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CORPORATE GOVERNANCE AND FIRM PERFORMANCE IN HONG KONG

Hong Kong has adopted updated corporate governance (CG) rules and code of best practices in year 2005. This study aims to review and analyze if CG practices of a firm in Hong Kong have any influence on its performance as a result of these updated adoptions. This study reexamines the issue by first developing a conceptual framework and then by calculating comprehensive corporate governance index (CGI) based on the updated CG rules. The main findings are CGI, three CGI sub-indexes (namely rights of shareholders, disclosure and transparency, and board responsibilities and composition), and transparent disclosure have a significantly positive relationship with firm performance. The findings suggest that companies should spend more resources to improve those three specific CGI sub-indexes, so that the public can rely on the disclosed information to make better decisions. Besides, international investors and regulators can make reference to the results of this study. This study shows that these sample firms that also listed as American Depositary Receipts in the U.S. have significant and positive relationship with rights of shareholders.

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UNCERTAINTY OF CLIENT IMPORTANCE AND INFORMATION ASYMMETRY

This study investigates whether a firm's client importance and the associated uncertainty affect the firm's information asymmetry; this investigation is conducted at the audit firm and group levels by using Taiwan's market data from 2000 to 2010. Empirical results show that client importance to an audit group (hereafter, IMP_G) and the associated uncertainty (hereafter, IMP_G_V) are significantly and negatively related to information asymmetry, whereas client importance to an audit firm and the associated uncertainty are no significant when other established variables are controlled for. The results suggest that the assertion of the reputation concern is empirically supported at the audit group level. In addition, we observe that the effects of IMP_G and IMP_G_V on information asymmetry become weaker with increasing firm profitability, indicating that firms with higher profitability have fewer incentives to hide information about earnings, thereby weakening the importance of auditor independence. Finally, our results are robust for addressing endogeneity concerns.

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IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ACTIVITIES ON ANALYSTS' BEHAVIOR

We investigate whether or not a firm's corporate social responsibility (CSR) activities influence analysts' behavior. CSR is concerned with the positive and negative impacts of corporations' present actions on the ecosystems, societies, and environments of the future. Firms with more concerns than strengths (i.e., a lower degree of social responsibility activities) are characterized by less reputation, high risk, high information asymmetry and non-transparent disclosures. These are attributes analyst care about and may influence their behavior. We therefore expect and find that analyst following and consensus forecast accuracy increase and that dispersion among consensus analyst forecasts and revision volatility decrease as the degree of CSR increases. We further find that the influence is driven by the CSR strengths while being limited by CSR concerns. Additionally, we identify three channels (firm performance, earnings quality, and earnings volatility) that mediate the effect of CSR on analysts' behavior. We show that CSR activities are relevant to an important user group and as a result, we inform regulators as they debate a CSR reporting framework and assurance standards.

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IDENTIFYING KEY FACTORS IN ACCOUNTING-BASED MODELS OF CREDIT RISK BASED ON A PREDICTIVE MODEL AVERAGING APPROACH

Accounting-based models in credit risk have been shown to perform well in predicting a firm's ability to meet its financial obligations, even if they include only a limited number of financial ratios measuring different aspects of the firm's financial health. However, there is little agreement on a specific set of ratios to be incorporated in these models in the existing literature. This study provides guidance on the set of accounting ratios to include in such models based on empirical results obtained for rating implied 1-year probabilities of default for a data set of large U.S. corporations. The analysis performed consists of a predictive Bayesian model averaging approach where the models included are restricted in the number of accounting ratios from different categories. The identified model is shown to provide similar predictive performance as more complex models, while retaining interpretability and simplicity.

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AUDITOR INDUSTRY SPECIALIZATION AND CLIENT CASH HOLDINGS: AN INFORMATION ASYMMETRY PERSPECTIVE

This study investigates the effects of industry specialization on client cash holdings at the levels of audit firms, audit groups, and individual auditors, respectively, and addresses this issue from information asymmetry perspective. The empirical results of this study find that auditor industry specialization at audit groups level is positively associated with client cash holdings, indicating that the lower the auditor industry specialization, the lower cash the client need to reserve due to the economic dependence effect, thereby supporting the monitoring cost hypothesis. In contrast, auditor industry specialization at both levels of audit firms and individual auditors is negatively associated with client cash holdings, indicating low auditor industry specialization causes the client to reserve more cash due to the reputation concern, thereby supporting the investment opportunities hypothesis. In addition, we also find that information disclosure quality mitigates the effects of industry specialization on cash holdings at the audit firm and audit group levels. Finally, the results are robust when controlling for other well-known determinant variables of cash holdings and endogeneity concerns.

