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JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH Vol. 6, No. 2 2007 pp. 5581
Value Relevance of Accounting Information in Different Stock Market Segments: The Case of Chinese A-, B-, and H-Shares
Jianwei Liu and Chunjiao Liu
ABSTRACT: This study provides empirical evidence on the value relevance of accounting information in different stock market segments of China. Using the available data of listed A-, B-, and H-shares from 1999 to 2003, and based on the modied Ohlson model, the value relevance of accounting information is compared among different Chinese stock market segments. Further, important factors that might inuence the value relevance of accounting information in the Chinese stock market (e.g., the percentage of total tradable shares [PTS] and the B-share opening event of 2001) are studied in this paper. Four primary results are drawn from this study. First, the accounting information is value-relevant in all the A-, B-, and H-share markets, and the accounting information in the B- and H-share markets is more value-relevant than that of the A-share market. Second, within the A-share market, the value relevance of accounting information does not differ between rms issuing both AB- and AH-shares and rms issuing only A-shares. Within the A-share market, rms with higher PTS do not enjoy higher value-relevant accounting information than the rms with lower PTS. Last, our results indicate that the opening event of B-shares to domestic investors in 2001 did indeed lower the value relevance of accounting information for B-shares. Keywords: value relevance; accounting information; market segments; Chinese stock market; A-, B-, and H-shares. Data Availability: Please contact the authors.
I. INTRODUCTION his study focuses on a topic that has been increasingly in the spotlightthe value relevance of accounting information in the Chinese stock market. We investigate whether investors in different Chinese market segmentsnamely A-, B-, and H-sharesperceive the accounting information to be useful for the stock valuation and whether the value relevance of accounting information differs in various market segments and situations.
Dr. Jianwei Liu is a Ph.D. Researcher at Vrije Universiteit Amsterdam, and Dr. Chunjiao Liu is an Assistant Professor at Shijiazhuang Railway Institute.
We thank the editor, the anonymous associate editor and two reviewers for their helpful comments that have improved this manuscript. We are grateful for the useful insights given by Professor Willem Buijink and Dr. Yue Wang at Tiburg University. Specially, Jianwei Liu thanks Professor Yao-Hua Tan and his colleagues at Vrije Universiteit Amsterdam for their support in writing this paper.
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The concept of the value relevance of accounting information is dened as the ability of accounting numbers to summarize the information underlying the stock prices, thus the value relevance is indicated by a statistical association between nancial information and prices or returns (Francis and Schipper 1999). From early publications such as Ball and Brown (1968) to more recent work, like that of Ohlson (1995), accounting researchers have provided convincing evidence that accounting information is associated with stock returns. Over the last decade, emphasis on the role of accounting information in the nonU.S. markets has increased (e.g., Harris et al. 1994; Chan and Seow 1996; Ball et al. 2003). The value relevance of Chinese nancial information is an interesting topic because of Chinas fast-developing stock market and its unique market segmentation (e.g., Haw et al. 1999; Chen et al. 2001; Samia and Zhou 2004). Our study contributes to the current literature in the following respects: (1) this paper provides a unique and comprehensive study on the value relevance of accounting information in the Chinese stock market, which comprises all three stock segments; (2) the sampling period covers the period from 1999 to 2003. Previous studies (e.g., Haw et al. 1999; Chen et al. 2001; Samia and Zhou 2004) employed samples only up to 2000. As 2001 is the benchmark year of the Chinese stock markets transition from bullish to bearish, the inclusion of the more recent period enables us to explain more accurately how investors may perceive accounting information differently in various market situations. (3) This study investigates the effects of ownership structure and the year 2001 B-share opening event on the value relevance of the accounting information in the Chinese stock market. Specically, we address four research questions in this study: (1) Is the accounting information value-relevant in the Chinese stock market according to either pooled crosssectional or year-by-year regressions? (2) Do B-share rms (under IAS) and H-share rms (under IAS or H.K. GAAP) report more value-relevant accounting information than A-share rms (under Chinese GAAP)? (3) Within the A-share market, do Chinese investors perceive the accounting information to be more value-relevant for the rms issuing both AB- and AH-shares than the rms issuing only A-shares? (4) Does the percentage of total tradable shares and the 2001 B-share opening event inuence the value relevance of accounting information in the Chinese stock market? Using available data of listed rms in the Shanghai, Shenzhen, and Hong Kong stock exchanges from 1999 to 2003, the evidence of value relevance of accounting information for Chinese rms is obtained based on the modied Ohlson (1995) model. The overall results indicate that the accounting information is related to prices in all the Chinese A-, B-, and H-share markets. Furthermore, the results show that the value relevance of accounting information is different in the three market segments. The accounting information in the B-share and H-share markets is more relevant than that of the A-share market, as expected. Within the A-share market itself, the value relevance of accounting information does not differ between the only-A-share group and the AB/AH-share dual listing groups. Further, rms with a higher percentage of total tradable shares (PTS) do not necessarily report more relevant accounting information. However, ndings indicate that investors rely more on earnings (book value) in the valuation process for rms with a higher (lower) percentage of total tradable shares. Last, this study shows that the opening event of B-shares to domestic investors in 2001 did, indeed, lower the value relevance of accounting information for B-shares. The paper is organized as follows. Section II discusses the background of this study, the development and features of the Chinese stock market, and the accounting and auditing systems under different market segments. Section III reviews the previous research and,
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based on these, hypotheses are developed in Section IV. Section V describes research design. Section VI demonstrates how the sample is selected. Section VII reports the empirical results and provides explanations for the results. Finally, conclusions and suggestions for further studies are provided in Section VIII. II. BACKGROUND OF THE CHINESE STOCK MARKET1 Development and Features of the Chinese Stock Market China reopened its stock markets in the early 1990s. There are two national exchanges in mainland Chinathe Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). Since 1993 Chinese rms have also been allowed to be listed on the Hong Kong stock exchange. Currently, there are mainly three segments of shares issued by Chinese rms: A-, B-, and H-shares.2 Chinese stocks experienced a decade of bullish development starting in 1991 and peaking on May 19, 2001. However, beginning in June 2001, a long-lasting bearish mood dominated the market, which lasted until the summer of 2006 (the implications of this change are discussed later in this study). The index of both national exchanges has dropped to roughly half of the historical high since 2001 (See Figures 1 and 2). A Chinese company can issue various shares in the domestic market: state shares, legal person/institution shares, employee shares, and tradable A-shares and B-shares. Only the last two types of shares are publicly tradable. A-shares are exclusively for Chinese citizens and domestic institutions. Firms can issue A-shares on either of the two national exchanges (SHSE and SZSE) but not both. B-shares are issued to attract foreign capital. The rst B-share was issued in 1992. Firms can choose to list their B-shares on either of the two national exchanges (SHSE and SZSE), but not both. Prior to March 2001, B-shares could only be bought with foreign currency and traded among foreign investors. Since renminbi (the Chinese currency) is not convertible under capital accounts, B-shares are traded in either U.S. dollars (in the SHSE) or H.K. dollars (in the SZSE).3,4 Since March 2001, Chinese mainlanders have been allowed to trade B-shares as well. However, they must trade B-shares with legal foreign currency accounts. When this change was announced at the beginning of 2001, Chinese B-shares prices rose dramatically. In 1993, Chinese enterprises started applying to list in Hong Kong as H-shares. Although B- and H-shares are both foreign shares, one important difference is that B-shares are listed and traded in the mainland market, while H-shares are only listed in Hong Kong. Firms that issue B-shares or H-shares can also issue A-shares; this phenomenon is called dual listing (or cross listing for AH rms). The majority of them are AB (ABshares) and AH (AH-shares) dual listings.5 The detailed information for A-, B-, and H-shares is shown in Tables 1 and 2.
1
3 4 5
All related information in this section about A-, B-, and H-shares is obtained from the Shanghai Stock Exchange (SHSE) website (http: / / www.sse.com.cn), Shenzhen Stock Exchange (SZSE) website (http: / / www.szse.cn), and Hong Kong Stock Exchange (HKSE) website (http: / / www.hkex.com.hk). Chinese companies are also allowed to list shares overseas, thus enabling them to conduct external nancing. Most Chinese offshore stocks are traded on the HKSE (H-shares), although there are now some Chinese stocks traded on the New York, London, and Singapore stock exchanges. 1 U.S. dollar 7.95 RMB, according to the spot exchange 01 / 09 / 2006. 1 H.K. dollar 1.02 RMB, according to the spot exchange 01 / 09 / 2006. There are also a few AS (A Singapore shares) and AN (A NASDAQ shares), but the sample size is very small and will not be considered in this research.
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FIGURE 1 Shanghai Stock Exchange Indexa (1991 / 1 / 22005 / 7 / 18)
The gures are obtained from the ofcial website of SHSE (http: / / www.sse.com.cn) and SZSE (http: / / www.szse.cn), 2005. The solid line in the gure indicates June 2001.
FIGURE 2 Shenzhen Stock Exchange Index (1991 / 1 / 22005 / 7 / 18)
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TABLE 1 Listing Information of A-, B-, and H-Shares in China Share Catalog A-shares B-shares Listed Exchange Shanghai Shenzhen Shanghai Shenzhen Hong Kong Quotation Chinese renminbi (RMB) U.S. dollars (USD) Hong Kong dollars (HKD) Hong Kong dollars (HKD) Trading Residents Only by residents of the Peoples Republic of China (PRC). Non-residents of the PRC (before 2001) and also residents of the PRC with appropriate foreign currency dealing accounts (after 2001). No restrictions.
H-shares
TABLE 2 Number of Listed Shares by 04 / 30 / 2005 (Data from CSRCa) Share Catalog A-shares B-shares H-shares AB-shares AH-shares
a
Stock Exchange Shanghai Shenzen Shanghai Shenzen Hong Kong (Mainboard) Hong Kong (GEM) Shanghai Shenzen MainlandHKSE
Number of Listed Shares 823 523 53 56 73 37 43 42 29
Total 1346 109 110 85 29
China Securities Regulatory Commission founded in October 1992. The CSRC is responsible for conducting supervision and regulation of the securities markets in accordance with the law.
Accounting and Auditing Practices The nancial reports of rms issuing A- and B-shares are prepared and audited under the Chinese generally accepted accounting principles (Chinese GAAP) and the International Accounting Standards (IAS), respectively. Both A- and B-shares convey equal rights to the same company, though they are different in terms of ownership (Fung et al. 2000). However, A-share investors receive accounting information prepared under Chinese GAAP and audited by mostly local CPA rms,6 while B-share investors receive accounting information prepared under IAS and audited primarily by the Big 5 international accounting rms.7 For rms issuing both A- and B-shares, the accounting information of the A-share part is prepared under Chinese GAAP and audited by mostly local CPA rms. By contrast, the accounting report of the B-share part must be prepared under IAS and audited by the Big 5 auditors or other reputable international rms for the purpose of international comparing
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Most A-share-only companies hire local CPA rms to audit their Chinese GAAP-based annual reports, primarily to reduce audit costs. It is possible that B-share investors may have access to Chinese GAAP-based nancial reports, but because Bshare investors are mostly international investors (foreign investors and domestic investors with foreign currency accounts), for efciency, most of them only use IAS-based nancial reports for B-shares. After the 2002 Andersen bankruptcy, there is more accurately a remaining Big 4, but due to the fact that the sample period covers the period between 1999 and 2003, we still use the old term, Big 5.
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and international credibility recognition. Reconciliation information on the two sets of accounting statements is released to A-share investors, but not to B-share investors. In the past few years, the Chinese authorities have eliminated, as much as possible, the differences between Chinese GAAP and IAS. Most markedly, with the release of the Accounting System for Insurance Companies in 1999 and the Accounting System for Securities Companies in 2000, Chinese GAAP has become much closer to IAS. However, there are still several major differences in content, forms, and formulating institutions between Chinese GAAP and the comparable IAS (Grant Thornton Hong Kong, 2004). In addition, Chinese GAAP has a more restrictive policy on estimating bad debt expense, depreciation expense, measuring inventory, and investment (for details please refer to Table 1 and Bao and Chow [1999, footnote 2]). These differences, along with the differences in auditing practices and professional judgment by domestic auditors versus international auditors are the major differences between the domestic nancial reports in the A-share market and those based on IAS in the B-share market. The accounting report for H-shares is prepared under either IAS or the Hong Kong GAAP (H.K. GAAP). The auditors of H-share rms must be Big 5 auditors or other highly rated international auditing rms. As a result of continuous efforts by the Hong Kong Society of Accountants (HKSA), by 2005, H.K. GAAP became fully harmonized with IAS, except for a few minor differences (Deloitte 2005). Admittedly, in our research, the sample period is from 19992003; there still existed several differences between H.K. GAAP and IAS (Deloitte 2003). Nonetheless, the difference of H.K. GAAP versus IAS is much less than that of Chinese GAAP versus IAS. For simplicity, we view accounting information prepared under H.K. GAAP and IAS as approximately equivalent. For the rms issuing both A- and H-shares, the accounting reports are dually reported and audited in the same way as AB-share rms. Table 3 summarizes differences of accounting and auditing practices in different market segments. III. LITERATURE REVIEW In accounting literature, as early as Ball and Brown (1968) and extending to work done by Ohlson (1995), earnings and book values have been empirically shown to be signicant variables in explaining stock price changes. Owing to Ohlsons (1995) theoretical work, an increasing number of studies use price-based models in their value relevance research. For instance, Collins et al. (1997) show that the combined value relevance of earnings and book values has increased slightly over the past 40 years and the results are fairly constant based on the Ohlson model. Burgstahler and Dichev (1997) develop and test that equity value is a convex function of both earnings and book value based on an option-style valuation model.8 By using a sample of 396 bankrupt rms, Barth et al. (1998) develop and test the equity book value and net income as a function of nancial health; they nd that the incremental explanatory power of equity book value (net income) increases (decreases) as nancial health decreases. The above research focuses on the value relevance study in the U.S., and the overall results support that the accounting information is useful and valuerelevant.
