A-share Investors Research Articles

Research on the Correlation Between Company Performance and Its Share Price

This paper mainly explores the correlation between corporate performance and stock price returns in the Chinese stock market. Theoretically, the stock value of a highly profitable company would also increase accordingly. But due to the structure of A-share investors, the extent of this correlation is yet to be proven. In this study, stock returns are set as explained variables, and market index returns, corporate earnings growth rates and momentum are used as explained variables. This article uses the financial statements and stock price information of Chinese listed companies as data for modeling. The selected companies are from the food and beverage industry, the medical industry and the home appliance industry. Multiple linear regression analysis was used as the method of this paper. From the regression results, it is concluded that the market index plays a leading role in stock returns. The study indicates that there is a certain positive correlation between company performance and stock price returns to a certain extent, and the degree of correlation varies with industries. The momentum factor has a positive or no correlation with returns, depending on the industry. This deviates from the theoretical assumption that momentum is a negative factor.

Does access to developed audit markets improve home audit quality? Evidence from China

In December 2010, Hong Kong regulators allowed 12 mainland Chinese registered audit firms to audit companies incorporated in mainland China and listed in Hong Kong (H-shares). In this study, we examine whether access to the Hong Kong audit market improves the quality of audits conducted by these Chinese audit firms for clients listed in the mainland markets (A-shares). Using data from 2008 to 2016, we find that mainland auditors with H-share clients provide higher quality audits, as measured by more modified audit opinions, higher audit fees and less earnings management, than auditors without H-share clients. This effect is more pronounced when the auditors are non-Big 4 firms and the clients are listed only in mainland China. Further analysis shows that A-share investors react positively to the initial announcement that mainland auditors are permitted to conduct H-share audits. Overall, our findings suggest that H-share audits have a positive spillover effect on the quality of A-share audits.

Media censorship and stock price: Evidence from the foreign share discount in China

This paper studies the price implication of media censorship in the context of the long-standing foreign share discount puzzle in China. We conjecture that the government censors negative news and promotes positive news in Chinese media, leading to the premium on A-shares, which are mainly traded by domestic investors. We find that the ratio of positive to negative news is substantially higher for Chinese newspapers than English newspapers. Such favouritism is found to inflate the price of domestic A-shares and contribute to the discount of foreign B-shares from the same firms. We also provide evidence that B-share investors pay more attention to bad news, while A-share investors pay more attention to good news. Our findings suggest that the news perception distorted by media censorship helps to explain the foreign share discount puzzle and has important implications for international capital flows.

Do Foreign Investors Better Seize the Moment of Buying and Selling Stocks? An Empirical Investigation Based on SH-HK Connect Scheme

We empirically investigate the Granger causality between northbound SH-HK Connect and domestic market behavior using a newly proposed sequential multiple-horizon non-causation test strategy. Empirical results illustrate that the northbound SH-HK Connect only cause onshore market change in very few windows, which means that foreign investors do not better seize the moment of buying and selling than domestic investors. Given the low proportion of the Qualified Foreign Institutional Investors (QFII) and the northbound Stock Connect quotas in aggregate free float A-share market cap and much lower turnover velocity than individual A-share investors, domestic investors would remain a dominant marginal price setter in the onshore market until foreign ownership reaches more meaningful levels.

Why Market Timing Makes Sense In China:Re-Examining Local Investor Behavior

In October 2000, when, during a televised interview, the renowned economist and long-standing capital markets advocate Wu Jinglian called the Chinese A-share market a “casino,” the public outcry was immediate. The early responses focused on the need for improved market regulation and transparency, but a few prominent market participants and academics highlighted a more fundamental problem: A-share investors’ stubborn reliance on market timing strategies to generate return. The persistence of this latter issue is why today—despite nearly 15 years of regulatory development and investor education—the gambling metaphor still finds traction. For overseas investors, this type of speculative investor behavior only reinforces the already robust investment case for China’s capital markets. The success of China’s f irst wave of reforms has bolstered confidence that the positive trends in consumer spending, urbanization, and productivity will ultimately be ref lected in higher share prices. Financial liberalization will introduce new f lows into the markets and support higher valuations. Further, according to J.P. Morgan Asset Management [2014], current valuations are still attractive: the market’s average price/forward earnings ratio in the third quarter of 2004 was less than 10x, and the 10-year average of a composite valuation metric evaluating price versus forward earnings, book value, historical cashf low, and historical dividends, respectively, was close to one standard deviation behind the long-term global market average. China’s interbank f ixed income market is still in a relatively nascent stage, but recent long maturity corporate issuance, newly introduced regulation to improve credit risk transparency, and the development of new securitized bonds—including the planned launch of mortage-backed securities—offer foreign investors the opportunity to benef it from unprecedented structural reforms. Recent efforts to liberalize interest rates have already had a positive impact on f ixed income market liquidity, and China’s current policy real yield remains among the highest in the world. Despite this positive long-term outlook for China’s capital markets, overseas investors would benefit from a close examination of domestic speculative investment behavior, particularly in China’s A-share market. Market timing—in simple practice, predicting the outperformance of stocks relative to bonds—is still a vexing topic in financial market theory. In the absence of persistent, superior forecasting skill, market timing is considered irrational behavior. Further, devising a method to assess this forecasting skill is fraught with difficulty and contingent on a number of impractical assumptions. Yet neither these impediments nor the long-term poor performance of onshore market timing strategies have deterred China A-share investors. In China, at least, this activity, albeit “irrational,” clearly must have some rationale. The seminal work by Merton [1981] on evaluating asset manager total performance proves relevant here. Merton argues that a pure market timing strategy can be regarded as a long position in a zero-cost European call option on the market portfolio, with a strike price that aligns to the drift path of the risk-free rate. This analogy Why Market Timing Makes Sense In China: Re-Examining Local Investor Behavior

