In-Mu Haw

Timeliness of Annual Report Releases and Market Reaction to Earnings Announcements in an Emerging Capital Market: The Case of China

This paper examines the relation between firm performance and the timing of annual report releases in an emerging capital market. Based on the population of listed Chinese firms with A-shares for 1994-1997, we find that good news firms release their annual reports earlier than bad news firms, and loss firms release their annual reports the latest. Moreover, consistent with Chambers and Penman (1984) and Begley and Fischer (1998), these firms unexpectedly accelerate the release of good news and delay the disclosure of bad news relative to their previous reporting pattern. We also observe a significant price reaction to the annual earnings announcements for both early (good news) and late (bad news) reporting firms. Similar results are found for those A-share firms which have also issued B- or H-shares to foreign investors. Our study documents a systematic timing pattern of annual report disclosures, which is useful for investors to predict future earnings, especially in anticipating bad news in Chinas emerging market where information about future earnings is very limited.

THE NATURE OF INFORMATION IN ACCRUALS AND CASH FLOWS IN AN EMERGING CAPITAL MARKET: THE CASE OF CHINA

Abstract Our study investigates the relative and incremental information content of earnings, operating cash flows, and accruals in the emerging capital market of China. The issue is tested by regressing stock returns on the levels of earnings and their components. Based on a sample of 1516 firm-years for listed Chinese firms during 1995–1998, our results demonstrate that earnings have relative information content over operating cash flows. The autocorrelations and cross-sectional correlations also imply that earnings have greater persistence and predictability than operating cash flows. We also find that discretionary accruals provide incremental information beyond that contained in nondiscretionary accruals, consistent with the argument that discretionary accruals improve the relevance of earnings in reflecting the fundamental values of the listed Chinese firms. Unlike prior findings in the studies on developed markets, we find no strong evidence that the value attached to discretionary accruals is lower than the value attached to nondiscretionary accruals. This is consistent with the argument that managerial policy choices available for the listed Chinese firms were rather limited during our sample period under relatively uniform Peoples Republic of China Accounting Standards (PRC-GAAP), thus, producing fewer opportunities for earnings management. An alternative interpretation could be that Chinese investors are functionally fixated on earnings.

The Accuracy of Financial Analysts' Forecasts after Mergers:

This paper examines forecasts developed by financial analysts before and after mergers. The study finds that forecast accuracy decreases sharply after mergers. These accuracy reductions tend to be more pronounced when financial leverage changes, when the merger does not provide earnings or industry diversification, when the purchase method of accounting is used to record the transaction, when capital intensity changes, and when the size of the target corporation is large compared to the size of the acquiring corporation. The data also show that reductions in forecast accuracy after mergers tend to be temporary. Accuracy returns to approximately the premerger level within four years after the merger. The study also finds that overprediction bias increases sharply in the year immediately following the merger. This increase in over-prediction bias, however, is also temporary. Overprediction bias returns to approximately the premerger level within the four-year postmerger study period.

Value Relevance of Earnings in an Emerging Capital Market: the Case of A‐shares in China

This study investigates the value relevance of earnings in the emerging capital market of China by examining the information content of accounting earnings measured under the People’s Republic of China Accounting Standards (PRC-GAAP). Based on the A-shares of listed Chinese firms during 1994–97, a significant association is observed between annual market-adjusted stock return and the change of earnings. Also documented is a significant price reaction to the annual earnings announcement in a three-day window centered around the announcement date. Overall, the empirical results suggest that earnings reported in China are value-relevant to A-share investors.

The Incremental Information Content of SEC 10-K Reports Filed under the EDGAR System

This paper examines the incremental information content of disclosures in the 10-K reports filed with the SEC through the EDGAR system with a research design that explicitly controls for cross-sectional differences in the informativeness of current and prior disclosures. More specifically, we investigate (1) whether stock returns exhibit abnormal behavior when the 10-K reports are filed with the SEC through the EDGAR system and (2) whether there exist preemptive and delayed market responses to disclosures in these reports. We also run tests for the pre-EDGAR 10-K reports submitted through the paper filing system to compare our results with those of prior studies. Our empirical results indicate that the 10-K report filed through the EDGAR system contains incremental information while the 10-K report filed through the prior paper filing system does not. This provides empirical evidence in support of the advantage of the EDGAR system over the previous paper filing system in disseminating information to investors in a timely fashion.

Firm Size and Dividend Announcement Effect

This paper examines the impact of firm size on market reaction to unexpected dividend changes. The empirical results indicate, after controlling for the magnitude of dividend changes, a negative relationship exists between firm size and the extent of abnormal returns around the dividend announcement date. The results are consistent with Miller and Rocks [14] position that the dividend announcement effect varies across firms with different degrees of information asymmetry.

Evidence On Income Measurement Properties Of Asr No-190 And Sfas No-33 Data

A number of studies have tested the association between security returns or levels of market value and current cost accounting data as reported under SEC Accounting Series Release No. 190 (ASR 190) and Statement of Financial Accounting Standards No. 33 (SFAS 33). For example, Beaver, Griffin, and Landsman [1982] (henceforth BGL), Beaver and Landsman [1983] (henceforth BL), and Olsen [1985] found no association, while Bublitz, Frecka, and McKeown [1985] (henceforth BFM) and Murdoch [1986] found a weak association.1 In this paper we estimate cross-section regressions of security returns on historical cost net income and holding gains, as was done previously, but with several extensions. First, we define our variables in terms of realizations of returns, income, and holding gains rather than in terms of unexpected changes. Thus, we

The Economic Consequence of Voluntary Auditing

A number of Chinese firms voluntarily acquire auditing services for their interim reports, even though the auditing of interim reports is mandatory only for a subset of firms in circumstances that are specified by the state regulators. This unique institutional setting in the Chinese market provides a natural experimental setting to directly investigate why listed firms voluntarily have their financial reports audited, and whether investors place more value on voluntarily audited earnings than on unaudited earnings. Based on a sample of 2,458 semi-annual interim reports released by listed Chinese firms from 1996 to 1999, we find that the choice of voluntary auditing is positively associated with the percentage of tradable shares, profitability, and company size. We also find that the earnings response coefficients of audited firms are higher than those of unaudited firms, especially when the auditing is voluntary. Our findings are consistent with theoretical propositions that managers voluntarily purchase external auditing to enhance the credibility of accounting numbers. This study contributes to the literature, especially on the economic value of voluntary auditing.

Differential Levels of Disclosure and the Earnings-Return Association: Evidence from Foreign Registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on Form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers. We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients.

Positive externality of analyst coverage upon audit services: evidence from China

Using China’s data, we find that analyst coverage helps reduce audit fees, and such effect is more pronounced for small firms, less-educated auditors, and small auditors. Our findings reveal positive externality of analyst coverage upon audit services in China, especially for those auditors weak in professional expertise, or hard to resist the pressure from their clients. Such evidence implies that the reputation protection hypothesis seems less applicable in an emerging market where the market share of big auditors is low. Our findings also provide alternative evidence justifying exchange-sponsored analyst coverage in practice intended to improve information environment of small firms.