May Hu

Fraud, Market Reaction, and the Role of Institutional Investors in Chinese Listed Firms

The extent and type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, and the association between institutional ownership and financial fraud are the subjects of this article. Using fraud data from the period between 2001 and 2011, the authors find wide occurrences of fraud and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to occur at firms that have a smaller proportion of independent directors and at poorly performing firms. Firms with higher mutual fund ownership subsequently have fewer incidences of fraud. Our results reports by the authors indicate that ownership by independent institutions, such as mutual funds, serves as an effective monitoring mechanism, deterring fraud and enhancing corporate governance in Chinese capital markets.

Corporate social responsibility and dividend policy

This study outlines and tests two corporate social responsibility (CSR) views of dividends. The first view argues that firms are likely to pay fewer dividends because CSR activities lower the cost of equity, encouraging firms to invest or hoard cash rather than to pay dividends. The second view suggests that CSR activities are positive NPV projects that increases earnings and hence dividend payouts. The first (second) view predicts that firms with a stronger involvement in CSR activities should be associated with a lower (higher) dividend payouts. The finding supports the second view and is robust.

Can analyst coverage reduce the incidence of fraud? Evidence from China

We investigate the impact of security analyst coverage on the incidence of corporate financial fraud in China. After controlling for the endogeneity between analyst following and fraud, we find that financial analyst coverage cannot significantly influence the incidence of fraud. The empirical findings suggest that financial analysts do not serve as external monitors to managers and large shareholders in China.

Counter‐Credit‐Risk Yield Spreads: A Puzzle in China's Corporate Bond Market

In this paper, using Chinas risk-free and corporate zero yields together with aggregate credit risk measures and various control variables from 2006 to 2013, we document a puzzle of counter-credit-risk corporate yield spreads. We interpret this puzzle as a symptom of the immaturity of Chinas credit bond market, which reveals a distorted pricing mechanism latent in the fundamental of this market. We also find interesting results about relationships between corporate yield spreads and interest rates and risk premia and the stock index, and these results are somewhat attributed to this puzzle.

Management Trading in Chinese Entrepreneurial Firms on the ChiNext

ABSTRACT We examine management trading in Chinese entrepreneurial firms on the ChiNext. We find that management shareholdings are considerably high, and executives tend to sell their shares after the IPOs on the ChiNext. The propensity for executives to sell shares is negatively correlated with the firms’ corporate governance and current operating cash flows, but the amount they sell is only positively correlated with the level of management holdings. Both the management selling decision and percentage of selling do not associate with firms’ earnings and sales growth. This suggests that managers are profit makers rather than informed traders in their selling activities on the ChiNext. We also find that the market reaction to management selling is substantially negative, which implies a herding effect of investors following executives to sell shares.