Kenneth Yung

Do State Enterprises Manage Earnings More than Privately Owned Firms? The Case of China

Abstract:  This paper examines the impact of state ownership on earnings management. In contrast with the conventional belief that state ownership is the root of corporate inefficiency, we find lower levels of earnings management among state-owned enterprises than privately-owned firms in China even after controlling for the effect of tunneling. Further investigation suggests that the protection of state enterprises by the government might have played an important role in mitigating the pressure on managers to manipulate firm-specific information. Moreover, we find that the divergence in earnings quality between state-owned and privately-owned firms becomes less evident as the economy becomes more and more market driven.

Earnings Quality and Corporate Cash Holdings

Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.

Institutional Herding in the ADR Market

This study examines institutional herding in the ADR market between 1985 and 1998. We find a significant positive relation between changes in institutional ownership and ADR returns over the same period. The positive relation persists after we control for the momentum effect in the US stock markets. We also find that in the ADR market, past winners (losers) in the herding period continue to be the winners (losers) in the post-herding period. The lack of a returns reversal suggests institutional herding is related to momentum trading. However, the positive relation between institutional ownership changes and ADR returns remains after controlling for momentum trading in the ADR market. Our results also rule out that positive feedback trading is related to institutional herding in the ADR market.

Atlantic and Pacific stock markets--correlation and volatility transmission

The relationship between stock returns in international capital markets has excited the curiosity of researchers for a long time. Two recent stimuli for this research have been the progressive integration of international capital markets and the globalization of investor portfolios with the concomitant need for effective portfolio diversification strategies. These stimuli have provided the impetus to understand the dynamics of stock prices across national boundaries. The development of increasingly sophisticated statistical techniques and the continued growth of data handling capabilities by ever more powerful computers have established an impressive record of literature which traverses from the simple and mundane to the exotic and esoteric. Most of the earlier literature on this topic only explores the contemporaneous or the lead/lag relationship among international stock markets and seldom questions the underlying sources of interdependence among international capital markets. Some recent papers, which are discussed a little later and which provide the motivation for this study, have begun to address this issue. The objective of this paper is to expand the knowledge of the relationship among international capital markets by examining both their correlations and sources of interdependence. To be specific, this study first examines the correlations (comovements) between six international stock markets, three from the Atlantic region (i.e., New York, London, and Frankfurt) and three from the Pacific region (i.e., Japan, Singapore, and Hong Kong), using stock price data between 1984 and 1989. Selecting three stock markets from each region allows us to examine interregional as well as intraregional correlations. The underlying cause of the comovements among the six international stock markets is then investigated by examining the international transmission of stock returns volatility. An understanding of the structure of interdependence and source of comovements among international capital markets has important implications for formulating international portfolio strategies and forecasting. The Generalized Autoregressive

Foreign Acquisitions and Managerial Discretion

Foreign acquisitions have been growingdramatically since the 1980s despite academic studiesshowing that shareholders of acquirers generally donot realize any significant gain. In this paper, weinvestigate whether foreign acquisitions aremotivated by managerial self-interest. Logisticregressions are performed to establish a link betweenforeign acquisitions and the acquirers free cashflow. The results show that foreign acquisitions oflow-Q firms are strongly influenced by managerialdiscretion. In addition, acquisitions of low-Q firmsare conducted without consideration of theperformance of the acquirers. Foreign acquisitions ofhigh-Q firms, however, do not representoverinvestments.

CEO overconfidence and financial policies of real estate investment trusts (REITs)

This study investigates the effects of CEO overconfidence on real estate investment trust (REIT) financial policies and performance. The unique regulatory environment facing REITs make REIT financial policies less likely affected by agency problems and tax-related reasons, and thus provide a clearer picture of the effect of CEO overconfidence. In addition, the significant amounts of tangible assets of REITs provide performance measures that are relatively unbiased by unrelated elements. We find that REITs with overconfident CEOs use more debt, and in particular, longer term debt. Overconfident CEOs also buy back more shares and pay fewer dividends. CEO overconfidence does not have significant effects on REIT cash holdings. Regarding REIT performance, CEO overconfidence is negatively related to Tobin’s q and return on assets, respectively. We also find that CEO overconfidence motivated leverage decisions and CEO overconfidence motivated share buybacks have significant negative effects on REIT performance. The results suggest that REITs with overconfident CEOs make mistakes in leverage and share buyback decisions. Lastly, we find that the effect of CEO overconfidence is non-linear. The results show that the effect of overconfidence comes mainly from the CEOs with higher levels of overconfidence. Our results also suggest that regulations do not have a moderating effect on CEO overconfidence.

