In so far as financial constraints affect firm performance, they may expose firms to survival risks. Using a large panel of Chinese firms observed from 1998 to 2013, I analyse the causal relationship between firm survival and financial constraints and how firm performance impacts this relationship. I find that financial constraints play an important role in influencing firm survival. Moreover, financial constraints are the mechanism underlying the relationship between firm performance and survival, and productive and profitable firms can alleviate financial constraints. Privately owned and foreign-owned firms with more leverage face more difficulties surviving in the market; however, state-owned enterprises with more leverage can ease their financial limitations. Finally, I provide evidence that high dependency and high coverage ratios can facilitate firms' survival through alleviating financial constraints.     

“How using derivative instruments and purposes affects performance of Islamic banks? Evidence from CAMELS approach”

The increase of the use of derivative instruments by Islamic banks for different purposes motivate us to conduct this study. This work has twice objective: firstly, to investigate the effect of each derivative instrument (forwards, futures, swaps or options) on the performance of Islamic banks, and secondly to examine the effect of each derivative purpose (hedging or trading) on the performance of Islamic banks.To reach this end, dynamic panel data econometrics with GMM system are conducted on 32 Islamic banks during the period from 2007 to 2017. The CAMELS approach is used to measure the performance of sample banks.Statistics on sample banks reveal that Islamic banks are substantial users of derivatives, prefer using derivatives for trading purpose than for hedging purpose, and have acceptable level of performance.The main results confirm that using options affects positively and moderately the performance of sample banks. In the same way, we find that swaps have positive and weak impact on the performance of sample banks. However, the results reveal that using forwards decrease the performance of sample banks. Finally, we find that futures have ambiguous and marginal effect on the performance of sample banks.As regards derivative purposes, results do not see which purpose mainly motivate the Islamic banks to invest in the derivatives market.As theoretical implication, we suggest for further studies to explore more the differences between using derivatives by Islamic banks for trading and hedging purpose.Finally, as practical implications, we recommend for managers of Islamic banks to enlarge their use of options and swaps, to supervise their use of forwards and to stop their use of futures.     

Does control‐ownership divergence impair market liquidity in an emerging market? Evidence from China

This paper examines how institutional characteristics of emerging economies influence the effect of control‐ownership divergence on market liquidity. We find that the divergence is negatively associated with liquidity and that this negative relationship is more pronounced in firms with more severe agency problems and information asymmetry. We argue that in an emerging market, the negative effect of the divergence on liquidity is worsened by state ownership and poorer shareholder protection, both of which result in more severe agency conflicts; we also find, however, that this effect is alleviated by the NTS reform, which aligns the interest of different shareholders.     

Why do firms save cash from cash flows? Evidence from firm‐level estimation of cash–cash flow sensitivities

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.     

How do taxpayers respond to tax subsidy for long-term savings? Evidence from Thailand’s tax return data

International Tax and Public Finance - This paper uses a panel of personal income tax return data for the population of Thai tax filers to examine how individuals respond to tax subsidy for...