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They argue that earnings provide a measure of how the rms resources are currently used. Book value provides a measure of the value of the rms resources, independent of how the resources are currently used. When the ratio earnings / book value is high, the rm is likely to continue its current way of using resources, and earnings are the more important determinant of equity value. When earnings / book value is low, the rm is more likely to exercise the option to adapt its resources to a superior alternative use, and book value becomes the more important determinant of equity value.
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TABLE 3 Accounting and Auditing Differences Applied In Different Stock Segments Share Catalog A-shares B-shares H-shares AB-shares AH-shares Accounting Standard Chinese GAAP IAS IAS / HK GAAP Chinese GAAP and IAS dual reporting Chinese GAAP and IAS dual reporting Local Big 5 Big 5 Local Local Auditing Firms auditing rms (International auditing rms) (International auditing rms) CPA and Big 5 dual auditing CPA and Big 5 dual auditing
Compared to the mature market in the U.S., the value relevance of accounting information has been questioned in the emerging Chinese stock markets (Aharony et al. 1997; Haw et al. 1999). Accounting information based on domestic standards may be considered noisy because of sloppy accounting, inadequate regulation, and crony capitalism (Fox 1998; Rask et al. 1998).9 Besides, there are some inevitable problems in the markets such as lagging legislation issues and multiple regulatory authorities that accompany the rapid development of securities markets (Liu and Zhang 1996). Ball et al. (2003) obtain evidence from four East Asian countries/districts (Hong Kong, Malaysia, Singapore, and Thailand) indicating that when accounting standards interact with preparer incentives, the quality of nancial reporting is considerably lowered. Their results indicate that the reporting quality is ultimately determined by the underlying economic and political factors inuencing managers and auditors incentives, and not by accounting standards alone. However, in their study, none of mainland Chinas data is included. Recently researchers have started paying attention to the value relevance of accounting information in the emerging Chinese markets. Haw et al. (1999) rst address the issue on the information content of earnings in China. Based on the entire populations of the A-share from 1994 to 1997, the paper assesses the value relevance of earnings prepared under Chinese GAAP. They nd positive and signicant association between the annual market-adjusted returns and the change of earnings in the Chinese market with the Easton and Harris (1991) return model. Thus, they conclude that earnings measured under Chinese GAAP provide useful information for investors valuing listed A-share rms. Bao and Chow (1999) use the Davidson-MacKinnon J-test to examine whether B-share market incorporates more IAS than Chinese GAAP accounting information.10 They nd that along with A-share accounting information, the estimated B-share prices from the IAS model are signicantly related to the actual B-share prices, indicating that the IAS model has additional explanatory power over that contributed by Chinese GAAP model. Hu (2002) replicates Bao and Chows (1999) study by focusing on companies only listed on the Shanghai Stock Exchange from 1994 to 1999. With the same methodology, however, they obtain opposite evidence that book value and earnings reported under Chinese GAAP are more relevant than those based on IAS.
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Crony capitalism is often described as an incestuously close relationship between government and business, in a secretive or non-obvious way. Instead of the government directly controlling businesses and giving it orders, the government gives legislative favors to certain businesses or types of businesses (e.g., ease of permits, government grants, and specially created tax benets). Companies are tied up in hard-to-value webs of interlocking shareholdings and government connections. They compared two sets of modied price models: the IAS model and the Chinese-GAAP model. The Chinese GAAP model is a regression of B-share prices on earnings and book value based on Chinese GAAP and estimated B-share prices from the IAS model, and the IAS model is a regression of B-share prices on earnings and book value based on the IAS and estimated B-share prices from the Chinese GAAP model.
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Furthermore, Chen et al. (2001) investigate the value relevance of accounting information in the A-share market. Using a sample of listed A-share rms from the Shanghai and Shenzhen stock exchange in the period from 1990 to 1997, they nd that both book value and earnings are value relevant in the A-share market under the price model and the return model. In addition, they compare the value relevance of A-share-only rms and ABshare rms. The study conrms that the Chinese stock market perceives accounting information to be more value-relevant for rms issuing both A- and B-shares than rms issuing only A-shares. The most recent study by Samia and Zhou (2004) uses the data of AB dual-listed rms from 19942000, and compares the differences between the value relevance of accounting information under Chinese GAAP for A-shares and under IAS for B-shares. Evidence is obtained that the accounting information in the B-share market is more value-relevant. The mixed and inconsistent results in the previous research require further study to shed light on the empirical question of whether the usefulness of accounting information under IAS is the same as that under Chinese GAAP. Our study applies the same methodology used by Samia and Zhou (2004). Samia and Zhou (2004) give limited insight on the value relevance issue in the Chinese market, as they only studied the AB dual-listing rms in their research. In this paper, we extend their work with more comprehensive and recent data analysis, covering all the A-, B-, and H-share markets with both AB and AH duallisting rms as well as A-share-only rms. We provide multi-faceted insights on the value relevance issue in the Chinese stock market, and we expect either supportive or diverse results can be obtained given a new sample period with different market situations. IV. HYPOTHESES DEVELOPMENT There are several factors suggesting that the Chinese market may not be as efcient as a mature market with respect to the usefulness of accounting information. Chen et al. (2001) provide three possible explanations: First, most listed companies were state-owned before going public, and the purpose of their accounting was not to provide useful information to investors, but to facilitate centralized state planning and control. Chinese accounting systems and regulations were traditionally different from market-oriented systems in the West. Second, though nancial statements of listed companies have to be audited, the quality of audits in China has been generally perceived to be low (Aharony et al. 1997). Independent auditing is a relatively new phenomenon in China. Finally, compared to a mature market (e.g., the U.S. market), the Chinese market lacks sufcient corporate governance such as independent outside directors, a market for corporate control, and competition in the managerial labor market, weakening the condence of investors with respect to the use of accounting information in the market. However, there still exist reasons for us to believe that accounting information is useful and relevant for the Chinese stock valuation. As a new market, the Chinese stock market is short of competitive information sources other than published accounting reports. As a result, investors may rely more upon accounting numbers. In addition, the relative shortterm horizon of Chinese investors could increase the value relevance of accounting information. Chinese investors have an extremely short horizon, with an average turnover of about 40 trading days.11 With a short-term horizon, investors tend to be more concerned with the current period accounting earnings and may react mechanically to accounting information. Moreover, the institutional changes in emerging markets, including the reform of the accounting information system, could increase market liquidity, reduce transaction
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From the Shanghai Stock Exchange Annual Statistics, 1998. Shanghai Peoples Publication: 18.
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cost, and improve pricing efciency (Feldman and Kumar 1995). The Chinese government has made considerable efforts at improving accounting and nancial reporting practices. These efforts may have had a positive impact on the condence of Chinese investors in accounting numbers. We believe that the above reasoning may outweigh the negative effects and result in the value relevance of accounting information in the Chinese market. Regardless of whether the accounting information is relevant to the investors decisions in the emerging markets like China is an empirical issue. Though former researchers have studied this topic (e.g., Haw et al. 1999; Bao and Chow 1999; Hu 2002; Chen et al. 2001), given the new sample period (including the bearish period of the Chinese stock market) and comparing the A, B, and H market segments, it is still necessary to include a test of general value relevance of accounting information in this study. Thus, our rst hypothesis is: H1a: The accounting information is value-relevant in Chinese A-share, B-share, and H-share markets.
Chinas unique market segmentation provides us with a great opportunity to compare the value relevance differences among different Chinese A-, B-, and H-share markets. Companies issuing A-shares prepare their Chinese-GAAP-based accounting statements that are then audited by local CPA rms. Companies issuing B-shares are required to follow IAS in preparing accounting statements, and usually have these audited by international CPA rms. When there is a discrepancy between the two sets of audited nancial reports, companies issuing both A-shares and B-shares need to reconcile their accounting statements with IAS for domestic investors. IAS is considered to be of higher quality than the local GAAP, and international auditors such as the Big 5 rms are commonly recognized to provide higher quality auditing than their Chinese counterparts. Thus, the accounting information in the B-share market should be more relevant to the pricing process compared to the A-share market. The same conclusion applies to H-shares also. One major difference is that H-share rms have the freedom to choose either IAS or H.K. GAAP to record accounting information. Firms using IAS and H.K. GAAP are of almost equal weight among all H-share rms. Compared to the mainland market, the Hong Kong stock market is more mature with better investor protection and a more transparent competitive environment. Accordingly, H.K. GAAP is considered to be more informative. Hence, it is reasonable to believe that the value relevance of accounting information in the H-share market is higher than that of the A-share market. The following hypotheses are developed (the comparison is based on nancial reports of Chinese GAAP for A-share versus IAS for B-share versus H.K. GAAP/IAS for H-shares): H1b: H1c: The accounting information is more value-relevant in the B-share market (under IAS) than in the A-share market (under Chinese GAAP). The accounting information is more value relevant in the H-share market (under H.K. GAAP/IAS) than in the A-share market (under Chinese GAAP).
Further, we would like to study the A-share market more closely to learn whether the value relevance of accounting information differs among companies issuing only A-shares and those issuing both AB- or AH-shares. We investigate this separately not only because A-shares versus AB-shares and AH-shares is a unique phenomenon in the Chinese market
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and thus receives a lot of media attention, but also because they proxy for different nancial reporting environments that have important implications for the quality of nancial reporting, and consequently, the usefulness of accounting information in each type of company. Compared to the A-share-only companies, AB-share rms have two attributes that lead us to believe that investors may nd more useful accounting information in these rms. First, A-share-only companies only follow Chinese GAAP in preparing their nancial statements, while companies that also issue B-shares are required to publish both Chinese GAAP-based and IAS-based nancial reports. In addition, AB-share companies are required to disclose the breakdown details of the reconciliation discrepancy. Since the IAS-based nancial statements are, on average, less subject to managers manipulations (Chen et al. 2001), the reconciliation discrepancy is likely to be interpreted by investors as an indication of the quality of the Chinese GAAP-based nancial statements. We argue that the mere existence of the dual-GAAP reporting system in AB companies, along with the disclosure of the reconciliation discrepancy, is a sufcient motivation to make it more likely for ABshare companies to produce higher quality accounting information than A-share-only companies with a one-GAAP reporting system. Second, these two types of companies also differ in the monitoring function performed by independent auditors. A-share-only companies are mostly audited by domestic CPAs; AB-share companies normally hire international accounting rms (the Big 5) to audit their IAS-based nancial statements, in addition to domestic auditors responsible for the Chinese GAAP statements. Since auditors play an important role in the quality of nancial reporting and since international CPA rms have a reputation that is perceived to be higher, we believe that the double monitoring performed by international and domestic auditors in AB-companies is another factor contributing to the higher quality of nancial reporting, and therefore provides more relevant accounting information to the market. Most of the above characteristics of AB-share rms are also true for the AH rms (i.e., dual auditing and dual-GAAP reporting systems), so we deduce investors also perceive a better value relevance of accounting information for the AH-share rms. The following hypotheses are developed as described below (the comparison is based on the Chinese GAAP accounting reports): H2a: H2b: Within the A-share market, the accounting information is more value-relevant for rms issuing both A- and B-shares than for rms issuing only A-shares. Within the A-share market, the accounting information is more value-relevant for rms issuing both A- and H-shares than for rms issuing only A-shares.
