Larry Li

Going public with good governance: evidence from China

Board characteristics have not been a significant area of study in the IPO literature. We focus on the emerging corporate governance reform in China to investigate the relationship between a range of board characteristics and IPO initial returns and long-term performance. We find evidence that board size is positively related to short-term returns, while in the long-term, a positive relationship exists between performance and the voluntary post-listing separation of the roles of CEO and Chair of the Board. Our long-term results suggest that at least some Chinese listed firms are actively and voluntarily moving toward better governance structures.

Technical and Fundamental Trading in the Chinese Stock Market: Evidence Based on Time-Series and Panel Data

Time-series and panel data are used to provide empirical evidence on technical and fundamental trading in the Chinese stock market. An econometric model is used to differentiate between the effect on stock prices of the actions of traders who act on the basis of fundamental analysis (financial ratios) and those acting on the basis of technical analysis. The model is estimated using monthly data on the stock prices of 100 companies listed on the Shanghai Stock Exchange. The results obtained from time series regressions show mixed results for the effectiveness of fundamental trading and overwhelming support for the effectiveness of technical trading. However, panel regressions show that both technical and fundamental trading have roles to play in determining stock prices, but technical trading is more effective.

Firm-Specific Factors as Determinants of Capital Structure: Evidence From Indonesia

The cross-sectional technique of extreme bounds analysis (EBA) is used to identify the determinants of capital structure in a sample of Indonesian shareholding companies. Additional results are presented based on variable deletion and nonnested model selection tests. The results of traditional EBA show that the only robust variable is liquidity, but the results of restricted EBA add three more robust variables: profitability, tangibility, and income variability. However, variable deletion and nonnested model selection tests lend support only to size and liquidity. The conclusion is that most of the variables that appear important in studies of capital structure may not be important at all. From a policy perspective, the finding that some firm-specific factors are relevant to corporate capital structure confirms that financial reform has eliminated the distortions of corporate financial policies and financial markets caused by the previously dominant role of state banks.

Sovereign wealth fund investment decisions: Temasek Holdings:

Sovereign wealth funds (SWFs) are investment portfolios and savings funds that are controlled and actively managed by a sovereign government. In this paper, we document the investment behaviour of a specific fund, Temasek Holdings, which is the Singapore government’s SWF. Using a sample dataset of 150 publicly listed Singapore firms over the period 2000—2004, we find evidence suggesting that Temasek has a predisposition to invest in firms that are relatively large and have few director block holders. The incentive to invest also increases in firms with lower systematic risk and with compensation schemes that provide the board of directors with stocks and options.

An operational risk profile: the experience of British firms

This study provides an analysis of 163 operational loss events experienced by a variety of British firms over the period 1999–2008. 10 different hypotheses are tested to examine the distribution of loss severity and frequency with respect to business line, event type and corporate entity type. We also test hypotheses on the relation between loss severity and the decline in the market value of the announcing firm and whether or not the decline in market value is greater if the loss results from internal fraud. The results indicate that loss severity does not depend on firm size, that the decline in market value bears no stable relation to the loss amount and that they decline in market value relative to the loss amount is positively related to firm size.

Short Term Equity Returns of Chinese IPOs, 1999 to 2004 Excess Demand, Social Policy and Wealth Effects

Our study of 531 Initial Public Offerings (IPOs) on the two Chinese Stock Exchanges during the period 1999 to 2004 indicates initial returns to investors of approximately 114.04 per cent and these earnings were sustained through the first month of trading. High initial returns on IPOs are most often characterised as a reflection of state policy acting with a view to longer-term economic gains and sound social policy. The sample IPOs were found to be oversubscribed by 243 times the share offered. Such a level of excess demand is a major factor in high initial returns to Chinese IPOs. Regression analysis indicated other major factors associated with these high initial returns including company size, offer size, general market conditions in the period of lead up to the first listing, the proportion of tradable-A shares available and the signal PE ratio at the time of offer. In addition, the paper emphasises the potential for very significant wealth effects, capital formation and development of a private capital market which arises from private sector gains linked to the IPOs.

Robust and fragile firm-specific determinants of the capital structure of Chinese firms

We demonstrate, using Extreme Bounds Analysis (EBA), that some of the firm-specific determinants of the capital structure of Chinese firms reported as important in previous studies may be fragile, in the sense that the sign and/or significance of the coefficients on these variables change depending on model specification (the variables included in or excluded from the model). For this purpose, data on 344 publicly listed shareholding companies are used, covering nine potential firm-specific determinants of capital structure. The robust variables, whose coefficients remain significant and of the same sign irrespective of model specification, turn out to be size, liquidity, profitability and growth opportunities. Although conventional cross-sectional analysis would lend support to the importance of tangibility and stock price performance, these two variables are indeed fragile. Other variables turn out to be insignificant.

Operational risk, the legal system and governance indicators: a country-level analysis

A total of 4388 operational loss events recorded over three decades in 53 countries are analysed on a country level in terms of the size of the economy, the standard of living, the legal system, the regional factor and six governance indicators. The results show that the average severity of the operational losses incurred by firms located in a particular country is positively related to the size of the economy and the standard of living. The results also show that loss of severity is negatively related to governance indicators, particularly regulatory quality. The frequency of operational loss events is also positively related to the size of the economy.

The frequency and severity of operational losses: a cross-country comparison

We examine the proposition that cross-country differences in the factors determining the frequency and severity of operational losses lead to cross-country differences in the distribution and incidence of operational loss events in terms of frequency and severity. For this purpose, we consider 4388 operational loss events covering 11 countries or country groups. The results reveal differences with respect to the type of loss events prevailing in each country or country group as well as differences with respect to the dominance of events of certain type in a particular business line and corporate entity type.

Taxation in a mixed economy: the case of China

Purpose - The purpose of this paper is to investigate how Chinese firms’ ownership structure is related to their effective tax rate. The People’s Republic of China provides an interesting environment to examine the corporate income tax. Government has significant ownership stakes in the for-profit economy and state-owned enterprises (SOEs) are liable to the corporate income tax. This is very different to most other economies where SOE tends to dominate the not-for-profit economy and pays no corporate income tax. Government ownership also varies between the central government and local government in addition to state asset management bureaus. This provides a rich institutional background to examining the corporate income tax. Design/methodology/approach - A panel data analysis approach is used to examine relationship between ownership structure and effective tax rates of all public firms in China from 1999 to 2009. Findings - The authors report that effective tax rates do appear to vary across the ownership types, but that SOEs pay a statistically higher effective tax rate than to non-state-owned. In addition, local government owned SOE pay higher effective tax rates than central government and SAMB owned SOE. The authors also investigate Zimmerman’s (1983) political cost hypothesis. Unfortunately, these results are econometrically fragile with the statistical significance of those results varying by empirical technique. Originality/value - This paper provides insight into government ownership and taxation in China.