Jing Chi

The Performance and Long-Run Characteristics of the Chinese IPO Market

We study the short-run and long-run performance of Chinese privatization initial public offerings (PIPOs), using data for 340 and 409 new issues on the Shanghai and Shenzhen Stock Exchanges respectively, from 1 January 1996 through 31 December 1997. The average market-adjusted initial return is found to be 127.31%, and the initial returns on both stock exchanges are not significantly different from each other. The average market-adjusted buy and hold return over the three years after listing is 10.26%, which is significantly different from zero at the 1% level. We then use cross-sectional analysis to explain the long-run supernormal performance of Chinese PIPOs, and find that government ownership, the offering size and the feature of belonging to a high-tech industry are the main determinants of the long-run performance. In addition, firms that perform better in the long-run tend to make more Seasoned Equity Offerings (SEOs), and the underpricing of IPOs is negatively related to their long-run performance.

Financial Integration in East Asian Equity Markets

This paper examines the degree of financial integration that exists in East Asian equity markets using the International Capital Asset Pricing Model methodology. We employ three market portfolios to test for integration: the weighted average equity index of all sample countries, the Japanese market index and the US market index. The study shows that the level of financial efficiency and the integration of sample countries is high and has improved significantly during 1991 to 2005, and they are more financially integrated within the region and with the Asian leading market (Japan) than with the world leading market (the USA). Copyright 2006 Blackwell Publishing Ltd

A review of corporate governance in China

The paper reviews the literature on internal and external corporate governance mechanisms in China. Chinese regulatory bodies have made considerable efforts to improve the corporate governance of listed firms. However, research has shown that most of the governance instruments that are effective in developed nations are less effective in China. We attribute the ineffectiveness to the large stake of the state in listed firms, strong political connections between listed firms and the government, and the lack of a truly independent judicial system. Some suggestions for making corporate governance more effective in China are provided.

Operating performance and its relationship to market performance of Chinese initial public offerings

We investigate the operating performance changes of initial public offerings (IPOs) and the relation between operating performance and both short-run underpricing and long-run market returns of IPOs. We find that listing causes a significant deterioration in profitability, sales-growth rates, and efficiency, and brings a significant increase in sales and a significant decrease in leverage. We also find underpricing has insignificant explanatory power in predicting post-issue operating performance, which suggests that the signaling hypothesis does not explain underpricing very well in Chinese IPO markets. Using a cross-sectional analysis, we find firms with higher return on assets (ROA), smaller size (lower sales), higher sales-growth rates, higher asset turnover, and higher debt-to-asset ratios enjoy higher long-run market returns.

Long-Run Outperformance of Chinese Initial Public Offerings

The long-run performance of Chinese IPOs is investigated using 897 A-share IPOs listed on the two Chinese stock exchanges from 1996 to 2002. Significantly positive abnormal returns are found up to three years after listing by using the cumulative abnormal return measure, the buy-and-hold abnormal return measure, and the Fama-French three-factor model. Since the series of reforms in 1999-2000, outperformance has shown clear signs of decreasing. Cross-sectional analysis supports the view that the reasons for the outperformance of IPOs are the privatized nature of the new issues and the inequality of supply and demand. However, the uncertainty of the reforms reducing state ownership has made investing in IPOs less attractive in the long run.

A Review of Earnings Management in China and its Implications

This paper reviews the academic literature on earnings management in China. We discuss the motivations behind the listed firms’ earnings management, and provide empirical evidence on earnings management using various accounting measures. The literature shows that earnings management occurs most often before security issuance, or when a firm is facing the risk of delisting. While non-core income was widely used to measure earnings management in China, as it is easily detected, researchers are now focusing their attentions on accrual-based models. We then explore the real causes of earnings management in China, and conclude that the two main causes are the concentrated ownership structure, and the strong political and economic connections between government and the listed companies. We review the impact of corporate governance mechanisms and government supervision on earnings management in China. Finally, we discuss implications for the regulators and make suggestions for future research.

The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Competitive Advantage?

This study investigates the impact of environmental regulatory delay on capital market reactions to capital expenditure announcements. Using the time to gain resource consent (regulatory) approval as an indicator of expected resource consent compliance costs, positive valuation effects are found from project announcements when the expected time to gain resource consent approval is long. The findings suggest that by undertaking voluntary capital expenditures with high environmental compliance costs, listed companies can create strategic advantages. For example, long consent times may improve firms’ opportunities to develop specialised capabilities such as early mover advantages, reputational benefits, or enhanced environmental management systems. Alternatively, high environmental compliance costs may inhibit actions by industry competitors and new entrants, resulting in greater expected project NPVs.

Mutual Fund Investment Strategies and Preferences

This article classifies Chinese mutual funds based on their past investment behavior, using factor and cluster analyses. The empirical results show that the majority of Chinese mutual funds are quasi-indexers (58.58%) which follow a buy-and-hold investment strategy; next are transient mutual funds (31.27%) and dedicated mutual funds (3.38). The results also show that mutual funds generally hold shares of large firms that offer low market risk, low liquidity, and good operating and stock performance. The preferences of quasi-index funds dominate the results. Transient mutual funds focus on good operating performance and growth opportunities. Dedicated funds invest heavily in small, highly liquid listed firms. All types of mutual funds in China prefer to hold state-controlled listed firms rather than privately controlled ones.

A review of earnings management in China and its implications: EARNINGS MANAGEMENT IN CHINA

This paper discusses the motivations behind the earnings management of listed firms in China and provides evidence on earnings management using various accounting measures. The literature shows that earnings management occurs most often before the issue of securities or when a firm is facing the risk of being delisted. While non�?core income was widely used to measure earnings management in China, as it is easily detected, researchers are now focusing on accrual�?based models. We explore the underlying causes of earnings management in China, and conclude that the two main causes are the concentrated ownership structure and the strong political and economic connections between government and the listed companies. We review the impact of corporate governance mechanisms and government supervision on earnings management in China.

IPO Performance on China’s Newest Stock Market (ChiNext)

We study IPO underpricing and long-run performance of ChiNext, a newly-established Growth Enterprise Board in China. Using a sample of 281 ChiNext IPOs during October 2009–December 2011, we find the initial average market adjusted abnormal return (MAAR) is 33.5 percent. The average 12-month buy-and-hold abnormal return (BHAR) is −45.7 percent for those IPOs listed prior to 2011. Although the average MAARs of ChiNext is significantly higher than IPOs listed on the Main Board, it is not significantly different from the Small and Medium Enterprise (SME) Board IPOs during the sample period. However, the ChiNext average BHARs are significantly lower than those on both the SME and Main Boards. Regression findings support the information asymmetry hypothesis (high uncertainty of ChiNext IPOs) and the behavioral theory (market sentiment) on underpricing for ChiNext IPOs, and we find that ChiNext IPO underperformances are consistent with the significant deterioration of their operating performance after listing and investors’ speculative trading behavior on these new issues.