The ownership structure of Chinese listed rms is signicantly different from that of the U.S. or other European countries. A typical listed company in China has a mixed ownership structure comprised of three predominant groups of shareholders: the state, legal persons/institutions, and domestic individuals. Listed Chinese rms have a signicant portion of nontradable shares, providing either the state or legal persons/institutions with the controlling ownership. Recent studies report that such ownership structures adversely affect rms information environment, resulting in higher information asymmetry, a greater level of earnings manipulation, and lower informativeness of the accounting earnings (e.g., Fan and Wong 2002; Haw et al. 2004). As managers of listed state-owned enterprises (SOEs) are frequently appointed by the government, managers of these rms have more incentives to act in the best interest of the
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state and legal persons/institutions, instead of maximizing the rm value for public shareholders. Consistent with the entrenchment effect argument (La Porta et al. 1999), outside investors may not trust the reported earnings for the rms with the controlling shareholders (such as the State or the families) because the controlling shareholders may not report highquality accounting information or may even manipulate earnings (Fan and Wong 2002; Haw et al. 2004). These studies suggest that a higher proportion of nontradable shares may weaken managerial incentives to act in the best interest of public shareholders. Alternatively, a higher percentage of tradable shares may strengthen the managers incentives to perform in the best interests of shareholders, indicating a more active market with a large number of rational buy-and-sell decisions, whereby stock prices may properly reect all public information, including accounting information. Thus in this study, we estimate the percentage of tradable shares to be a determinant of value relevance in the Chinese stock market. Our third hypothesis is: H3: The value relevance of the accounting information is higher for rms with higher percentage of total tradable shares.
Since March 2001, mainlanders have been able to trade B-shares as well. When this news was announced at the beginning of 2001, the prices of Chinese B-shares dramatically rose, with many of the shares increasing eight-fold in a few weeks. The comparatively unchanged A-share market in comparison to the rising prices and turnover rate of the B-shares indicates that speculation by domestic investors became an important factor in B-share markets. Many researchers focus on the price reaction of the B-share market after the opening (e.g., Chan et al. 2003; Mei et al. 2004). Their results indicate that after allowing Chinese domestic investors to buy B-shares, B-shares turned over faster and prices rose, behaving more like A-shares. They argued that except for capital controls, information asymmetries, corporate governance, and liquidity, speculative trading could contribute a signicant nonfundamental component to stock prices. Peterson (2002) uses the theory of investor psychology and neuroscience in investigating the price reaction of B-shares of 2001 opening. They attribute the change of B-share prices after the 2001 opening to the behavioral conformity and overreaction of the investors.12 This sort of behavior would lower the value relevance of the accounting information for B-shares. On the other hand, the dramatically increased trading volume of B-shares would also increase the market liquidity and efciency, thus increasing the value relevance level of B-share accounting information. However, the change in value relevance of the accounting information for B-shares due to this event remains unstudied. We believe that the negative inuence of investors overreaction to the news accompanying the speculation may counter the positive effect of increased trade volume, lowering the value relevance level of accounting information for B-shares after the 2001 opening. Our fourth hypothesis is (the study is based on B-share IAS nancial reporting): H4:
12
The opening of the B-share market to domestic investors in 2001 may lower the value relevance of the accounting information for B-shares in the affected year.
The B-share price was undervalued relative to the corresponding A-share prices before the 2001 opening. A-share prices were on average 420 percent higher than the corresponding B-shares. Investors expected the B-share price to increase to a level close to or even higher than that of A-shares after opening. The expectation proved contagious among investors. Investors took less accounting data performance into their account when valuating the B-share prices; even poorly performing B-shares were believed to be protable in the portfolio of investors.
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V. RESEARCH DESIGN There are two basic types of valuation models in the value relevance literature. The annual return model describes the relationship between stock returns and accounting earnings (Ball and Brown 1968; Easton and Harris 1991).13 Return models are a traditional focus on much of the market-based accounting research, the other modelprice based valuationis actually gaining momentum more recently (e.g., Landsman 1986; Ohlson 1995; Barth et al. 1998; Burgstahler and Dichev 1997). Relatively speaking, price models have two advantages over return models, even though a price model does not measure the impact of new information arriving in a period. First, if stock markets anticipate any components of accounting earnings and incorporate the anticipation in the beginning stock price (e.g., prices leading earnings), return models will bias earnings coefcients toward zero. In contrast, price models yield unbiased earnings coefcients because stock prices reect the cumulative effect of earnings information (Kothari and Zimmerman 1995). Second, return models only permit the assessment of the value relevance of accounting earnings, whereas price models based on Ohlson (1995) show how a rms market value is related to both book values of equity and accounting earnings. When applying price models, some studies use earnings bases (e.g., Collins and Kothari 1989; Kothari and Zimmerman 1995), while others indicate that stock price is associated with the book value of rm assets (e.g., Barth 1991; Shelvin 1991). In these studies, the models based on earnings and book values are viewed as alternative approaches. Recent studies argue that given that accounting information about book value and earnings are complementary rather than substitutive components of equity value (Feltham and Ohlson 1995; Pennman 1998; Chang 1999), a multivariate valuation model is preferred over a univariate one. We investigate the value relevance of earnings and book value using the valuation framework provided by Ohlson (1995), which expresses price as a function of both earnings and book value of the equity. In this study, a modied model consistent with Collins et al. (1997) and Barth et al. (1998) is used as follows: Pit a0 a1BVPSit a2EPSit e where: Pit the share price of rm i four months after the end of the scal year t, i.e., on 30 April in year t 1 (the value of B- and H-shares are translated into renminbi using the exchange rate at that date); BVPSit the reported book value per share for rm i at 31 December of year t; EPSit reported earnings per share for rm i for year t; and e the error term. This model also appears in Bao and Chow (1999) and Samia and Zhou (2004) when testing the value relevance of accounting information for Chinese rms. In the model, price is a weighted linear combination of book value per share and earnings per share. Compared with the model of Barth et al. (1998), this valuation model uses the per-share values (scaled by number of common shares outstanding) and reduces heteroscedasticity. A high level of R2 from the regressions suggests that investors use accounting information for their
13
(H1)
Easton and Harris (1991) model the returns earnings relation as follows: RETit 0 1EARNit 2EARNit .
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decision-making (Eichenseher 2000). To assess whether the difference in the R2 is statistically signicant, we estimate the standard deviation of estimated R2 as suggested by Cramer (1987). Using the model above, data from 1999 to 2003 are included. The stock price of the last trading day of next April (i.e., P2000 is actually the closing price on 30th of April 2001) is used because all companies should disclose annual reports, at the latest, four months after the scal year ending December 31, according to the China Securities Regulatory Commissions (CSRC) requirement. To test H1a, H1b, and H1c, we estimate the model separately for A-shares, B-shares, and H-shares, using pooled samples as well as yearly samples. That is, we estimate the following three models with superscripts indicating particular shares:
A A A A A A PA it a0 a1 BVPSit a2 EPSit e ; B B B B B B PB it a0 a1 BVPSit a2 EPSit e ; H H H H H H PH it a0 a1 BVPSit a2 EPSit e .
(H1a) (H1b) (H1c)
Superscript A stands for rms issuing A-shares; B stands for rms issuing B-shares; H stands for rms issuing H-shares. For the A-share rms, we use all the data disclosed under Chinese GAAP, for the B-share rms we use all the data disclosed under IAS, and for H rms the data used are disclosed under either IAS or H.K. GAAP. We expect that the value relevance of accounting information would be higher in the B-share and H-share market relative to the A-share market. Hence, the related R2s are expected to be higher in the B- and H-share market than that of the A-share market. Further, the t-test is also used to test the relative signicance of coefcients in different markets. To examine H2a and H2b, the following models with superscripts indicating particular shares are used:
OA OA OA OA OA OA POA it a0 a1 BVPSit a2 EPSit e ; AB AB AB AB AB AB Pit aAB 0 a1 BVPSit a2 EPSit e ; AH AH AH AH AH AH Pit aAH 0 a1 BVPSit a2 EPSit e .
(H2a) (H2b) (H2c)
Superscript OA stands for the rms issuing only A-shares; AB stands for the rms issuing both A- and B-shares; AH stands for rms issuing both A- and H-shares. This test is based on the data within the A-share market; the A-share data is actually divided into three groups: only-A-share, AB-share, and AH-share groups. Because the comparison is within the A-share market, all the accounting data used are disclosed under Chinese GAAP. We expect that rms issuing both AB-shares and AH-shares will report more value-relevant accounting information than the rms issuing only A-shares; thus, higher R2s are expected for AB and AH rms. To test H3, a new variable, DUMMYPTS, is introduced into the model. The dummy is coded 1 if PTS exceeds 0.5 (clearly above the median, which is about 0.4), and coded 0 if otherwise:
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A A A A A A A PA it a0 a1 BVPSit a2 EPSit a3 DUMMYPTS*BVPSit A A a4 DUMMYPTS*EPSit DUMMYPTS eA
Liu and Liu
(H3)
where: PTS the percentage of total tradable shares; and DUMMYPTS the dummy variable, coded 1 if PTS exceeds 0.5, coded 0 if otherwise. PTS is dened as total tradable shares (tradable A-shares tradable B-shares Hshares) divided by the total shares outstanding. In this model, all the data are from the Chinese GAAP-based A-share accounting data. Owing to the lack of sufcient PTS data in 1999 and 2000, and the fact that the stock ownership structure has not changed much for most rms during the observation period between 1999 and 2003, only data from the threeyear interval between 2001 and 2003 are tested. The value relevance of the accounting information is expected to be higher for the rms with a higher percentage of total tradable A shares. Hence, either aA 3 , a4 , or both are expected to be positive and signicant. Moreover, we partition the sample equally into three portfolios according to the magnitude of PTS and estimate the two groups (with lower and upper 1/3 PTS) separately with the original model (1). A higher R2 is expected for the portfolio with higher PTS. The last hypothesis, H4, is examined via model (4) below:
B B B B B B B PB it a0 a1 BVPSit a2 EPSit a3 DUMMY2000&2001*BVPSit B B B aB 4 DUMMY2000&2001*EPSit a5 DUMMY2000&2001 e
(H4)
where: DUMMY2000&2001 the dummy variable, coded 1 if the year is 2000 and 2001, 0 if otherwise. The validity of the inclusion of the year 2000 also in the dummy testing is because the stock price data used in this study comes from the last trading day of the subsequent April. The Chinese government opened the B-share market to the domestic investors on March 1, 2001, which means the stock price data used in our study of 2000 (PB 2000) had been inevitably affected by the opening event of 2001; thus, the corresponding value relevance of accounting information in 2000 must be affected as well. The opening of the B-share market to domestic investors in 2001 would, expectedly, lower the value relevance of the accounting information for B-shares in 2000 and 2001, B thus negative and signicant aB 3 or a4 is expected. VI. DATA SELECTION The samples are selected from the entire population of A-shares, B-shares, and H-shares listed in the two national exchanges (SHSE and SZSE) and the Hong Kong stock exchange from 19992003. The A- and B-share Chinese GAAP data are available from the China Stock Market and Accounting Research (CSMAR) database; the IAS-based accounting data for the B-shares is obtained from the yearly nancial reports of the corresponding rms;14 and the H-share data is obtained from the Taiwan Economic Journal
14
Downloaded from SHSE (http: / / www.sse.com.cn), and SZSE (http: / / www.szse.cn) websites.
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(TEJ). The rms with missing data on stock price, book value, and earnings are deleted from the sample.15 According to previous studies, the specic nancial attributes of nancial rms (banks and insurance companies) could result in different information content of their earnings; thus, these rms are also excluded from the sample. We also delete observations in the top and bottom 1.5 percent of the rms in terms of (1) earnings-price and (2) bookvalue price. Furthermore, rms issuing both AB- or AH-shares are selected out for further research. For the A-share rms, we use all the data disclosed under Chinese GAAP; for the B-share rms, we use all the data disclosed under IAS; and for H rms, the data are disclosed under either IAS or H.K. GAAP. Table 4 presents the yearly distribution of the sample rms. VII. RESEARCH RESULTS AND ANALYSIS Overall Descriptive Results Table 5 presents descriptive statistics for the variables pooled during the ve years of observation.16 The average price of A-shares and B-shares is 11.65 and 5.38 respectively, and that of H-shares over the same period is even lower (with a mean of 1.95). The result is consistent with prior studies showing that B-shares and H-shares in China are generally traded at a discount relative to A-shares (Bailey and Jagtiani 1994; Wo 1997; Wang and Li 2004). The mean earnings (EPS) and book values (BVPS) are lower for the B- and H-shares than that of A-shares. The average percentage of the total tradable shares for the A-shares is about 40 percent, which suggests that most shares of the Chinese listed rms are still owned by the state and legal persons/institutions that cannot be traded freely in the market. The mean price of AB-shares is slightly higher than that of only A-shares, but the price for the AHshares ranks lowest. The average of earnings and book values for the AB and AH-shares are lower than that of the only-A-share group. The Pearson bivariate correlation coefcients and p-values of A-, B-, and H-shares based on the pooled sample are presented in Table 6. These results provide preliminary
TABLE 4 Sample Distribution
Catalog
\Share
Year 1999 751 95 40 668 67 16 2000 828 94 46 742 68 17 2001 1010 104 52 910 80 21 2002 1070 103 58 970 76 24 2003 1143 103 72 1037 79 27 Total 4802 499 268 4327 370 105
A-shares B-shares H-shares Only A-shares AB-shares AH-shares

