Heibatollah Sami

The investment opportunity set, director ownership, and corporate policies: evidence from an emerging market

Abstract This paper provides evidence of the association between a firms investment opportunity set (IOS), director ownership, and corporate policy choices. Using a sample of growth and non-growth firms in an emerging Asian market, we find that the IOS theory has significant explanatory power in the financing, dividend, executive compensation, and leasing aspects of corporate policies. Growth firms have lower debt-to-equity ratios and dividend yields, pay higher cash compensation and bonus amounts to their top executives, and finance a higher proportion of their asset acquisitions through operating leases. We also find that director ownership moderates and counteracts the association between IOS and corporate policies. Our results are consistent with contracting theory predictions that high director ownership mitigates the need for incentive or bonus compensation plans in growth firms.

Accounting Conservatism, Earnings Persistence, and Pricing Multiples on Earnings

We examine the effect of accounting conservatism on earnings persistence and the stock market’s valuation of earnings. Using a sample of U.S. companies during the period of 1988-2010, we find that firms with more conservative accounting generate less persistent earnings than firms with less conservative accounting. We also document that the pricing multiple on more conservative earnings is smaller than pricing multiples on less conservative earnings. Finally, we show that conditionally conservative earnings are less persistent than unconditionally conservative earnings and the pricing multiple on earnings is smaller for conditionally conservative earnings than for unconditionally conservative earnings. Our results improve our understanding of the characteristics of conservatively-reported earnings.

The Effect of Potential Environmental Liabilities on Earnings Response Coefficients

In this study, we investigate the implication of potential environmental liabilities for the reliability (noisiness) of accounting information as it manifests itself in the magnitude of an earnings response coefficient (ERC). Multiple regression analyses of abnormal stock returns on earnings surprise and other control variables are carried out. The results provide support for the hypothesis that the ERCs for potentially responsible party (PRP) firms are lower than those of non-PRP firms. Robustness of the results, with regard to the sample selection procedures and inclusion/exclusion of different control variables, was checked as well. In addition, the results indicate that as firms are named as PRP for more sites, their ERCs decline, which is an indication that the market perceived increased noise in their earnings. These results are consistent with the notion that potential environmental liabilities create noise in a firms accounting system in general and its earnings in particular.

The Economic Consequences of Increased Disclosure: Evidence from Cross-Listings of Chinese Firms

In this paper, we investigate the impact of cross-listings on information asymmetry risk, the cost of capital and firm value of a group of cross-listed Chinese companies. Our paper is the first to examine the effect of cross-listing on information asymmetry risk. Because cross-listed firms are subject to increased disclosure requirements, increased regulatory scrutiny and increased legal liability, we propose that Chinese cross-listed firms have lower information asymmetry risk, lower cost of capital and higher firm value than their non-cross-listed counterparts. We find in both univariate and multivariate tests that cross-listed firms enjoyed lower information asymmetry risk in the domestic market compared with the non-cross-listed firms. We also find that cross-listed firms have lower cost of capital in the cross-listing market than non-cross-listed firms in the domestic markets. Finally, we find that cross-listed firms are associated with higher firm value as measured by Tobins Q. These results have implications for international investors and companies seeking cross-listing opportunities.

The Impacts of State Ownership on Information Asymmetry: Evidence from an Emerging Market*

This study examines the effect of corporate ownership on information asymmetry as measured by bid-ask spread in the emerging markets of China. Government ownership has significant and positive impacts on bid-ask spread during the period 1995-2000, but disappears afterward during 2001-2003. The finding that state ownership raised bid-ask spread in the early period is consistent with recent studies on emerging markets including China, which indicate that firms with higher state ownership tend to have a greater deviation between cash flow rights and control rights (eg, Wei et al., 2005). This implies that lower state ownership is associated with lower information asymmetry in the market, an economic consequence of significant economic reform and privatization regarding the market microstructure. However, with more active control transfers and

Price and trading volume reaction: the case of Hong Kong companies’ earnings announcements

