Jiwei Wang

Stock Liquidity and the Pricing of Earnings: A Comparison of China's Floating and Nonfloating Shares

The reform aimed at converting nonfloating shares to floating shares in China provides a setting in which shares are subject to different levels of liquidity constraints. We show that the severity of these constraints is inversely related to the extent to which earnings information is reflected in share prices. Specifically, before the reform, transfer prices of nonfloating shares reflect much less earnings information than the market prices of floating shares. After the reform, however, transfer prices of nonfloating shares reflect more earnings information, although the weights are still less than those found in market prices. Thus, Chinas unique setting shows that share liquidity affects the way earnings are priced in stock.

Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China

This study provides empirical evidence of managerial agency costs in socialistic internal capital markets. Listed Chinese companies are required to disclose the amount of resources that are reallocated to other firms of the parent company, which provides us with a direct measure of the socialistic subsidization of weak member firms by strong member firms within a business group. We hypothesize that in strong member firms, managerial compensation is less sensitive to firm performance because cross-subsidization makes it difficult for group CEOs to hold the managers in strong firms accountable for their own firms’ performance, and also increases the noise in performance measures. We also hypothesize that socialistic cross-subsidization results in an increase in managerial agency costs of strong member firms due to the low pay-performance sensitivity and low incentive to work hard. We document empirical results that are consistent with these two predictions.