15
16
This is resulted from computer-based ltering. Note that as only about three percent of the rms are excluded from the whole sample, no large sample bias is created. The market price data for A-share, B-share, and H-share are the closing price at the end of April of the corresponding years. Accounting data for A-shares are from the Chinese GAAP-based nancial statements, where the subgroups for rms issuing both AB- and AH-shares are removed for further comparison; accounting data for B-shares are from the IAS-based nancial statements, and those H-shares are from the IAS / HK GAAPbased nancial statements. The percentage of the total tradable share variable is pooled by the prior three years of observation.
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TABLE 5 Descriptive Statistics n Panel A: A-shares P BVPS EPS PTS (20002003) Panel B: B-shares P BVPS EPS Panel C: H-shares P BVPS EPS Panel D: Only A-shares P BVPS EPS Panel E: AB-shares P BVPS EPS Panel F: AH-shares P BVPS EPS 105 105 105 3.190 .650 1.570 21.370 5.770 .910 8.34552 2.28205 .08435 3.622260 .838866 .313071 370 370 370 3.250
5.350 4.710
Minimum 2.570
8.588 10.996
Maximum 71.450 11.370 1.940 1.000
Mean 11.65311 2.73615 .14586 .39730
Std. Deviation 6.005128 1.354355 .394956 .122513
4802 4802 4802 3222
.087
499 499 499
.880
5.350 4.199
18.974 8.402 1.724
5.38428 2.42270 .09922
2.936468 1.564049 .440749
268 268 268
.138 .379 1.500
24.592 6.080 1.600
1.95408 2.31492 .10824
2.309999 .884629 .269179
4327 4327 4327
2.570
8.588 10.996
71.450 11.370 1.940
11.70679 2.76138 .15102
6.125284 1.334435 .388841
30.780 8.390 1.596
11.96384 2.57002 .10290
4.731542 1.642241 .475529
Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; and EPS earnings per share for scal year t (all data is quoted in Chinese RMB).
evidence that prices are positively related to book value and earnings for all A-, B-, and H-shares. In addition, consistent with H1b and H1c, the price correlation with earnings and book value is much higher for B- and H-shares in comparison to those for A-shares. The yearly plot forms of Pearson correlation between price (P), book value (BVPS), and earnings (EPS) are shown in Figures 3 and 4. On the yearly base, the price correlation with book value is much higher for the B-shares than that of the A-shares and H-shares. The correlation between price and book value for the H-shares is not consistently higher than that of the A-shares, especially in 2000 (Figure 3). The price correlations with earnings
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TABLE 6 Pearson Correlation Coefcients P Panel A: A-shares P BVPS EPS n Panel B: B-shares P BVPS EPS n Panel C: H-shares P BVPS EPS n 1 .422*** .624*** 268 1 .359*** 268 1 268 1 .380*** .334*** 499 1 .501*** 499 1 499 1 .209*** .310*** 4802 1 .526*** 4802 1 4802 BVPS EPS
*** Statistically signicant at 0.01. Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; and EPS earnings per share for scal year t.
FIGURE 3 Pearson Correlation Coefcients Between Price (P) and Book Value Per Share (BVPS)
0.8 Correlation Coefficients 0.7 0.6 0.5 0.4 0.3 0.2 0.1
are always higher for both B- and H-shares compared with that of A-shares. Prior to 2001, the earnings coefcient is higher for B-shares than that of H-shares; though since 2001, the results have reversed (Figure 4).
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FIGURE 4 Pearson Correlation Coefcients Between Price (P) and Earnings Per Share (EPS)
0.9 Pearson Correlation Coefficients 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1
Regression Results and Analysis: H1 Table 7 presents the slope coefcients and the related t-statistics in parentheses, adjusted R2, and F-statistics for models (1a), (1b), and (1c) (representing A-, B-, and H-shares, respectively). In addition, the table provides the Cramer (1987) R2 signicance test for models (1a) versus (1b) and (1a) versus (1c) in the last two columns. According to the F-test of the pooled sample, all three models are highly signicant; both BVPS and EPS are signicantly related to the stock price in all three segments. The year-by-year regressions show that the model performs well for all A-, B-, and H-shares in all years under observation, as suggested by highly signicant F-statistics. For the A-shares, BVPS is signicantly associated with the A-share price in later years 20012003; EPS is constantly signicant in all the years. In the B-share market, EPS is signicantly associated with Bshare price for each year; the same results are also obtained for BVPS, except in 2000. For the H-shares, BVPS is not signicantly associated with H-share price in most of the period under examination except for 2001; EPS, however, is signicantly associated with price in all the years. The overall results are consistent with H1a, which suggests that accounting information is relevant to the pricing process in the A-share, B-share, and H-share markets. However, one should notice that Table 7 also provides overwhelming evidence for parameter (model) instability over time. Additionally, the result of model (1a) (A-share market) shows that the slope coefcients of book value (BVPS) increase since 2001; however, the slope coefcients of earnings (EPS) decrease in the same period except for the last year (Figure 5). The result indicates that the importance of BVPS has increased over time in the A-share market, while that of EPS has declined. We attribute this to the distinctive roles of the book value and earnings in the nancial reporting. Book value provides the net value of the rms resources primarily in terms of historical cost, and it is largely independent of the success with which the rm currently employs its resources. In contrast, earning fullls its role by providing a measure of value that reects the results of employing rms current resources (Burgstahler and Dichev 1997). As mentioned above, 2001 is the benchmark year of the A-share market turning from bullish to bearish. In the depressed market, investors may valuate rms by focusing more on their historical resources (reected by BVPS) and weigh less on the present performance (reected by EPS) of the rms.
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TABLE 7 Value Relevance in A-Share versus B-share versus H-Share Market: Regression Results of Models (1a), (1b), (1c)
Model (1a): A-Share Model (1b): B-Share Model (1c): H-Share EPS 4.200 (17.141)*** 6.411 (6.688)*** 6.946 (8.175)*** 6.932 (5.729)*** 0.619 (2.029)** 1.225 (4.413)*** 1.865 (5.461)*** 0.619 0.535 0.280 21.051 59.792 83.901 0.304 21.354 2.446 (5.986)*** 1.188 (4.342)*** 2.996 (11.096)*** 0.309 256.314 0.768 (9.540)*** 0.134 83.741 0.438 (6.640)*** 0.129 75.562 0.428 (3.525)*** 0.110 52.200
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Pooled Sample 0.098 263.021 499 0.534 (6.027)*** 1.275 (4.053)*** 1.382 (3.861)*** 0.127 (0.718) 0.427 (2.228)** 0.218 (0.982) 0.231 (0.939) 0.499 47.820 0.158 (0.805) 0.169 51.580 0.393 (3.816)*** 268 0.593 (4.589)*** 4.658 (10.968)*** 3.129 (3.771)*** 0.837 (2.446)*** 1.807 (3.682)*** 7.780 (7.597)*** 10.234 (10.805)***
BVPS
Adj. R2 F-Statistics BVPS EPS F-Statistics BVPS EPS
Adj. R2
Adj. R2 0.430
Cramer R2 Cramer R2 Signicance Signicance Test Test (p-value) (p-value) (1a) versus (1a) versus F-Statistics (1b) (1c) 101.834 0.017** 0.001***
n 4802 Slope Coef. 0.282 t-test (3.943)*** Annual Regressions 1999 Slope Coef. 0.136 t-test (0.397) 0.090 37.882
0.395 0.089 0.308 0.557 0.701
13.755 3.206 12.376 36.902 84.265
0.001*** 0.013** 0.041** 0.001*** 0.001***
0.011*** 0.813 0.09** 0.001*** 0.001***
2000
Slope Coef. t-test
0.167 (0.836)
2001
Slope Coef. t-test
0.658 (5.643)***
2002
Slope Coef. t-test
0.713 (7.943)***
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Slope Coef. t-test
0.830 (12.136)***
**, *** Statistically signicant at 0.05 and 0.01, respectively. Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; and EPS earnings per share for scal year t.
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FIGURE 5 Slope Coefcient of Book Value (BVPS) and Earnings (EPS) of A-share
8.000 7.000 6.000 Slope Coefficient 5.000 4.000 3.000 2.000 1.000
Comparing A-share with B-share and H-share markets, the adjusted R2 for pooled and yearly samples (as plotted in Figure 6) suggest that in the B-share market, the valuerelevance level of accounting information is higher than that of the A-share market for all the observed years; in the H-share market the value-relevance level of accounting information is much higher than that of the A-shares with the exception of the year 2000. The results are consistent with H1b and H1c. The abnormal decrease of the value-relevance level of accounting information for B-shares in 2000 and 2001 may be caused by the 2001 B-share opening event. The abnormal decrease of the value-relevance level for H-shares in 2000 may be caused by the unusual booming of the Hong Kong economy in year 2000.17
FIGURE 6 Adj. R2 from Estimating Models (1a) (1b) (1c) by Year

