Showing papers in "China journal of accounting research in 2016"
TL;DR: In this paper, the authors examined the effects that earnings management has on expense stickiness and investigated the interaction effects of earnings management and corporate governance on the effect of cost stickiness.
Abstract: Cost and expense stickiness is an important issue in accounting and economics research, and the literature has shown that cost stickiness cannot be separated from managers’ motivations. In this paper, we examine the effects that earnings management has on expense stickiness. Defining small positive profits or small earnings increases as earnings management, we observe significant expense stickiness in the non-earnings-management sub-sample, compared with the earnings-management sub-sample. When we divide expenses into R&D, advertising and other general expenses, we find that managers control expenses mainly by decreasing general expenses. We further examine corporate governance’s effect on expense stickiness. Using factor analysis, we extract eight main factors and find that good corporate governance reduces expense stickiness. Finally, we investigate the interaction effects of earnings management and corporate governance on expense stickiness. The empirical results show that good corporate governance can further reduce cost stickiness, although its effect is not as strong as that of earnings management.
61 citations
TL;DR: Wang et al. as discussed by the authors empirically examined the effect of auditors' work stress on audit quality using a sample of Chinese A-share listed companies and their signature auditors from 2009 to 2013.
Abstract: With reference to the Job Demands–Control Model, we empirically examine the effect of auditors’ work stress on audit quality using a sample of Chinese A-share listed companies and their signature auditors from 2009 to 2013. The results show that (1) there is generally no pervasive deterioration in audit quality resulting from auditors’ work stress; (2) there is a significant negative association between work stress and audit quality in the initial audits of new clients; and (3) the perception of work stress depends on auditors’ individual characteristics. Auditors from international audit firms and those in the role of partner respond more strongly to work stress than industry experts. Auditors tend to react more intensively when dealing with state-owned companies. We suggest that audit firms attach more importance to auditors’ work stress and rationalize their allocation of audit resources to ensure high audit quality.
57 citations
TL;DR: In this paper, the authors examined the relationship between accounting information quality and capital investment choice from the perspective of accounting information's governance function and found that the higher the quality of publicly listed firms' accounting information, the stronger that correlation, particularly when the corporate governance of the listed company is poor.
Abstract: This paper examines the relationship between accounting information quality and capital investment choice from the perspective of accounting information’s governance function. Measuring capital investment choice as the correlation of growth of operating income between company and industry, this paper investigates whether and to what extent companies focus on their core business. The results show that the higher the quality of publicly listed firms’ accounting information, the stronger that correlation, particularly when the corporate governance of the listed company is poor. The findings imply that accounting information quality can thus optimize the capital investment choice, which complements and strengthens the functioning of corporate governance. Hence, regulators should pay more attention to the market’s power to supervise the behavior of listed firms, improve the governance functions of accounting information and increase the efficiency of capital allocation.
55 citations
TL;DR: Wang et al. as mentioned in this paper investigated whether religious traditions influence firm-specific crash risk in China and found that the more intense the religious environment, the lower the stock price crash risk, implying that religion plays an important role in Chinese corporate governance.
Abstract: This paper investigates whether religious traditions influence firm-specific crash risk in China. Using a sample of A-share listed firms from 2003 to 2013, we provide evidence that the more intense the religious environment, the lower the stock price crash risk, implying that religion plays an important role in Chinese corporate governance. Further, we find that (1) religion affects stock price crash risk by reducing earnings management and the management perk problem; (2) different religions have different effects, and Taoism, in particular, is unrelated to crash risk; and (3) the effects of religion are more pronounced with higher quality corporate governance and a stronger legal environment. Religion constrains the management agency problem, thus reducing stock price crash risk in China. Our paper enriches the literature on stock price crash risk and religion, and on new economic geography.
47 citations
TL;DR: In this article, the effect of share pledges on earnings smoothing in non-state-owned enterprises in China was investigated and it was shown that share pledging firms smooth their earnings more than other firms.