REIT returns: between the Pacific and the Atlantic

Purpose - The purpose of this paper is twofold in examining the international transmission of REIT returns volatility. The first purpose is to add to the literature on whether the real estate securities market and the broader equity market are integrated. The second objective of the study is to determine whether geographic risk factors can be transmitted beyond their region of influence. Design/methodology/approach - The study uses the GARCH(1, 1), EGARCH, and GARCH-M models. Findings - The results show that there are significant international spillovers of REIT returns volatility within the Pacific region. The results also show that there are significant volatility transmissions between the Pacific and the Atlantic regions. Practical implications - The results are consistent with the implication that the real estate sector and the general equity market are integrated such that geographic risk can be transmitted across national borders. The result will have major implications for international investment strategies. Originality/value - To date, there has been no published study on the international transmission of REIT returns volatility. This study therefore examines whether the conditional variance of REIT returns of a country is affected by volatility transmission across markets in the same region using four Pacific markets.

Stock return autocorrelation and institutional investors: the case of American depository receipt

Purpose – Though stock portfolio return autocorrelation is well documented in the literature, its cause is still not clearly understood. Presently, evidence of private information induced stock return autocorrelation is still very limited. The difficulty in obtaining foreign country information by small investors makes the private information of institutional investors in the ADR (American Depository Receipt) market more significant and influential. As such, the ADR market provides a favorable environment for testing the effect of private information on return autocorrelation. The purpose of this paper is to address this issue. Design/methodology/approach – In this paper, ADRs are sorted annually into three groups based on market equity capitalization. Within each capitalization group, ADRs are further sorted into three groups based on the fraction of shares held by institutional investors. Each ADR is assigned to one of the nine groups and group membership is rebalanced each year. The return autocorrelation of individual ADR securities and ADR portfolios for each group are then calculated. Findings – The results demonstrate that ADR individual stock and portfolio daily return autocorrelations are positively related to institutional ownership. It is also found that other explanations, such as non-synchronous trading, bid-ask spread and volatility of ADR, cannot explain the positive relation between daily return autocorrelations and institutional ownership of ADR. Originality/value – Since ADR market is more suitable than other markets for testing the role of private information, stronger and clearer results are got accordingly. This paper suggests that trading strategy based on private information of institutional investors can lead to stock return autocorrelation in ADR daily returns.

The Interaction of Short-Term Reversal and Momentum Strategies

This article investigates the interaction between short-term reversal and momentum strategies. The authors find that the magnitude of price reversals of short-term winners and losers is significantly related to past medium-term performance. Both past medium-term winners and losers with the best short-term performance experience the strongest price continuation. Short-term reversal strategies perform best in the momentum-loser quintile, and momentum strategies perform best in the short-term-winner quintile. The authors’ results imply that investors could achieve higher momentum profits by also considering short-term performance and vice versa. The results also suggest that investors adhere to prior dominant beliefs in the face of new contradictory information. Short squeezes and fire sales (self-attribution bias) may explain the continued underperformance (outperformance) of momentum losers (winners) with good short-term performance.

Acquirer's earnings quality and the choice of payment method in mergers and acquisitions

Purpose - The purpose of this paper is to investigate the role of acquirers earnings quality on the choice of payment method in mergers and acquisitions (M&A). Design/methodology/approach - The paper applies a simultaneous equations model to address the concern of endogeneity between earnings quality and payment method in corporate acquisitions. In addition, a propensity score matching model is used for robustness purpose. Findings - Previous studies imply that short-term accruals have a significant impact on the choice of payment method in M&A. In this study, This paper shows that acquisition financing is not significantly affected by short-term earnings quality once control variables are considered. Instead, this paper finds that it is the long-term earnings quality of the acquirer that matters. Acquiring firms with poor (good) long-term earnings quality prefer lower (higher) cash payment in acquisitions. Their results are robust to different definitions of earnings quality. Research limitations/implications - Researchers should consider the effect of long-term earnings quality in their future investigations. Practical implications - Investors should be aware of this issue when evaluating corporate mergers. Originality/value - This is the first study to examine the impact of long-term quality of earnings on the choice of payment method in M&A.