0.800 0.700 0.600 Adjusted R2
17
0.500 0.400 0.300 0.200 0.100
The Hong Kong economy revived strongly in 2000, with GDP growing at 10.5 percent in real terms, the fastest since 1987, which is also the highest among all the world economic entities. The Hangsheng index also reached a historic high in the same year.
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Generally speaking, the value relevance of accounting information for all A-, B-, and Hshares improved during recent years. We further calculate the standard deviation of the estimated R2 of each model, suggested by Cramer (1987) and also used by Ball et al. (2000) and Samia and Zhou (2004), to test the signicance of the differences in R2 for models (1a) versus (1b) and (1a) versus (1c). The results suggest that the R2 for the A-share market is indeed signicantly smaller than that of B- and H-share markets on both pooled and annual bases, except for A-H comparison in 2000. Overall, the results indicate that accounting book value and earnings are associated with the stock prices in A-, B-, and H-share markets, consistent with H1a. Moreover, the explanatory power manifested in the adjusted R2 of earnings and book value for B-share and H-share markets are higher than that of the A-share market, as predicted in H1b and H1c. Regression Results and Analysis: H2 Table 8 (Panel A) presents the slope coefcients and the related t-statistics in parentheses, adjusted R2, and F-statistics for models (2a), (2b), and (2c) (representing three subgroups within the A-share market: Only-A, AB-, and AH-shares). The last two columns of the table show the Cramer (1987) R2 signicance test for models (2a) versus (2b) and (2a) versus (2c). As the yearly samples of AB- and AH-shares are too small to provide a convincing result, only pooled samples are used to test the model. Results show that both book value (BVPS) and earnings (EPS) are signicantly related to the stock price for onlyA-share and AB-share segments. Only book value (BVPS) is signicantly related to the stock price in the AH-share segment. Comparing only-A-share with AB-share and AHshare groups, the adjusted R2s for AB- and AH-shares are slightly higher than that of onlyA-shares. The Cramer R2 test shows, however, that the differences in the R2s are insignificant between subgroups. The overall results do not lend support to H2a and H2b. This result is not consistent with the result obtained by Chen et al. (2001). In their research, they use the sample period from 1990 to 1997 and nd that the Chinese stock market perceives accounting information to be more value-relevant for rms issuing both A- and B-shares than the rms issuing only A-shares. With the new data (19992003) in our research, the result implies that, with the continuous improving effort of Chinese authorities in recent years, the credibility of Chinese GAAP-based reporting and the quality of local CAP auditing improved so dramatically that domestic investors do not discriminate between rms issuing only A-shares or rms with AB/AH-share dual listing. The result from H2 triggers another question for this research: within the A-share market, especially for the AB dual-listed rms, both sets of accounting information (Chinese GAAP and IAS) are actually available for the Chinese (A-share) participants; it would be interesting to determine whether the accounting information under Chinese GAAP is more relevant to the A-share prices than that under IAS. To investigate this question, we use a sample of AB dual-listed rms of both national markets from 19992004, like that of Samia and Zhou (2004); the difference is that our analysis is purely based on A-share price realizationsone regression using the Chinese GAAP information and the other regression using the IAS information to explain the same A-share prices. Two addition models (2A) and (2B) are used as below:
AB AB AB-Chinese AB AB-Chinese PAB-A a0 a1 BVPSit a2 EPSit eA; it AB AB-IAS AB-IAS PAB-A aAB aAB eAB. it 0 a1 BVPSit 2 EPSit
(2A) (2B)
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TABLE 8 Value Relevance Comparison within the A-Share Market
Panel A: Value Relevance A-Share-Only versus AB-Share versus AH-Share within the A-Share Market: Regression Results of Models (2a), (2b), (2c)
Model (2a): A-Share-Only Model (2b): AB-Share Model (2c): AH-Share
Plate # 0
Pooled Sample EPS 370 0.099 240.276 0.430 (2.521)*** 2.323 (3.940)*** 0.111 24.088 1.530 (3.520)*** 0.023 (0.019) 105 4.516 (16.946)*** Adj. R2 F-Statistics BVPS EPS F-Statistics BVPS EPS Adj. R2
BVPS
Adj. R2 0.109
F-Statistics 7.363
Cramer R2 Signicance Test (2a) versus (2b) 0.703
Cramer R2 Signicance Test (2a) versus (2c) 0.863
n Slope Coef. t-test
4327
0.233 (3.000)***
Panel B: Value Relevance of Accounting Information to A-Share Prices under Chinese GAAP versus IAS of AB Dual Listed Firms: Regression Results of Models (2a) and (2b)
Model (2a): Chinese GAAP Model (2b): IAS
Pooled Sample EPS 367 2.329 (3.941)*** 0.114 24.583 0.534 (3.335)*** Adj. R2 F-Statistics BVPS
BVPS
EPS 367 1.874 (3.407)***

