Alan Guoming Huang

Idiosyncratic Return Volatility and the Information Quality Underlying Managerial Discretion

Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary accrual volatility and the correlation between premanaged earnings and discretionary accruals reflective of information quality across firms. These results are robust to controls for firm operating uncertainty, growth options, business-cycle variations, and firm age and industry effects, and they highlight the importance of managerial discretion in determining idiosyncratic volatility.

The Development of the Real Estate Industry in China

Real estate in China had been owned and managed by the government under the socialist central-planning economic system before 1988. China’s constitution has a tremendous effect on the Chinese economy because it codifies basic national and economic policies along with the conduct of basic norms of social lives. Under the 1982 Constitution, land is owned by either the state or collectives. The exercise of land ownership is usually delegated to government agencies of different levels. Amendments to the constitution adopted on April 12, 1998, created land use rights aside from land ownership. According to the 1988 Constitutional Amendments, land use rights are allowed to be separated from land ownership and can be traded in the open market. These governing legislatures result in the separation of land ownership and land use rights. Land ownership, in the sense that it is not a commercial product, is not transferable, but land use rights are. As a result, real estate in China differs primarily from that in the United States and other Western countries in that it refers only to land use rights plus the ownership of the improvements on the land. These land use rights carry terms that range from forty to seventy years but can be renewed at expiration. The real estate industry has become an important part of China’s economy in recent years. For example, in Shanghai, real estate output accounted for 0.5 percent of the city’s gross domestic product (GDP) in 1990. This percentage jumped to 6.9 percent in 2002, and then 7.4 percent in 2003. The industry as a whole added approximately 1 percent to the city’s economic growth rate in 2003. Recently, Beijing’s successful bid to host the 2008 Olympic Games and China’s ac-

Is China’s P/E Ratio Too Low? Examining the Role of Earnings Volatility

We find that China’s P/E ratio is comparable to that of the U.S. SP and (ii) historical earnings volatility is considerably higher in China than in the U.S. Higher earnings volatility in China offsets higher growth prospect in setting the P/E ratio, making its P/E ratio much closer to what is observed empirically than otherwise implied by its growth rate.

Re-examining Accounting Conservatism: The Importance of Adjusting for Firm Heterogeneity

Prior studies have documented the extent of accounting conservatism (in the form of the asymmetric response of accountings earnings to news) and its increase over time. However, many of these studies implicitly assume that unobserved firm-specific characteristics (known as firm heterogeneity or firm-specific fixed effects) are homogenous and, thus, unimportant to earnings determination. In this paper, we show that this assumption is over-restrictive, and there are significant cross-sectional differences (firm heterogeneity) in earnings. We find that, after accounting for firm-specific fixed effects in the earnings determination, [i] the level of accounting conservatism is smaller in magnitude than previously documented, and [ii] there is no clear pattern of increasing conservatism over time. Our results stand in stark contrast to much of the findings in the literature and raise the awareness among researchers of the importance of accounting for firm-specific heterogeneity in examining earnings-returns relations.

Generational Asset Pricing, Equity Puzzles, and Cyclicality

To examine the potential role cohort preferences play in asset pricing cycles and puzzles, we consider a model with stochastic generational variation in preferences. In our structure, the pricing kernel reflects an investing generations consumption growth from mid-life to retirement rather than aggregate consumptions growth over the same time period. Generational domination of the pricing kernel provides insight into rationalizing three widely-recognized asset pricing puzzles and suggests one potential contributor to boom-bust patterns in stock market returns. (Copyright: Elsevier)

Institutional Restrictions on Stock Issuance and Buyback and the Asset Growth Effect

The asset growth effect states that firms with higher asset growth exhibit lower future stock returns. Existing research finds that the effect is stronger in financial markets that are more developed, more transparent and have better legal protection of investors than in markets with less development, transparency and legal protection. We single out equity financing as the dominant driver of asset growth, and provide evidence that institutional regulations on stock issuance and share buyback explain the cross-country differences of the asset growth effect. Institutional restrictions on stock issuances and buyback are negatively associated with the asset growth effect across countries, and supersede variables such as legal system, stock market development, and information transparency in explaining the effect.This paper investigates the driver of asset growth to explain the cross-country variation of the asset growth effect. We find that institutional restrictions on equity financing constrain firms’ abilities to grow assets, and the degree of such restrictions is associated with the observed cross-country variations of the asset growth effect. Specifically, the asset growth effect is weaker in countries with more restrictions on stock issuance and buyback. In horserace tests, equity financing restrictions supersede legal system, stock market development, and information transparency in explaining the cross-country differences of the effect. We highlight our results through a comparison of two Asian countries—Korea and China—with the United States. Our results provide evidence that country financial regulations dampen certain sources of risks in asset prices.

Investment Banking in China: Past, Present and Future

China’s economy has been growing rapidly since the late 1970s and is expected to maintain this momentum in the foreseeable future. Coupled with the biggest population in the world, there is tremendous growth potential for China’s capital markets and financial services industry, both vital to the continued development of the economy. The contributors present research on all facets of China’s markets including: stock and bond markets; futures and over-the-counter markets; regulatory issues; and the development and roles of financial institutions such as brokerage firms, banks and insurance companies. Also addressed are the recent performance of equity markets, the emergence of small and medium enterprises, and the state banks’ bids to be listed in overseas stock exchanges. Taken together, the book sheds a welcome light on China’s overall economic growth.