Abstract: In this paper, we present evidence that firms with concentrated ownership manage earnings when their large shareholders have an incentive to do so. The large shareholders of Chinese public firms often pledge their shares for loans. Before the split share reform in 2006, loan terms were based on the book value of the firm. Since then, the share price has become critical for share pledged loans. We postulate that the reform triggered large shareholders’ incentive to influence financial reports. Using a sample of non-state-owned enterprises, we test the effect of share pledges on earnings smoothing and how this effect changes after the reform. Our results suggest that share pledging firms smooth their earnings more than other firms, but these results are only found after the split share reform. Accordingly, our results provide more direct evidence on the effect of ownership concentration on financial reporting.
36 citations
TL;DR: In this article, the effect of income smoothing on the debt market was investigated using the Tucker-Zarowin (TZ) statistic, and the authors found that firms with higher TZ rankings exhibit lower cost of debt.
Abstract: The literature on income smoothing focuses on the effect of earnings smoothing on the equity market. This paper investigates the effect of income smoothing on the debt market. Using the Tucker–Zarowin (TZ) statistic of income smoothing, we find that firms with higher income smoothing rankings exhibit lower cost of debt, suggesting that the information signaling effect of income smoothing dominates the garbling effect. We also find that the effect of earnings smoothing on debt cost reduction is stronger in firms with more opaque information and greater distress risk.
30 citations
TL;DR: The authors examined whether business groups' influence on cash holdings depends on ownership and found that privately controlled firms are more likely to benefit from group affiliation than state-controlled firms propped up by the government.
Abstract: We examine whether business groups’ influence on cash holdings depends on ownership. Group affiliation can increase firms’ agency costs or benefit firms by providing an internal capital market, especially in transition economies characterized by weak investor protection and difficult external capital acquisition. A hand-collected dataset of Chinese firms reveals that group affiliation decreases cash holdings, alleviating the free-cash-flow problem of agency costs. State ownership and control of listed firms moderate this benefit, which is more pronounced when the financial market is less liquid. Group affiliation facilitates related-party transactions, increases debt capacity and decreases investment-cash-flow sensitivity and overinvestment. In transitional economies, privately controlled firms are more likely to benefit from group affiliation than state-controlled firms propped up by the government.
30 citations
TL;DR: Li et al. as discussed by the authors used a sample of China's provincial government data for the 2006-2012 period to examine the effect of the disclosure of financial information by local governments on their debt financing costs.
Abstract: China’s slowing economic growth and rapid urbanization have made local government debt financing a significant issue. This study uses a sample of China’s provincial government data for the 2006–2012 period to examine the effect of the disclosure of financial information by local governments on their debt financing costs. The results show that financial information disclosure is conducive to public supervision and enhances government credibility, leading to a decrease in the cost of debt financing. Furthermore, increased government economic intervention increases the strength of the association between financial information disclosure and the cost of debt financing. Increased government audit prevention function weakens the strength of the association between financial information disclosure and the cost of debt financing.
23 citations
TL;DR: In this article, the influence of government governance and executive networks on enterprise innovation was evaluated using data collected from China A-share listed companies from 2007 to 2010, showing that the governance efficiency of the government where the enterprise is located determines the efficiency of resource allocation firms are faced with, which provides institutional constraints on corporate R&D intensity.
Abstract: The increasingly competitive market environment makes independent innovation the core of the enterprise’s and evens the country’s competitiveness. In order to solve the problem of its own limited R&D resources, firms need to find access to outside resources. Since the government mainly provides policy and financial support, the information diffusion and learning effects of executive networks can effectively compensate for the shortage of formal institutional arrangements. In view of this, we manually collect data on R&D expenditures and executive networks having common management members in China A-share listed companies from 2007 to 2010. Combined with corporate governance and government governance data, this paper empirically tests the influence of government governance and executive networks on enterprise innovation. The empirical results reveal that the governance efficiency of the government where the enterprise is located determines the efficiency of resource allocation firms are faced with, which provides institutional constraints on corporate R&D intensity, and that the establishment and scale of executive networks do contribute to R&D decisions. Further testing shows that compared with non-state-owned enterprises, state-owned enterprises are faced with relatively weaker restraints and pressures in terms of policy, finance, technology and competition. Thus, they show no obvious reliance on government governance quality and the information diffusion of executive networks. The findings of this study help us to understand the role of informal systems in social economics, such as relationship networks and social capital, in the context of China’s economic development, and provide relevant evidence and enrich macro and micro studies of “government and market” and “market and enterprise” relationships.
