Public Firms In China Research Articles

Taxation in a mixed economy: the case of China

PurposeThe purpose of this paper is to investigate how Chinese firms’ ownership structure is related to their effective tax rate. The People’s Republic of China provides an interesting environment to examine the corporate income tax. Government has significant ownership stakes in the for-profit economy and state-owned enterprises (SOEs) are liable to the corporate income tax. This is very different to most other economies where SOE tends to dominate the not-for-profit economy and pays no corporate income tax. Government ownership also varies between the central government and local government in addition to state asset management bureaus. This provides a rich institutional background to examining the corporate income tax.Design/methodology/approachA panel data analysis approach is used to examine relationship between ownership structure and effective tax rates of all public firms in China from 1999 to 2009.FindingsThe authors report that effective tax rates do appear to vary across the ownership types, but that SOEs pay a statistically higher effective tax rate than to non-state-owned. In addition, local government owned SOE pay higher effective tax rates than central government and SAMB owned SOE. The authors also investigate Zimmerman’s (1983) political cost hypothesis. Unfortunately, these results are econometrically fragile with the statistical significance of those results varying by empirical technique.Originality/valueThis paper provides insight into government ownership and taxation in China.

A comprehensive and quantitative internal control index: construction, validation, and impact

We use a new method to better measure internal control quality. Specifically, we construct an internal control index for all public firms in China, because the lack of internal control regulations during our sample period presents an interesting setting, in which the diversity of internal control quality is preserved. Two distinctive features set our index apart from the information currently available under SOX 404 in the U.S. First, it comprehensively evaluates a firm’s internal control, based on the COSO framework. Second, it quantitatively measures a firm’s internal control, using the analytic hierarchy process designed for analyzing complex decisions. We proceed to validate our index by confirming the known relation between internal control quality and earnings management. Further, we theorize that our internal control index has a positive impact on the earnings response coefficient, and find that better internal control indeed makes financial reporting more credible to investors.

State ownership and market orientation in China's public firms: An agency theory perspective

In China, an increasing number of state-owned firms have gone public, which suggests a dual-principal phenomenon such that firms are owned by both the government and non-state shareholders. Non-state shareholders tend to focus on the firm's market orientation and performance, while state shareholders seek political goals over profit-maximization. This manuscript attempts to investigate this issue based on agency theory with both qualitative and quantitative studies. Our findings suggest that state-controlled public firms indeed exhibit a lower degree of market orientation than privately controlled public firms in China, and that the firm's market orientation is relatively high when firm ownership is concentrated in the hands of non-state shareholders.

Strong Enough to Fight or to Flee? Executive Social Capital and Ship Jumping in Declining Firms

How does executive social capital, i.e., executives’ social connections with external stakeholders, affect executives’ ship- jumping behavior in declining firms? Should the executives stay, using their social capital to help turn around the firm, or should they use their social capital to find a position at another firm? Drawing upon resource dependence theory, we resolve this dilemma by highlighting the way in which executive social capital affects executives’ dependencies on external employment opportunities and their current declining firms, which together determine the potential benefits and opportunity costs of ship- jumping. The evidence from specially treated (*ST) public firms in China confirms that executives are less likely to jump ship from a firm in crisis when their social capital endowments are particularly low or particularly high. Moreover, executive social capital also moderates the effects of social capital endowments of other (peer) upper-echelon executives in a firm and the firm’s alli...

Price Elasticity for Stocks: Evidence from China's Split-Share Structure Reform

In 2005 and 2006, the split-share structure reform converted the nontradable shares of most domestic public firms in China to tradable shares. This conversion imparted a drastic supply shock to the public market. Studying this unique event, we provide direct evidence to support an inelastic demand curve for stocks. Abnormal returns of the sample firms resulting from the reform are found to be negatively associated with the size of the supply shock. This finding is free from the confounding information effects present in many prior studies of stock price elasticity. It is also robust after controlling for opposite price impacts of ROA, firm size, and ownership concentration.

A Comprehensive and Quantitative Internal Control Index: Construction, Validation, and Impact

We use a new method to better measure internal control quality. Specifically, we construct an internal control index for all public firms in China, because the lack of internal control regulations during our sample period presents an interesting setting, in which the diversity of internal control quality is preserved. Two distinctive features set our index apart from the information currently available under SOX 404 in the U.S. First, it comprehensively evaluates a firm’s internal control, based on the COSO framework. Second, it quantitatively measures a firm’s internal control, using the analytic hierarchy process (AHP) designed for analyzing complex decisions. We proceed to validate our index by confirming the known relation between internal control quality and earnings management. Further, we theorize that our internal control index has a positive impact on the earnings response coefficient (ERC), and find that better internal control indeed makes financial reporting more credible to investors.

Does Pyramid Create Access to Debt Financing for Entrepreneurs? Evidence from China

Pyramid has been regarded as a means to create internal financial market and tunnel asset by the ultimate controller, however, in a financial system dominated by banking sector and most of bank loans go to state controlled firms and public firms, entrepreneurs may also try to get access to bank loans through controlling public firms by pyramid. Entrepreneurs who want to over leverage the public firm and thus transfer more funding which would have been otherwise not available will find that it is easy to do so with more control over this public firm, but under the severe financial constraint, entrepreneurs might well not want to increase their ownership, the result being increase in leverage as increase in separation. The empirical study based on all public firms in China from 2004 to 2005 confirms that public firms with ultimate largest shareholder as individual(s) have more leverage or separation compared to their state controlled peers and within those firms, those in pyramid structure present a significant higher leverage. However, it is still unknown whether this development has increased financial risks for public firms and banking system as a whole.

The Dynamic Adjustment of Firms' Capital Structure in China

By using a dynamic adjustment model, this paper examines the dynamic adjustment for capital structure of public firms in China. The results show that, the capital structure of Chinese public firms is adjusted dynamically. The public firms in China are systemically under-leveraged with high adjustment costs. The main reason can be attributed to the imperfect capital market. Therefore, some efforts, such as completing the laws and accelerating the development of capital market, should be made to improve the optimization of public firms' capital structure.

Stock Market Bubble and Earnings Management: Model and Evidences from China's Stock Market

This study examines how stock market bubbles will influence firm's incentive to manipulate earnings report. The model predicts that under high level of stock market bubbles, firms are more likely manipulate their earnings reports. We tested this prediction by using a sample of public firms in China's stock market. The result strongly supports the prediction of the model. It also shows that individual stock's price level does not influence the degree and propensity of firm's earnings manipulation significantly, which suggests that firms only use the whole market price level as a reference point when they make the decision of earnings manipulation.