Adj. R2 0.105 F-statistics 22.579
Cramer R2 Signicance Test (2a) versus (2b) 0.907
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0.446 (2.603)***
*** Statistically signicant at 0.01. Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; and EPS earnings per share for scal year t.
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PAB-A stands for the A-share stock price for the rms issuing both A- and B-shares; superit script AB-Chinese stands for the Chinese-GAAP based accounting information for AB duallisted rms; and superscript AB-IAS stands for the IAS-based accounting information for AB dual-listed rms. With strong, rm-specic information controls, by comparing both sets of accounting numbers with the same A-share prices, we derive evidence that answers which set of accounting information (Chinese GAAP or IAS) is more relevant for Chinese (A-share) investors evaluating A-share price. The regression results from Table 8 (Panel B) show no signicant difference of the value relevance between the Chinese GAAP-based accounting numbers and the IAS-based accounting numbers when explaining the same stock prices (insignicant Cramer test between two R2s under different accounting sets). Two possible explanations for this result are: (1) A-shareholders are actually not using the differential (reconciliation) data when evaluating stock prices. (2) The difference between the ChineseGAAP accounting number and the IAS number is so little for the AB dual-listed rms that most can be ignored. Regression Results and Analysis: H3 Table 9 presents the slope coefcients and the related t-statistics in parentheses, adjusted R2, and F-statistics for model (3). From results of pooled samples from 20012003 we can see that the slope coefcient of both BVPS*D and EPS*D are insignicant. This indicates that the value relevance of accounting information does not differ for rms with higher PTS (above 0.5) as predicted in H3. In order to further investigate differences among rms with different PTS, the sample is divided equally into three portfolios according to the magnitude percentage of total tradable shares. The regression results of the lower one-third and upper one-third portfolio are shown in Table 10. A result similar to that in Table 9 is obtained. The adjusted R2 for the lower one-third PTS portfolio is just slightly higher than that of the upper one-third portfolio; no signicant difference between the two groups is apparent (from Cramer test). One might notice that the slope coefcient of BVPS (EPS) is much higher (lower) for the portfolio with lower PTS than the portfolio with higher PTS. It might indicate that investors rely more on book value in valuating the price of the rms with lower PTS; conversely, investors rely more on earnings in valuating process for the rms with higher PTS. The
TABLE 9 Effect of PTS on the Value Relevance: Regression Results of Model (3) Model (3) Pooled Sample 20012003 n Slope Coef. t-statistics
BVPS
EPS
BVPS*D EPS*D
Adj. R2 F-Statistics 0.165 128.091
3223 0.770 2.020 0.036 0.437 1.308 (12.137)*** (9.096)*** (0.262) (0.942) (3.142)***
*** Statistically signicant at 0.01. Denitions: P price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; EPS earnings per share for scal year t; and D the dummy variable, coded 1 if PTS (percentage of total tradable shares at time t) of the sample PTS exceeds 0.5, coded 0 if otherwise.
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Liu and Liu
TABLE 10 Value Relevance Differences of Groups with Different PTS (Upper and Lower 1 / 3 PTS): Regression Results of Model (1) Model (1): Upper 1 / 3 PTS Pooled Sample 20012003 n Slope Coef. t-statistics BVPS EPS Adj. R2 F-Stat. 97.870 Model (1): Lower 1 / 3 PTS BVPS EPS Adj. R2 F-Stat. 102.167
1074 0.581 1.852 0.152 7.201*** 6.632***
1074 1.153 0.789 0.158 10.139*** 2.336**
Cramer R2 Signicance Test (Lower 1 / 3) versus (Upper 1 / 3) 0.834