19 citations
TL;DR: Zhang et al. as discussed by the authors examined executive compensation in the subsidiaries of business groups in China and found that when the change in performance of one subsidiary is lower than that of the other subsidiaries, its change in its executive compensation is significantly lower.
Abstract: This paper examines executive compensation in the subsidiaries of business groups in China Analyzing a sample of China business groups (the so-called “XiZu JiTuan” in Chinese) from 2003 to 2012, we find convincing evidence of the use of Relative Performance Evaluation (RPE) in the executive compensation of the subsidiaries of business groups Specifically, when the change in performance of one subsidiary is lower than that of the other subsidiaries, the change in its executive compensation is significantly lower Further, when the business group is private and the level of marketization is high, the subsidiary’s executive compensation is more likely to be influenced by the performance of the other subsidiaries This research improves our understanding of the decision mechanisms of executive compensation in business groups and enriches the literature on executive compensation and business groups
17 citations
TL;DR: Li et al. as mentioned in this paper investigated whether the media in China has an incremental impact on stock price efficiency and found that as media coverage of a firm increases, stock price synchronicity decreases, the probability of informed trading of its stock increases, and the extent to which its stock price deviates from random walk decreases.
Abstract: The media in China has undergone extensive commercialization to become more market-driven over the last 35 years. Based on a sample of over two million newspaper articles, this study investigates whether the media in China has an incremental impact on stock price efficiency. We find that: as media coverage of a firm increases, (1) its stock price synchronicity decreases; (2) the probability of informed trading of its stock increases; and (3) the extent to which its stock price deviates from random walk decreases. Our inter-regional analysis over thirty-one provinces/regions within China reveals that the effects of the media on decreasing stock price synchronicity, increasing the probability of informed trading, and reducing stock price deviation from random walk are stronger in regions of weaker institutional development. Our findings suggest that a market-driven media can play the role of compensating for the underdeveloped governance institutions in transitional economies such as China.
TL;DR: In this paper, the authors examine whether chief financial officer gender matters to bank-firm relationships and the designing of collateral clauses in bank loan contracting, and explore the potential path of influence.
Abstract: Based on signaling and gender discrimination theory, we examine whether chief financial officer (CFO) gender matters to bank–firm relationships and the designing of collateral clauses in bank loan contracting, and explore the potential path of influence. Data taken from Chinese listed companies between 2009 and 2012 indicate that (1) female-CFO-led firms are less likely to obtain credit loans than male-CFO-led firms; (2) female-CFO-led borrowers are more likely to be required to provide collateral for loans than male-CFO-led borrowers; and (3) banks are more inclined to claim mortgaging collateral when lending to female-CFO-led firms and prefer to guarantee collateral when lending to male-CFO-led firms. Female-CFO-led borrowers seem to be granted more unfavorable loan terms than male-CFO-led borrowers, supporting the hypothesis that female CFOs experience credit discrimination. Further analysis reveals that regional financial development helps to alleviate lending discrimination against female CFOs. Furthermore, female CFOs in SOEs are less likely than their non-SOE counterparts to experience gender discrimination in the credit market.
TL;DR: In this paper, the authors investigated the effects of bank equity connections and intellectual property protection on enterprises' innovation behavior, and the regulating effect of Intellectual Property Protection on the relationship between bank equity connection and innovation.
