Category Archives: Accounting & Finance

Political ranking in hierarchy and receipt of a comment letter: Evidence from China

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Abstract

This study investigates the effect of political ranking in hierarchy on the probability that a firm will receive comment letters in China. We find that state-owned enterprises (SOEs) are less likely to receive comment letters compared to non-SOE firms, and the probability of receiving a letter is even lower for central government-controlled firms. These results demonstrate that political hierarchy is a significant factor in determining the receipt of comment letters. In addition, alternative proxies for political ranking yield similar findings. Lastly, our further analysis suggest that the level of marketisation and media coverage can significantly influence the results, indicating that a highly developed market may alleviate the negative effect of political ranking.

Production similarity and the cross‐section of stock returns: A machine learning approach

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Abstract

This paper employs a machine learning approach to capture firm-pair production similarity, which depicts how firms' production processes resemble each other using textual data in corporate MD&As. We show that production-linked firms' average return has strong predictive power on focal firm's future stock return. A hedging portfolio yields an annualised return of 11.69%, which cannot be subsumed by existing factor models. For mechanism tests, we find that the main findings are stronger in firms with higher information asymmetry and higher costs of arbitrage. The production-linkage measure also predicts future unexpected earnings, suggesting it possibly includes valuable information on firm fundamentals.

Plus Token and investor searching behaviour – A cryptocurrency Ponzi scheme

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Abstract

In July 2020, the Chinese government warned that the Plus Token was a Ponzi scheme based on blockchain. More than 200 million investors were involved in this scam. We investigate how investors' search behaviour is associated with their decision making. We find that the bitcoin bag of words Baidu index is positively and significantly related to bitcoins transferred to Plus Token addresses, suggesting that public prominence of searches about bitcoin and blockchain tends to be related to investor decisions regarding the Plus Token project.

Deleveraging for talents: Human capital reliance and corporate leverage

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Abstract

Using data from Chinese listed firms, we develop a measure of a firm's reliance on human capital that is based on its demand for highly educated employees. We find that a high reliance on human capital is linked to low corporate leverage, and this effect is more pronounced among firms at a high risk of human capital mobility and those facing high skilled-labour adjustment costs. Our results indicate that firms strategically manage their capital structure to maintain financial flexibility, enabling them to effectively respond to the labour-related costs associated with human capital losses and costly labour adjustments.

Cultural diversity and Indigenous participation on Australian corporate boards: Harder but better decisions

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Abstract

This study explores Indigenous Australians' participation on corporate boards. We confirm the significant under-representation of Indigenous Australians on corporate boards. Using data collected from semi-structured interviews with business leaders, we explore their perceptions of cultural diversity and pathways to directorships provided by corporate Australia for Indigenous Australians. Australian business leaders perceive the importance of cultural diversity (particularly in terms of its myriad benefits such as enhanced decision making), acknowledge the problem of limited diversity, and provide insights to improve diversity. Key pathways for Indigenous Australians include skills and experience, education and training, reputation, networking and organisational support.

Corporate social responsibility disclosure, dividend payments and firm value – Relations and mediating effects

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Abstract

We examine the relations between corporate social responsibility (CSR) disclosures, dividend payments and firm value. We use an international sample and measure CSR disclosures based on Global Reporting Initiative (GRI) disclosure levels, which we divide into two parts (unexpected and expected disclosures). We find three main results. First, firms with higher levels of unexpected CSR disclosure pay higher dividends, and this association is attributable to firms where unexpected CSR disclosure is aligned with CSR performance. Second, only the unexpected part of CSR disclosures is positively associated with share prices. Third, this positive association is fully mediated by dividends.

Does patent infringement litigation affect stock price crash risk? Evidence from China

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Abstract

Previous studies have examined the determinants of stock price crash risk. However, extant literature overlooks the relationship between patent infringement litigation and stock price crash risk. Based on a dataset of Chinese firm-year observations for the period 2007–2021, we fill the gap by examining how patent infringement litigation affects stock price crash risk and the underlying channels through which this effect occurs. We provide robust evidence that corporate patent infringement litigation increases its risk of one-year-ahead stock crash. This unfavourable effect is more pronounced in firms that were involved with invention patent infringement lawsuits, lost a patent litigation case, suffered from larger litigation costs and are defendant firms. The channel analysis confirms that increased information risks and exacerbated financial constraints are two plausible channels explaining how patent infringement litigation leads to stock price crash risk. Finally, we find that effective corporate governance and risk-taking level are conducive to mitigate the unfavourable effect of patent infringement litigation on stock crash risk. This study enriches the literature on stock price crash risk from the perspective of patent infringement litigation.

Managerial short‐termism and financial statement comparability

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Abstract

This study examines the association between managerial short-termism and financial statement comparability. Using a short-termism measure constructed through textual analysis and machine learning based on a Chinese language setting in management discussion and analysis (MD&A), we find that firms with higher short-termism produce financial statements with lower comparability and that this effect disappears in short-horizon industries. We further find that the increased comparability is associated with an improvement in analysts' forecasts only in non-short-horizon industries. Overall, our findings suggest that firms with greater managerial short-termism are more likely to have unusual corporate behaviours, thus having worse comparability with other firms.

Higher‐order moments and asset pricing in the Australian stock market

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Abstract

This paper investigates a set of realised higher-order co-moment risk–return relationships in the Australian stock market. We test the predictive power of the asset pricing model by implementing the two-, three-, four-moment Capital Asset Pricing Model. Our findings show that investors respond differently to information related to realised higher-order co-moments, and that the corresponding gamma (normalised co-skewness) and kappa (normalised co-kurtosis) risk factors remain priced in the presence of continuous beta and jump beta. Furthermore, we find that the realised high-order co-moment risk measures are priced differently and remain significant even when combined with a set of firm characteristics.

How does credit information sharing affect trade credit? Evidence from China

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Abstract

This paper investigates how credit information sharing affects corporate trade credit financing. Utilising the difference-in-differences method, we find a significant reduction in trade credit for infra-marginal bank borrowers following the introduction of the Chinese National Enterprise Credit Information Publicity System (NECIPS). To reveal the mechanisms underlying the reduction in trade credit, we show that the NECIPS alleviates information asymmetry and increases formal finance access. This financing substitution effect is magnified by weak bargaining power in product markets. Our findings complement the literature on the determinants of trade credit and underscore the indispensable role of the public credit registry.