**, *** Statistically signicant at 0.05 and 0.01, respectively. Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; and EPS earnings per share for scal year t.
overall results obtained do not support H3. The reason may be attributed to the fact that the Chinese stock market is still under strong governmental intervention and regulation. Though governmental intervention decreases market efciency, governmental regulation does increase investors belief in the rms.18 Investors may perceive rms with a higher percentage of total tradable shares (lower percentage of state shares) as being less regulated by the government and thus lose their trust in the accounting data of these rms. Regression Results and Analysis: H4 Hypothesis 4 is tested by model (4) and the regression results are shown in Table 11. The slope coefcient of BVPS*D is signicant and negative, indicating the value relevance of book value indeed decreased in 2000 and 2001 compared with the other years in question,
TABLE 11 Effect of the 2001 B-Shares Opening Event on the Value Relevance in the B-Share Market: Regression Results of Model (4) Model (4) Pooled Sample n Slope Coef. t-statistics BVPS*D EPS*D D
BVPS
EPS
Adj. R2 F-Statistics 0.521 109.651
499 0.549 1.447 0.292 0.309 4.247 (6.620)*** (4.296)*** (2.053)** (0.638) (11.236)***
**, *** Statistically signicant at 0.05 and 0.01, respectively. Denitions: P the price per share at the end of the fourth month after scal year t; BVPS book value per share at the end of scal year t; EPS earnings per share for scal year t; and D the dummy variable, coded 1 if samples are from year 2000 and 2001, coded 0 if otherwise.
18
Traditionally, the Chinese trust their government and view governmental intervention and regulation as a kind of investor protection.
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as predicted by H4. The slope coefcient of EPS*D is not signicantly related to stock price. In general, this is consistent with H4; the opening of B-shares to domestic investors indeed lowered the value relevance of accounting information for B-shares, especially in regard to the book value. VIII. CONCLUSIONS AND SUGGESTIONS FOR FUTURE RESEARCH This paper is an empirical study on the value relevance of accounting information of earnings and book value in different Chinese stock market segments. Using the available data from listed A-, B-, and H-share rms from 1999 to 2003 and based on the modied Ohlson model (per-share based price model), the results obtained demonstrate that the accounting information is relevant to prices in all the A-, B-, and H-share markets. Furthermore, the results show that the value relevance of accounting information is different among three markets. The accounting information in the B-share and H-share market is more value-relevant, as expected. This implies that the accounting information issued by B-share and H-share companies that is prepared and audited under IAS/H.K. GAAP is more value relevant than that prepared under Chinese GAAP of the A-share rms. In addition, by further examining the A-share market, we nd that during the bearish market situation (since 2001), the incremental explanatory power of accounting information for equity book value increases, whereas it decreases for earnings. Within the A-share market, no signicant difference of the value relevance of accounting information can be found among only-A-share, AB- and AH-share subgroups. Next, we further control the rmspecic information characteristics by limiting the sample into AB dual-listed rms. We still nd no signicant differences between the value relevance of accounting information under Chinese GAAP and IAS with the same A-share prices. Further we nd that rms with a higher percentage of total tradable shares (PTS) do not have more value-relevant accounting information than the rms with lower PTS. However, ndings indicate that investors rely more on earnings (book value) in valuating process for the rms with higher (lower) percentage of total tradable shares. Finally, evidence suggests that the opening event of B-shares to domestic investors in 2001 did indeed lower the value relevance of accounting information for B-shares. The ndings of our study have several implications. First, this study adds more evidence to the claim that accounting information is relevant to the pricing process in the Chinese A-, B-, and H-share markets. It provides both foreign and domestic investors with useful information regarding the relevance of rms accounting data. Second, the cross-sectional comparison of the accounting information prepared under Chinese GAAP and IAS/H.K. GAAP has implications for recent moves toward replacing the local GAAP with IAS. Third, this study provides evidence that during bearish market situations, investors may perceive accounting information differently compared to more bullish periods. In a depressed market, investors may valuate rms by focusing more on their historical resources (reected by BVPS) and relying less on the present performance (reected by EPS) of the rms. However, there are several limitations in this study. First, this study only takes into account book value and earnings in investigating the association between accounting information and stock prices. However, other accounting information (e.g., sales, R&D expenditures, and dividends) that can be value-relevant is ignored. Also, though the study provides a primary test of the change of value relevance of accounting information due to the 2001 B-share opening event, it is far from an event study. A more careful event study would be useful. Last, this study does not fully consider the scale effect of the R2 comparison agued by Brown et al. (1999). Hopefully, future studies will shed light on these issues.
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80 REFERENCES
Liu and Liu
Aharony, J., C. J. Lee, and T. J. Wang. 1997. Financial packaging of IPO rms in a transitional economy: The case of B-shares and H-shares in China. Working paper, Hong Kong University of Science and Technology, Kowloon, H.K. Bailey, W., and J. Jagtiani. 1994. Foreign ownership restrictions and stock prices in the Thai capital market. Journal of Financial Economics 36: 5787. Ball, R., and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research (Autumn): 159178. , S. P. Kothari, and A. Robin. 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics 29: 151. , A. Robin, and J. S. Wu. 2003. Incentives versus standards: Properties of accounting income in four East Asian countries. Journal of Accounting and Economics 36: 235270. Bao, B., and L. Chow. 1999. The usefulness of earnings and book value for equity valuation in emerging capital markets: Evidence from listed companies in the Peoples Republic of China. Journal of International Financial Management and Accounting 10: 85104. Barth, M. 1991. Relative measurement errors among alternative pension asset and liability measures. The Accounting Review 66: 159178. , W. Beaver, and W. Landsman. 1998. Relative valuation roles of equity book value and net income as a function of nancial health. Journal of Accounting and Economics 25: 134. Brown, S., L K. Lo, and T. Lys. 1999. Use of R2 in accounting research: Measuring changes in value relevance over the last four decades. Journal of Accounting and Economics 28: 83115. Burgstahler, D., and I. Dichev. 1997. Earnings, adaptation and equity value. The Accounting Review 72: 187215. Chan, K. C., and G. S. Seow. 1996. The association between stock returns and foreign GAAP earnings versus earnings adjusted to U.S. GAAP. Journal of Accounting Economics 21: 139158. Chan, K. A., A. J. Menkveld, and Z. Yang. 2003. Evidence on the foreign share discount puzzle in China: Liquidity or information asymmetry? Working paper, Hong Kong University of Science and Technology, Kowloon, H.K. Chang, J. 1999. The Decline in Value Relevance of Earnings and Book Values. Cambridge, MA: Harvard University, Graduate School of Business Administration. Chen, J. P., C. S. Chen, and X. Su. 2001. Is accounting information value relevant in the emerging Chinese stock market? Journal of International Accounting Auditing and Taxation 10: 122. Collins, D., & S. Kothari. 1989. An analysis of intertemporal and cross-sectional determinants of ERCs. Journal of Accounting and Economics 11: 143183. , E. Maydew, and J. Weiss. 1997. Changes in value relevance of earnings and book value over the past forty years. Journal of Accounting and Economics 24: 3967. Cramer, J. S. 1987. Mean and variance of R2 in small and moderate samples. Journal of Econometrics 35: 253266. Deloitte. 2003. Comparison of IFRSs and Hong Kong GAAP. October. Available at: www.iasplus.com/ hk / ifrs-hkgaap0310.pdf. . 2005. Implementing Hong Kong Financial Reporting Standards: The Challenge for 2005. Available at: www.iasplus.com / dttpubs / 0508hongkong.pdf. Easton, P., and T. Harris. 1991. Earnings as an explanatory variable for returns. Journal of Accounting Research 29: 1936. Eichenseher, J. W. 2000. Accounting information and equity valuation on the Stock Exchange of Shanghai. Working paper, University of WisconsinMadison. Fan, J. P. H., and T. J. Wong. 2002. Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics 33: 401425. Feldman, R., and M. Kumar. 1995. Emerging equity markets: Growth, benets and policy concerns. The World Bank Research Observer 181192. Feltham, G., and J. Ohlson. 1995. Valuation and clean surplus accounting for operating and nancial activities. Contemporary Accounting Research 11: 689731. Fox, J. 1998. The great emerging markets rip-off. Fortune 137 (9): 98110. Journal of International Accounting Research, Volume 6, No. 2, 2007
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Francis, J., and K. Schipper. 1999. Have nancial statements lost their relevance? Journal of Accounting Research 37: 319353. Fung, H., W. Lee, and W. K. Leung. 2000. Segmentation of the A- and B-share Chinese equity markets. Journal of Financial Research 23 (2): 179196. Grant Thornton Hong Kong. 2004. Doing Business in ChinaPRC Accounting Standards and IAS. Available at: www.gthk.com.hk / cgi-bin / cms / upload / PageEditor / big5 / China%20le% 20insightspring02.pdf. Harris, T., M. Lang, and H. Moller. 1994. The value relevance of German accounting measures: An empirical analysis. Journal of Accounting Research 32 (Autumn): 187209. Haw, I., D. Qi, and W. Wu, 1999. Value-relevance of earnings in an emerging capital market: The case of A-shares in China. Pacic Economic Review 4 (3): 337348. , B. Hu, L. Hwang, and W. Wu. 2004. Ultimate ownership, income management, and legal and extra-legal institutions. Journal of Accounting Research 42: 423462. Hu, D. 2002. The usefulness of nancial statements under Chinese GAAP vs. IAS: Evidence from the Shanghai Stock Exchange in PRC. Working paper, Kobe University, Kobe, Japan. Kothari, S., and J. Zimmerman. 1995. Price and return models. Journal of Accounting and Economics (September): 155192. Landsman, W. 1986. An empirical investigation of pension fund property rights. The Accounting Review (October): 662691. La Porta, R., F. Lopez-De-Silanes, and A. Shleifer. 1999. Corporate ownership around the world. Journal of Finance 54: 471518. Liu, K. C., and W. G. Zhang. 1996. Current Accounting Issues in China: An Analytical Approach. Singapore, PRC: Prentice Hall. Mei, J., J. Scheinkman, and W. Xiong. 2004. Speculative trading and stock prices: An analysis of Chinese A-B share premia. Working paper, Princeton University. Ohlson, J. 1995. Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research (Spring): 661687. Pennman, S. 1998. Combining earnings and book value in equity valuation. Contemporary Accounting Research 15: 291324. Peterson, R. L., M.D. 2002. Buy on the rumor: Anticipatory affect and investor behavior. Journal of Psychology and Financial Markets 3 (4): 218226. Rask, R., D. Chu, and T. Gottschang. 1998. Institutional change in transitional economics: The case of accounting in China. Comparative Economic Studies 40 (4): 76100. Samia, H., and D. Zhou. 2004. A comparison of value relevance of accounting information in different segments of the Chinese stock market. The International Journal of Accounting 39: 403427. Shelvin, T. 1991. The valuation of R&D rms with R&D limited partnerships. The Accounting Review 66: 121. Wang, S., and J. Li. 2004. Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A- and H-shares. Journal of Banking & Finance 28: 12731297. Wo, C. S. 1997. Chinese dual-class equities: Price differentials and information ows. Emerging Markets Quarterly 1: 4762.
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JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH Vol. 6, No. 2 2007 pp. 5581

