THE CHINESE SECURITIES REGULATORY COMMISSION AND THE REGULATION OF CAPITAL MARKETS IN CHINA

The rapid development of China’s capital markets necessitated the establishment of a regulatory agency that would administer market operations and protect investors’ interests. The Chinese Securities Regulatory Commission (CSRC) was established in 1992 for this purpose. In 1999, the Chinese Securities Law recognized the CSRC as the sole regulatory agency responsible for regulating securities instruments and markets in China. Although the CSRC is considered instrumental to Chinese accounting reforms and capital market development, it has remained relatively unexamined in the accounting literature. This paper contributes to the accounting literature by providing insight into an important regulatory agency that has enormous impact on the economic development of China. Specifically, this paper discusses the CSRC’s establishment and development, its regulatory efforts, and its achievements and shortcomings in its efforts to regulate China’s emerging capital markets. The underlying factors that explain some of the CSRC’s regulatory actions are also analyzed by discussing several cases involving fraudulent financial reporting.     

THE CHOICE OF TRADING VENUE AND RELATIVE PRICE IMPACT OF INSTITUTIONAL TRADING: ADRs VERSUS THE UNDERLYING SECURITIES IN THEIR LOCAL MARKETS

We address two important themes associated with institutions’ trading in foreign markets: (1) the choice of trading venues (between a company's listing in its home market and that in the United States as an American Depositary Receipt [ADR]) and (2) the comparison of trading costs across the two venues. We identify institutional trading in both venues using proprietary institutional trading data. Overall, our research underscores the intuition that the choice of institutional trading in a stock's local market or as an ADR is a complex process that embodies variables that measure the relative adverse selection and liquidity at order, stock, and country levels. Institutions route a higher percentage of trades to more liquid markets, and these trades are associated with higher cumulative abnormal returns. We also find that institutional trading costs are generally lower for trading cross‐listed stocks on home exchanges even after controlling for selection bias.     

SEGMENTATION OF THE A‐ AND B‐SHARE CHINESE EQUITY MARKETS

In this study we use the latent variable asset pricing model to examine the pricing of A and B shares in the Chinese stock markets. The hypothesis tested is whether markets for the A and the B shares of the same companies are segmented. We document only one latent variable in both A‐ and B‐share markets. However, the latent risk premiums for the A and B shares are only weakly correlated, indicating the two‐tier markets are loosely related. The weak correlation implies the two markets reflect different fundamental forces. Additional analysis demonstrates that the Shanghai market responds to the Shenzhen market rather than the other way around.     

CONVEXITY,MAGNIFICATION, AND TRANSLATION: THE EFFECT OF MANAGERIAL OPTION‐BASED COMPENSATION ON CORPORATE CASH HOLDINGS

Using the distinctions among the convexity, magnification, and translation effects, we identify the pertinent parameters and examine empirically the relation between cash holdings and option‐based managerial compensation. We show that changes in delta reduce the effects of magnification and convexity on managerial risk aversion. We also provide evidence that there is a negative relation between the option‐based incentives delta and vega and cash holdings. These results are robust when incentives are extended to include all executive board members and when the sample is broken down according to different risk characteristics.     

INSTITUTIONAL TRADING AND OPENING PRICE BEHAVIOR: EVIDENCE FROM A FAST‐EMERGING MARKET

Using daily and intraday data, we investigate the cross‐sectional relation between stock prices and institutional trading in the Taiwan stock market. Consistent with the investigative herding hypothesis, we find that institutional herding exists because of institutional positive feedback trading behavior rather than following trades made by other institutions, as suggested by the information cascade hypothesis. Moreover, the positive correlation between institutional trade imbalance and stock returns mainly comes from institutional positive feedback trading. The institutional trading decisions rely on returns measured not only over the lagged trading day but also over the opening session during the same day.     

DIFFERENTIAL RISK‐TAKING IMPLICATIONS OF PERFORMANCE INCENTIVES FROM STOCK AND STOCK OPTION HOLDINGS

We study the risk‐taking implications of managerial pay‐for‐performance incentives (delta) arising from stock and stock options separately in the United States between 1992 and 2017. The current literature assumes that each unit of delta has an equal incentive effect on firm performance. Instead, we show that the risk‐reducing effect of performance incentives is more pronounced for executives whose delta comes mostly from stock holdings relative to option holdings. Accordingly, we propose a new measure that takes into account the magnitude of delta from option holdings relative to delta from stock holdings (source ratio). Our results show that risk taking increases as this ratio increases.     