Abstract: This study investigates the effects of bank equity connections and intellectual property protection on enterprises’ innovation behavior, and the regulating effect of intellectual property protection on the relationship between bank equity connections and innovation. In general, bank equity connections and intellectual property protection not only significantly increase innovation input, but also improve innovation performance. However, the efficiency of bank equity connections is influenced by the heterogeneity of enterprises and the value orientation of the subjects. Bank equity connections have a more significantly positive effect on innovation in private and central enterprises, whereas the principal-agent problem and government intervention may weaken the marginal contribution of bank equity connections to the innovation of local state-owned enterprises. Bank equity connections and intellectual property protection are complementary in promoting enterprise innovation. Not only are the combined effects of bank equity connections and intellectual property protection greater than the individual effects, but when the latter is relatively weak, the former’s positive effect on innovation is obviously weakened and may even crowd out innovation.
TL;DR: In this paper, three groups of investors with large holdings, namely individual investors, blue-chip institutional investors and underperforming institutional investors, are compared by their use of three types of corporate governance information: board characteristics, equity structure and affiliated relationships.
Abstract: The IPO process is a way for companies to improve their corporate governance and for investors to assess company quality This paper posits that investor choices vary with differences in investment ability and experience Three groups of investors with large holdings, namely individual investors, blue-chip institutional investors and underperforming institutional investors, are compared by their use of three types of corporate governance information: board characteristics, equity structure and affiliated relationships Overall, institutional investors make greater use of corporate governance information than individual investors, with blue-chip institutional investors making the greatest use Further, bull-bear markets exert a significant influence on the behavior of both individual and underperforming institutional investors These results enrich the IPO literature and contribute to optimal social fund allocation in the stock market
TL;DR: In this article, the authors used US-listed Chinese firms as their research sample and found that firms that hire top executives with work experience in the US or educational qualifications from the US attract more US institutional investors and analysts.
Abstract: Foreign firms face enormous obstacles in attracting investors and analysts when issuing securities in the United States. We use US-listed Chinese firms as our research sample and find that firms that hire top executives (i.e., Chief Executive Officer [CEO] or Chief Financial Officer [CFO]) with work experience in the US or educational qualifications from the US attract more US institutional investors and analysts. Further, we find that CFOs’ US experience dominates the results. Corroborating our results, we further find that firms with US-experienced CFOs are more likely to hold conference calls and voluntarily issue management forecasts, which suggests that CFOs with a US background are better at communicating with US investors and analysts and acting in alignment with US norms compared with Chinese CFOs. Collectively, our results suggest that hiring a CFO with a US background could facilitate cross-listed foreign firms to lower US investors’ and analysts’ information disadvantage.
TL;DR: Li et al. as mentioned in this paper examined the relationship with firm performance of the internal pay gap among individual members of the top management team (TMT) and the compensation level of TMT members relative to their industry peers.
Abstract: We examine the relationships with firm performance of the internal pay gap among individual members of the top management team (TMT) and the compensation level of TMT members relative to their industry peers. We find that pay gap is positively related to firm performance and that this positive relation is stronger when the TMT pay level is higher than the industry median. However, we do not observe such effects in Chinese state-owned enterprises (SOEs), in which both the executive managerial market and compensation are government-regulated. We also document that cutting central SOE managers’ pay level can increase firm value, whereas doing so for local SOE managers has the opposite effect. Our findings have important implications for research on TMT compensation as well as for policy makers considering SOE compensation reform.
TL;DR: It is suggested that VC/PEs have value relevance in the M&A market, confirming their “certification” role.
Abstract: The information gap in the M&A market hinders acquirers from effectively identifying high-quality targets. We examine whether VC/PEs convey information content in the M&A market and whether acquirers can use such information to identify high-quality targets. We show that VC/PEs have significant information content and can signal high-quality target companies via “certification”. When acquirers lack acquisition experience and targets are located in inferior information environments, VC/PE “certification” is more significant. The better reputation a VC/PE has, the more information it conveys. Syndicate VC/PEs convey stronger information than independent VC/PEs. We also find that acquirers do not pay higher premiums for high-quality targets. Overall, our results suggest that VC/PEs have value relevance in the M&A market, confirming their “certification” role. We present means for acquirers to select high-quality targets and investors to build efficient portfolios.