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

Journal of International Accounting Research, Volume 6, No. 2, 2007

Liu and Liu

FIGURE 1 Shanghai Stock Exchange Indexa (1991 / 1 / 22005 / 7 / 18)

FIGURE 2 Shenzhen Stock Exchange Index (1991 / 1 / 22005 / 7 / 18)

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

Number of Listed Shares 823 523 53 56 73 37 43 42 29

Total 1346 109 110 85 29

Journal of International Accounting Research, Volume 6, No. 2, 2007

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

Journal of International Accounting Research, Volume 6, No. 2, 2007

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

Journal of International Accounting Research, Volume 6, No. 2, 2007

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

(H1a) (H1b) (H1c)

(H2a) (H2b) (H2c)

Liu and Liu

Journal of International Accounting Research, Volume 6, No. 2, 2007

Value Relevance of Accounting Information in Different Stock Market Segments

TABLE 4 Sample Distribution

A-shares B-shares H-shares Only A-shares AB-shares AH-shares

Journal of International Accounting Research, Volume 6, No. 2, 2007

Liu and Liu

Maximum 71.450 11.370 1.940 1.000

Mean 11.65311 2.73615 .14586 .39730

Std. Deviation 6.005128 1.354355 .394956 .122513

4802 4802 4802 3222

499 499 499

18.974 8.402 1.724

5.38428 2.42270 .09922

2.936468 1.564049 .440749

268 268 268

.138 .379 1.500

24.592 6.080 1.600

1.95408 2.31492 .10824

2.309999 .884629 .269179

4327 4327 4327

71.450 11.370 1.940

11.70679 2.76138 .15102

6.125284 1.334435 .388841

30.780 8.390 1.596

11.96384 2.57002 .10290

4.731542 1.642241 .475529

Value Relevance of Accounting Information in Different Stock Market Segments

Liu and Liu

01/18/2008 01:32PM Plate # 0

Adj. R2 F-Statistics BVPS EPS F-Statistics BVPS EPS

0.395 0.089 0.308 0.557 0.701

13.755 3.206 12.376 36.902 84.265

0.001*** 0.013** 0.041** 0.001*** 0.001***

0.001* 0.013 0.041 0.001* 0.001***

0.011* 0.813 0.09 0.001* 0.001*

1074 0.581 1.852 0.152 7.201* 6.632*

1074 1.153 0.789 0.158 10.139* 2.336