Bing-Xuan Lin

The frequency and magnitude of earnings management in China

Earnings management is an indicator of the corporate governance quality and investor protection standard. We study the frequencies and magnitudes of earnings management under two different thresholds, zero earnings and prior earnings, in the Chinese market from 1997 to 2004. We model earnings as a mixed-normal distribution and obtain parameter estimators that measure the frequency and magnitude of earnings management. We show that the practice of earnings management has gone up both in frequency and magnitude during the post-2000 period. We also find that the frequency and magnitude of earnings management are higher when firms try to avoid negative earnings than when firms try to report earnings increase. Our findings reflect the current economic environment in China and caution investors on the low-disclosure quality in the Chinese stock market.

Corporate Ownership, Debt, and Expropriation: Evidence from China

We provide direct evidence on the dark side of leverage and offer new insights regarding the role of debt in corporate governance. Using a sample of Chinese state-owned enterprises that have experienced a transfer of controlling rights, we find a positive and significant relationship between expropriation and debt usage. Firms controlled by private block shareholders tend to have higher leverage due to excessive expropriation via debt. The evidence we document provides fresh insights into the impact of debt on the agency problem between the controlling shareholder and minority shareholders, and suggests the presence of expropriation through debt and its conditional effect on corporate ownership.

Product market competition, corporate governance, and cost of capital

We investigate how market competition and corporate governance affect a firm’s cost of equity and debt. We find firms with better corporate governance have a lower cost of equity and cost of debt. However, we find that the negative relation between cost of capital and governance primarily holds for firms in highly competitive industries. The relation between governance and cost of capital does not hold if the industry competition is weak.

Cross-listing, corporate governance and operating performance – evidence from The Chinese market

The effectiveness of corporate governance is a major factor in forecasting firm performance. We examine the relationships among cross-listing, corporate governance and firm performance for a sample of Chinese cross-listed companies. We show that cross-listed firms display higher overall quality of corporate governance compared to non-cross-listed firms. Consequently better corporate governance results in higher operating performance. Our results support the bonding hypothesis of cross-listing. Furthermore, we also illustrate that the cross-listing status encapsulates the higher quality of corporate governance that leads to higher operating performance. When forecasting performance of cross-listing companies, it is therefore important to recognize the substitute effect between cross-listing and corporate governance.

Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China

ABSTRACT China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.

SEC FRR No. 48 and analyst forecast accuracy

ABSTRACT SEC FRR No. 48 requires that all firms report their market risk exposures by choosing among three alternative formats: sensitivity analysis, tabular and value at risk (VaR). In this article, we examine how different methods affect analyst forecast accuracy. By regressing analyst forecast errors on a company’s choice of disclosure method, we find that analyst forecast errors are smaller for firms using VaR and tabular than for firms using sensitivity analysis. Our findings suggest that VaR and tabular approaches are more informative than sensitivity analysis.