Pei-Gi Shu

The behavior of Taiwan mutual fund investors—performance and fund flows

Abstract We examine the investment flow of open-end equity mutual funds. With a unique data from Taiwan, we are able to investigate the buy and sell behavior of mutual investors separately. We find that most investors that invest in large mutual funds are small-amount investors, while those that invest in small funds invest a much larger amount. Small-amount investors of large funds tend to chase past winners and redeem shares once fund performance improves. They are more likely to avoid actively managed funds with high turnover. On the other hand, large-amount investors of small funds appear to be dispassionate buyers whose purchases are not remarkably affected by short-term performance. They are more likely to keep performance-improving funds, redeem the losers, and pay higher management fees.

Non‐Tradable Share Reform and Corporate Governance in the Chinese Stock Market

Prior to China’s split-share structure reform, domestic A shares were divided into non-tradable and tradable shares. Non-tradable shareholders represent the government, hold roughly a two-thirds majority, and manage the firms, while tradable shareholders have little power to affect the decisions made by non-tradable shareholders. This is a typical structure to exhibit agency problems. The 2005 structure reform program stipulates that non-tradable shareholders have to bargain with tradable shareholders in order to gain liquidity. The price that non-tradable shareholders pay to tradable shareholders for gaining liquidity is defined as “compensation.” We explore the issue of why corporate governance might play an important role in affecting the level of compensation. Firms with a weak governance structure or severe agency problems are required to have a higher level of compensation. The level of compensation is positively correlated with the non-tradable shareholding, the pledge ratio, and related-party transactions, and is negatively correlated with foreign shareholdings. The same set of variables dictates the ex-post wealth effect of tradable shareholders, but in the reverse direction. The share reform provides a natural setting that allows tradable shareholders to reflect their concerns with agency problems. The mechanism could ameliorate the agency problems. Corporate governance, in a broad sense, is related to compensation and the ex-post wealth effect of tradable shares. A successful mechanism should be designed to have minority shareholders involved in the process and have the final compensation reflect the quality of corporate governance.

Managerial Overconfidence and Share Repurchases

Following prior studies, we use keywords in press portrayals to gauge managerial overconfidence. We hypothesize that managerial overconfidence is related to a managers perception that the firm is undervalued. Results from 2744 share repurchase programs launched by 783 listed firms in Taiwan confirm this hypothesis. We find that managerial overconfidence is positively correlated with the intensity of share repurchasing, which is measured by scale, execution, frequency, and the difference between the announced price and post‐execution price. Moreover, the programs launched by overconfident managers were not undervalued and therefore were associated with reduced post‐announcement returns.

The Year-End Anomaly of Taiwanese Family-Controlled Groupings

The average abnormal return of Taiwanese family-controlled grouping (1.60 percent) is significantly higher than that of individually listed companies (0.03 percent) in December. Within the same family-controlled grouping, the average abnormal return in December is also higher than that of the rest of the months (-0.13 percent) in the sampling periods 1992 through 1997. We cautiously set five joint criteria to define the anomaly in December that pertains only to the family-controlled grouping. The empirical results supported our argument by which the ornamenting motive of the family-controlled grouping is to account for the anomaly. For illustration, we further identify company size, losses from currency translation and bad debt, cash flow, and the gain from selling long-term investment which can effectively contrast the willingness and capability of family-controlled grouping to engage in the year-end earning management.

Stock Price and Trading Volume Effects Associated with Changes in the MSCI Free Indices: Evidence from Taiwanese Firms Added to and Deleted from the Indices

This study analyzes price-volume relation for Taiwanese listed firms that are added to or deleted from the MSCI free indices in the sampling period from May 17, 1999 to May 21, 2001. Additions to the indices found a positive abnormal return of 3.9% in the run-up window from the announcement day up to one day before the change was implemented. This was followed by a significant reversal on the change day. The deleted firms exhibit an even stronger announcement effect, with a significant abnormal return of -9.1% in the run-up, followed by a reversal of 1.6% on the change day. Even when reversals occurred on the change day, the abnormal returns in the post-announcement window are positive for additions and negative for deletions. The results support the price-pressure and long-run downward-sloping-demand hypothesis and are inconsistent with the efficient market hypothesis. The abnormal trading volume for deletions is negative following the announcement, contradicting the findings of Lynch and Mendenhall (1997). This difference is due to the innate of the Taiwanese stock market, in which no dedicated market makers accommodate block trading. Moreover, the regression results confirm a positive volume-return relation before and a negative relation on and after the change day. Finally, the QFII net buy (sell) the added (deleted) stocks up to ten days after the change was implemented, while the Securities Investment Trusts and Securities dealers, having a shorter frame net, buy the added stocks up to two days after the effective change. Individual investors reversing position on the change day are responsible for the price reversal on the change day.