THE ENERGY MLP GOES INSTITUTIONAL: IMPLICATIONS FOR STRATEGY AND GOVERNANCE

Master limited partnerships (MLPs) were popular in the 1980s because of the favorable tax treatment of their cash distributions. But since the Revenue Act of 1987, which imited the lines of business and income sources for which this tax treatment was available, virtually all remaining public MLPs have been in natural resource businesses.
Institutional investors have traditionally avoided investing in master limited partnerships because any cash distributions must be treated as unrelated business income, creating an immediate tax liability. But in an innovative underwriting in May 001, Goldman Sachs offered shares in a limited liability company that would pay stock dividends equivalent to the cash distributions on its proportional ownership interest in Kinder Morgan Energy Partners, a pipeline operator. In effect, this structure allows tax-exempt investors (institutions) to own an interest in Kinder Morgan Energy Partners without triggering unrelated business taxable income.
An interesting aspect of this recent development is that while the MLP was originally viewed as a vehicle for slow-growth firms to distribute cash and wind down operations, the "institutional" MLP could be used to facilitate growth by attracting needed investment to businesses currently housed in MLP form—typically energy transportation and storage infrastructure businesses (so-called "mid-stream" energy assets). The new structure raises some potential corporate governance challenges in that it is highly complex and offers investors only limited control rights. But the authors' conclusion is that the institutional MLP is likely to be a successful financing innovation whose tax-favored status and extensive public disclosure will outweigh any governance concerns.     

THE EFFECT OF THE TRADING SYSTEM ON IPO UNDERPRICING: EVIDENCE FROM THE 1997 ORDER‐HANDLING RULES

We use a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order‐handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects initial public offering (IPO) underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold NASDAQ IPOs, suggesting that when liquidity is lowest, changes in market liquidity display a negative relation to initial returns.     

TAX-LOSS SELLING,INSTITUTIONAL INVESTORS,AND THE JANUARY EFFECT: A NOTE

In this note we test the hypothesis that trading by tax-motivated individual investors is responsible for the January effect. We examine the ownership structure of a large sample of firms over a four-year period and find that the small firms that usually exhibit high January returns have low institutional ownership. After controlling for firm size, we still find that institutional ownership is significantly related to January abnormal returns. These results suggest that one reason the January effect may concentrate in small firms is because these firms are held by tax-motivated individual investors.     

INSTITUTIONAL TRADING AND SECURITY PRICES: THE CASE OF CHANGES IN THE COMPOSITION OF THE S&P 500 INDEX

This paper examines the common stock valuation and liquidity effects of firms being added to and deleted from the S&P 500 Index. Three potential pricing and trading volume hypotheses are discussed and tested—an Information Content Hypothesis (ICH), a Price Pressure Hypothesis (PPH), and a Liquidity Cost Hypothesis (LCH). The empirical findings indicate that firms being added to (deleted from) the S&P 500 Index over the 1977 to 1983 period experience positive (negative) abnormal common stock returns on the day following the addition. An analysis of common stock liquidity around additions to the Index reveals that while relative trading activity increases in the month of addition, it actually declines in subsequent months. The valuation and liquidity results are consistent to some degree with both the PPH and the LCH and are most likely due to index fund managers adjusting their holdings to reflect changes in the Index.     

Cross‐sectional determinants of post‐IPO stock performance: evidence from China

This paper examines the cross‐sectional determinants of post‐IPO long‐term stock returns in China. We document that the aftermarket P/E ratio has the most robust negative association with post‐IPO stock returns. The negative relation indicates that the market corrects the aftermarket overvaluation of IPO firms in the long run. Underwriter reputation has a positive effect on post‐IPO stock returns, while board size has a negative impact, consistent with the views that reputable underwriters mitigate the information asymmetry in IPO pricing and over‐sized boards reduce the effectiveness of corporate governance. However, we find little evidence indicating that the equity ownership structure is significantly associated with post‐IPO stock returns.     

FINANCIAL DISCLOSURE REGULATION AND INDIRECT ECONOMIC CONSEQUENCES: AN ANALYSIS OF THE SALES DISCLOSURE REQUIREMENT OF THE 1934 SECURITIES AND EXCHANGE ACT

This study analyzes an indirect economic consequence of accounting regdations - that of inducing inter-firm wealth transfers. This analysis is applied to the sales disclosure requirement of the 1934 Securities and Exchange Act. Using daily returns to the New York Stock Exchange and over-the-counter stocks, it was found that when Congressional deliberations favored passage of the 1934 Act, mturns to h s which had previously disclosed sales significantly exceeded those of non-sales-disclosing firms. This result is consistent with a wealth transfer having occurred from the latter to the former through an unexpected shift in competitive advantage.