Abstract In this paper, we investigate the price changes and trading volume reactions during the days surrounding the announcements of annual earnings based on a 31-day observation window for a sample of Hong Kong firms listed on the Stock Exchange of Hong Kong (SEHK). The major findings of our study: (1) materially support the findings of Morse (1981) , (2) demonstrate significant price and volume reactions over four days surrounding the annual earnings announcement over the years 1992 to 1995, (3) show similar market reaction for Blue Chip stocks compared to Non–Blue Chip stocks, and (4) indicate a larger overall price reaction for Non–Blue Chip stocks and mixed results regarding volume reaction when comparing the Blue Chip and Non–Blue Chip stocks. These results show that, although the Hong Kong results are largely in line with the U.S. and international evidence, the Blue Chip stocks are followed more and remain the mainstream stocks for Hong Kong investors.

Auditor failure and market reactions: evidence from China

Zhongtianqin, the largest Chinese auditor in 2000, collapsed in 2001 owing to its audit failure. This study examines how the market reacted to the audit scandal in the Chinese institutional setting. Chinese investors are entitled to recover their investment losses from auditors owing to audit failure. However, civil lawsuits against auditors have not succeeded in the past. Therefore, Chinese auditors do not face the real threat of shareholder litigation. They only have the threat of costly governmental penalties for violating the regulations. Even so, we demonstrate that Chinese audit still contains both assurance and insurance values. Also, the entire market reacted to the scandal. Moreover, we show that investors differentiate audit quality in stock valuation. Finally, companies audited by international auditors suffered less value losses. This study adds to the worldwide literature on auditor failure.

Restoring Trust Among Investors after Shredded CPA Reputation: Evidence from China

Our study examines whether CPA firms take measures to improve their audit quality and restore trust among investors when their reputations are in danger subsequent to disciplinary actions by the government regulatory agencies in China. Compared with a control group of the CPA firms without a reputation crisis, we find that the CPA firms with shredded reputation have lower audit quality, experience more CPA turnover, and earn lower audit fees prior to the publicized accounting scandals and relevant disciplinary actions. We also find that, subsequent to the disciplinary actions, these CPA firms significantly increase their audit quality when they operate under strong legal environments and when affiliated with Big 4, have no difference in audit quality from the control group, and are less likely to be dismissed and more likely to charge higher audit fees after taking remedial action. These results should be of interest to the accounting profession in general and those in emerging markets in particular.

Do Companies With Effective Internal Controls Over Financial Reporting Benefit From Sarbanes–Oxley Sections 302 and 404?:

Post-SOX (Sarbanes–Oxley Act) academic research on internal control focuses on the characteristics of publicly listed companies disclosing material control weaknesses or the consequences experienced by these companies. However, to date, limited research has empirically examined whether these new disclosures truly enhance “public interest” by promoting “equity” in the capital markets through enhanced information distribution. In this article, we empirically investigate the impact these disclosures have on information asymmetry and related market micro-structure. We hypothesize that both the management’s and the auditor’s reporting on internal control provide outside investors additional and higher quality information about a firm’s future prospects, thereby reducing the information asymmetry in capital markets. Such reduction in information asymmetry should be reflected in decreased bid-ask spreads and price volatility, as well as increased trading volume. Our cross-sectional analyses show that, subsequent to the management’s report on internal control per Section 302, the information environment improves for U.S. firms as manifested by decreased bid-ask spread and price volatility, and increased trading volume. However, we find no similar results subsequent to the auditors’ reporting on a company’s internal control over financial reporting. In our time-series intervention analyses, about 70% of sample firms have experienced significant and permanent reductions in their bid-ask spreads subsequent to the implementation of Section 302 of SOX, in contrast to only 30% of firms subsequent to the implementation of Section 404 of SOX. Our findings point to the public policy issue of whether financial reporting quality of public companies can be improved at a lower cost.

Corporate Transparency from the Global Perspective: A Conceptual Overview

This is a conceptual overview of transparency from the global and interdisciplinary perspectives. It briefly develops a conceptual framework on transparency as to how it relates to governance and market environments, outlines conditions for transparency, and presents hypotheses concerning the level of transparency in a global world. It then summarizes 12 papers included in the research volume.