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DIVERSIFICATION STRATEGY AND EARNINGS INFORMATIVENESS FOR SECURITY VALUATION

This paper examines the association between two types of diversification, including industrial diversification and global diversification, and the informational role of earnings for equity valuation. Using a sample of listed firms in Taiwan, the results show that, the incremental effect of industrial diversification on the association between stock return and future earnings is negative, whereas the incremental effect of global diversification on this association is positive. In addition, the relation between current earnings and future earnings is weaker for firms with industrial diversification and stronger for firms with only global diversification. The results are robust with respect to alternative measures of diversification and controlling for size, book-to-market, institutional holdings, and earnings volatility. Collectively, this paper suggests that earnings informativeness is lesser for firms with industrial diversification, which weakens earnings persistence. In contrast, earnings informativeness is greater for firms with only global diversification, which enhances earnings persistence.

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AUDITOR INDUSTRY SPECIALIZATION AND DECISION USEFULNESS OF FINANCIAL REPORTS IN AN EMERGING MARKET

This paper examines the association between audit firm industry specialization and decision usefulness of accounting information, characterized as the informativeness of financial reports. To consider the endogenous specialist auditor choice, we adopt the two-stage Heckman estimation procedure, and the propensity-score matching (PSM) estimation as an additional analysis. Using a sample of firms listed in Taiwan, we find that earnings and book value of equity explain more variations in stock return and are more informative for firms audited by industry specialist auditors than for firms audited by non-specialist auditors. The results are robust with respect to alternative estimation method and empirical models, alternative definition of industry specialization, and controlling for size, financial health, and success of operating performance. The evidence suggests that the informativeness of financial reports enhanced by industry-specialized auditors provides a channel through which information asymmetry may be reduced.

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WHAT EXPLAINS THE COMMONLY OBSERVED EX-DIVIDEND DAY PRICE BEHAVIOR OF STOCKS?

It is a well-known fact that the stock price drops less than the amount of dividend on ex-dividend days. We test the relative importance of two well-known theories-the tax theory and the market microstructure theory-in explaining the ex-dividend day behavior of Real Estate Investment Trust (REIT) stocks. We use REITs because of a special tax treatment applicable to REIT dividends, which facilitates the testing of the tax theory and comparing it with the market microstructure theory. Our empirical results support the tax theory but also suggest that the microstructure theory is necessary for a complete explanation of the ex-dividend day behavior.

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DO SHARE REPURCHASES IMPACT ANALYSTS' ACTIVITY AND INFORMATIVENESS?

Share repurchases announcement are discretionary transactions that stimulate analyst's activity. We use the multi-dimensional concept of informativeness to capture the integration of information in the stock prices. Our empirical test comprises American and European buybacks in the period 2000-2013. We refer to three independent measures of informativeness: the synchronicity measure introduced by Roll (1988), the Amihud (2002) illiquidity ratio, and the Llorente, Michaely, Saar, and Wang (2002) measure. We relate these three measures to analysts' activity in earning forecasting. We show that share repurchase decisions initiate a process, stimulate revisions by analysts, but do not systematically improve the informativeness of stock prices. An effective information process may develop if first it is pegged on negative cumulative abnormal return (CAR) values, and/or if the analysts are revising downward their earnings forecasts. We also highlight that informativeness improves asymmetrically depending on whether a change in the dividend policy occurs simultaneously.

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UNDERSTANDING LOAN LOSS RESERVES UNDER IFRS 9: A SIMULATION-BASED APPROACH

Based on historical data, we simulate time series using International Financial Reporting Standards (IFRS) 9's expected credit loss (ECL) model and analyze how these behave compared to loan loss reserves under International Accounting Standard (IAS) 39. While the current model under IAS 39 has been prone to build provisions considered ＂too little, too late,＂ the ECL model is supposed to be more forward-looking. We use a stage-based simulation model to estimate the three components of ECL, probability of default, exposure at default and loss given default, while simultaneously considering the three IFRS 9 stages and possible stage transitions of financial assets. Calibrating our model with European banking data from 2005 to 2014, we develop modeling approaches to all ECL components based on real world assumptions, estimate the expected amount of reserves under the new ECL model, and test to which parameters this amount is most sensitive. Our results suggest that while simulated ECL reserves are not higher compared to IAS 39 reserves in general, they tend to exceed IAS 39 reserves during times of crises. Simulated reserves are very volatile to changes in the market environment and differ substantially for more troubled compared to non-troubled banks, as well as across European countries and regions. We further find a high sensitivity of the ECL depending on the model in use to estimate the probability of default. Our estimates suggest that IFRS 9 reserves are not likely to result in the International Accounting Standards Board's (IASB) envisaged increase in countercyclical loan loss reserves.