T.J. Wong

Earnings Management and the Long-Run Market Performance of Initial Public Offerings

Issuers of initial public offerings ~IPOs! can report earnings in excess of cash f lows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.

Earnings management and the underperformance of seasoned equity offerings

Seasoned equity issuers can raise reported earnings by altering discretionary accounting accruals. We find that issuers who adjust discretionary current accruals to report higher net income prior to the offering have lower post-issue long-run abnormal stock returns and net income. Interestingly, the relation between discretionary current accruals and future returns (adjusted for firm size and book-to-market ratio) is stronger and more persistent for seasoned equity issuers than for non-issuers. The evidence is consistent with investors naively extrapolating pre-issue earnings without fully adjusting for the potential manipulation of reported earnings.

Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

In emerging markets, the concentration of corporate ownership has created agency conflicts between controlling owners and minority shareholders. Conventional corporate control mechanisms such as boards of directors and takeovers are typically weak in containing the agency problem. This study examines whether external independent auditors could be employed as monitors and as bonding mechanisms to alleviate the agency conflict. Using a broad sample of firms from eight East Asian economies, we document that firms are more likely to employ Big Five auditors when they are more subject to the agency problem imbedded in their ultimate ownership structure. One possible reason that this documented relation between auditor choice and the agency problem is more evident than the inconsistent results using U.S. and U.K. data is that alternative governance mechanisms are limited in East Asia. In addition, among East Asian auditees subject to the agency problem, Big Five auditors charge a higher fee and set a lower audit modification threshold while non-Big Five auditors do not. Taken together, the evidence suggests that Big Five auditors in emerging markets do have a corporate governance role.

Are Accruals during Initial Public Offerings Opportunistic

We find evidence that initial public offering (IPO) firms, on average, have high positive issue-year earnings and abnormal accruals, followed by poor long-run earnings and negative abnormal accruals. The IPO-year abnormal, and not expected, accruals explain the cross-sectional variation in post-issue earnings and stock returns. The results are robust with respect to alternative abnormal accruals and earnings performance measures. IPO firms adopt more income-increasing depreciation policies when they deviate from similar prior performance same industry non-issuers, and they provide significantly less for uncollectible accounts receivable than their matched non-issuers. The results taken together suggest opportunistic earnings management partially explains the new issues anomaly.

Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms

ABSTRACT This paper tests the proposition that politicians and their affiliated firms (i.e., firms operating in their province) temporarily suppress negative information in response to political incentives. We examine the stock price behavior of Chinese listed firms around two visible political events—meetings of the National Congress of the Chinese Communist Party and promotions of high‐level provincial politicians—that are expected to asymmetrically increase the costs of releasing bad news. The costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies. The result will be fewer stock price crashes for the affiliated firms during these event windows, followed by an increase in crashes after the event. Consistent with these predictions, we find that the affiliated firms experience a reduction (an increase) in negative stock return skewness before (after) the event. These effects are strongest in the three‐month period directly preceding the event, among firms that are more politically connected, and when the province is dominated by faction politics and cronyism. Additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events, suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms’ information environment.

The Value of Political Ties Versus Market Credibility: Evidence from Corporate Scandals in China

This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of i) the firm’s political networks (political scandals), ii) the firm’s market credibility (market scandals), or iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state-owned banks, and higher departure of political directors.

Political Bias in Corporate News: The Role of Conglomeration Reform in China

Using textual analyses of 1.77 million articles, we find that, through the Chinese government’s conglomeration reform that reorganizes official and nonofficial newspapers from the same locale into a news group under state control, there is an increase (decrease) in positive tone and political content in official (nonofficial) newspaper articles. The evidence is consistent with official newspapers becoming more concentrated on political goals and nonofficial newspapers becoming more focused on commercial objectives, thus better enabling the newspaper industry to pursue a dual role as the government’s mouthpiece and an information institution supporting the market economy. Our results are robust to using a matched firm-month research design that examines the content of articles written about the same firm in the same month, a matched firm-event approach that examines concurrent newspaper articles published immediately following corporate earnings announcements, and a difference-in-differences approach to test for conglomeration effects.

Political Bias of Corporate News in China: Role of Commercialization and Conglomeration Reforms (September)

Using textual analyses of 1.8 million articles, this paper examines whether the authoritarian government in China, despite its direct ownership and control of the press, manages to increase the diversity of corporate news through commercialization and conglomeration reforms. Through the creation of business newspapers, commercialization introduced market competition into the media market; conglomeration subsequently re-organized business and official newspapers from the same locale into a single news group. Our evidence shows that business newspaper articles are less politically biased than official newspaper articles, and this difference in the bias magnifies among conglomerated newspapers, with business newspapers showing a further reduction in political bias. Our results are robust to using a matched firm-month research design that examines the content of articles written about the same firm in the same month and a difference-in-difference approach to test for conglomeration effects. Corroborating evidence on the perceived informativeness of the news articles, as captured by absolute stock price response to article publication, follows a similar pattern. That is, the stock price response is stronger for business newspaper articles than official newspaper articles, and this difference is larger for conglomerated newspapers than non-conglomerated newspapers. The evidence suggests that commercialization can shift newspapers’ reporting incentives towards consumers’ preferences and attenuates state influence, even under state ownership and control. Also, conglomeration facilitates specialization and diversification, allowing business newspapers to focus on commercial objectives and official newspapers to concentrate on political goals. The combined evidence suggests the reforms allowed the government to successfully realign the newspaper industry to better fulfill its dual role as the government’s mouthpiece and an information institution supporting the market economy.