Empirical investigation of herding behavior in Chinese stock markets: Evidence from quantile regression analysis

This study examines the herding behavior of investors in Chinese stock markets. Using a least squares method, we find evidence of herding within both the Shanghai and Shenzhen A-share markets and no evidence of herding within both B-share markets. A-share investors display herding formation in both up and down markets. However, we cannot find herding activity for B-share investors in the up market. By applying quantile regression analysis to estimate the herding equation, we find supporting evidence of herding behavior in both A-share and B-share investors conditional on the dispersions of returns in the lower quantile region.

Accounting internationalization and value relevance of accounting earnings in China

Using financial reports of AB-share listed companies in China from 1996 to 2003, this paper attempts to evaluate the impact of accounting internationalization in China by comparing time serial value-relevance differences between Chinese Accounting Standards (CAS) and International Accounting Standards (IAS). Empirical evidence from relative information content test indicates that unexpected earnings reported under IAS have more information content to A-share investors than those under CAS. However, the relative value-relevance of IAS is weakened through the accounting internationalization process. Moreover, empirical evidence from incremental information content test shows that the incremental value-relevance of IAS is also weakened through the accounting harmonization process. Further empirical evidence demonstrates that CAS earnings appear to substitute for CAS earnings in the valuation process to the extent to which CAS is harmonized with IAS.

Herding behavior in Chinese stock markets: An examination of A and B shares

This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find evidence of herding within both the Shanghai and Shenzhen A-share markets that are dominated by domestic individual investors, and also within both B-share markets, in which foreign institutional investors are the main participants. Herding occurs in both rising and falling market conditions. Herding behavior by A-share investors in the Shanghai market is more pronounced under conditions of rising markets, high trading volume, and high volatility, while no asymmetry is apparent in the B-share market.

A comparison of value relevance of accounting information in different segments of the Chinese stock market

This paper investigates the difference in the value relevance between the accounting information prepared and audited under the Chinese GAAP for A-share investors and under the international accounting standards (IAS) for B-share investors in the Chinese stock market. The study reports three primary findings. First, accounting information influences the pricing process in both the A-share market and the B-share market. Second, the accounting information in the B-share market is more value relevant than that in the A-share market, as expected. Finally, the value relevance level of accounting information in the A-share market was low in earlier years, peaked in 1996, and then decreased due to changes in the disclosure environment. However, the value-relevance level of accounting information in the B-share market had no substantial changes. Using a constant sample, control variables on firm features, and measures of traders' behavior, we obtain robust results. These findings have implications for policymakers on recent moves toward replacing local GAAP with the IAS.

Stock price reactions to earnings announcements: evidence from Chinese markets

We examine the stock price reactions to changes in earnings per share (EPS) in the Chinese stock markets. We find that domestic A-share investors do not correctly anticipate the changes in earnings and fail to adjust new earnngs information quickly, but international B-share investors can predict earnings changes better than A-share investors. As a result, abnormal returns (ARs) can be obtained by trading on the earnings information, but for A shares only. An explanation is that most A-share holders are individuals with short-term investment horizon while most B-share holders are large institutions that trade on more detailed and accurate financial information not immediately available to A-share holders.

The use of accounting information for the valuation of dual-class shares listed on China's stock markets

This study examines whether accounting data are useful in helping explain the market value of listed firms in China. In particular, we focus our investigation on companies that have issued dual-class shares sold to domestic investors (A-shares) and foreigners (B-shares). Domestic accounting standards (DAS) are used for the financial statements of A-shares while international accounting standards (IAS) are used for B-shares. Our results show that IAS earnings information is incorporated in the prices and returns of B-shares. In contrast, A-share investors appear to place most weight on DAS earnings and only recently has there been an association with IAS information. Book values are value relevant for B-share prices but not for A-share prices. Sensitivity tests show that accounting information is more likely to be impounded in share prices and returns for firms with high individual (i.e. non-government) share ownership. Based on our results, we argue that China's move towards the adoption of IAS will be useful for A-share investors, especially in light of the country's recent accession to the WTO and the consequent opening-up of the economy.

Capital Control, Market Segmentation And Cross-Border Flow Of Information: Some Empirical Evidence From The Chinese Stock Market

This paper investigates the trading activities of two distinct classes of shareholders, namely, the Chinese domestic investors and the foreign investors in the segmented Chinese A-share and B-share markets, respectively. Based on the results of our event study, we document prominent volatility and trading volumes during the windows of earnings announcements. The market reaction is more intensive in the A-share market and takes place much earlier before the public release of information. Furthermore, the abnormal trading volumes without price changes in advance of the public disclosure support the hypothesis of existing information among the A-share investors. This manifests information leakage and suggests an informal information environment in the A-share market. We further classify the earnings announcements into good news and bad news, and find that different information does not bring about different reaction patterns for the A shares. Insider trading, speculation and over-optimistic prospects for the economy in the A-share market are possible explanations.