Decisions of Initial Public Offering Review Committees: Causes and Consequences

We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firms associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.

Audit duration quality and client credit risk

Using Taiwanese listed firms, we examined how auditor-related idiosyncratic risk affects clients’ credit risks from the perspective of audit duration quality, including the level and volatility of audit report lag (ARL). We find that both the level and the volatility of ARL are positively related to clients’ credit risks when other well-known determinant variables are controlled. In addition, the level (volatility) of ARL has weaker (greater) power in predicting the financial crisis of client firms associated with the Big-4 auditing firms than the non-Big-4 ones. Moreover, the results are robust to the issue that ARL may be long, the concern of initially engaged clients, different estimation periods of ARL volatility, and another credit risk measure.

Board Structure, Intra-Industry Competition, and the R&D Announcement Effect

The main purpose of this paper is to investigate how investors perceive and respond to a firms R&D announcement. We propose that board structure and intra-industry competition jointly dictate the announcement return. In addition, we assume that investors prefer carefully scrutinized R&D investments to mitigate asymmetric-information risks. Finally, we assume that investors prefer a sustainable R&D investment to prevent intense intra-industry competition and to ensure profit potential.We use a sample of 229 announcements made by 116 Taiwanese listed firms to verify our postulation. Our postulation is the abnormal returns are positively correlated with board independence while negatively correlated with board size. We construct two variables to capture intra-industry competition: (i) the number of days that have elapsed since a competitors prior announcement and (ii) the ordinal number of announcements in the same industry. Our results show that the announcement effect is negatively correlated with industry R&D intensity. The negative effect is partially ameliorated when the lapse since a prior competitors announcement is long. Moreover, the announcement effect is also lower when the announcing firm has a high-level of R&D intensity and has experienced numerous prior R&D announcements in the same industry.

Earnings Management, Managerial Optimism, and IPO Valuation

We postulate that both managerial overoptimism and earnings management using accruals to boost accounting numbers effect on initial public offering (IPO) valuation. Referring to Purnandam and Swaminathan [2004], we gauge the IPO intrinsic values with respect to the offer price and the initial price. The portion that real offer (initial) price is above the intrinsic offer (initial) price is defined as offer premium (overreaction). Using 287 Taiwans IPOs in sampling period 2004–2008, we find that most IPO firms were overpriced rather than underpriced. The offer premium is neither affected by earnings management nor managerial optimism, which is probably due to the greater scrutiny by the associated underwriters who are less gullible to managerial optimism or earnings management. In contrast, in initial market price valuation investors are cautious to take the face value of earnings management when IPO managers are perceived of moderate optimism. However, investors directly discipline overoptimistic managers with a lower initial valuation. Managerial overoptimism is the dominant factor in explaining long-run underperformance. We find that offer premium is positively associated with overreaction. Moreover, earnings management, albeit unrelated to overoptimism and offer premium, is positively related with initial overreaction and long-run underperformance.

Managerial Overconfidence, the Odds of Completing a Merger, and Post-Merger Performance

We postulate that the level of managerial overconfidence is a critical factor influencing the likelihood of completing a merger. Using keywords in press portrayals to gauge managerial overconfidence (Malmendier and Tate, 2005b) we find that the managerial overconfidence of acquiring (target) firms is positively (negatively) related with the odds of completing a merger. The results hold for three datasets: acquiring firms listed in Taiwan, target firms listed in Taiwan, and both acquiring firms and target firms listed in Taiwan. The negative correlation between managerial overconfidence and abnormal returns around the time of the announcement shows the market lends little credence to such overconfidence. Managerial overconfidence is also detrimental to long-run post-merger performance measures. Our results go beyond the intuitive inference that managerial overconfidence is positively correlated with merger premium and therefore with the likelihood of completing a merger. We find that both managerial overconfidence and merger premium have significant effects on the odds of completing a merger, and that managerial overconfidence when being isolated from merger premium significant affects the likelihood of merger completion. We also find that corporate governance weakens the positive association between managerial overconfidence and the likelihood of completing a merger.