Corporate governance and accounting scandals Essay

An empirical survey on the ownership construction and net incomes quality of the listed companies in Zhejiang Province in China

Introduction

Nowadays, many major dirts happened around the word which significantly influenced investors ‘ religion in published company accounts. Top executives have been found to pull off their net incomes sharply. They present high net incomes quality to demo their companies ‘ good evident public presentation. As in Chinese stock market many surveies provide strong grounds that Chinese listed companies will supply high net incomes quality in order to derive mandate for an IPO, to publish new portions or to avoid being delisted. It means that company has the inducements to pull off net incomes to accomplish high net incomes quality to run into the regulative demands. ( Aharony et al. , 2002 ; Liu and Lu,2002 ; Chen and Yuan, 2004 ; Jian and Wong,2004 ) . From the bureau position, we consider the net incomes quality direction construction as one signal of the bureau job confronted with modern corporations. Because ownership construction is the primary determiner of bureau cost, this survey attempts to associate Company ‘s ownership construction and net incomes quality. Ownership construction can be defined as two dimensions: ownership concentration and ownership mix. The former refers to the per centum of bulk of stockholders ‘ portions while the latter is related to the individuality of the major stockholder. In this survey, I will look into that how the ownership concentration influence the net incomes quality and the relationship between ownership individuality and net incomes quality.

Literature Review

net incomes quality

Previous research workers gave assorted definitions of net incomes quality which emphasized on the quality, net incomes, persistent and predictability, steady and value relativity.

The Hawkins ( 1998 ) thinks that high net incomes quality should be stable, predicted and reflect the tendency of the income degree in the hereafter. Meanwhile, the net incomes quality non merely involves the income, finance activity, the direction feature will be set to income quality as a sequence creative activity influence. Furthermore, the outside factors such as the economic environment, revenue enhancement policy etc. besides play of import functions in make up one’s minding the company ‘s net incomes quality.

Penman and Zhang ( 2002 ) claims that before the company discloses abnormally points, if the net incomes can show the hereafter gaining degree, so the earning quality is high.

In 2002, American accounting ‘s maestro ( AAA ) defines net incomes quality from the hard currency position: net incomes quality is reciprocally related to the sum of clip elapsed between gross ( income ) acknowledgment and hard currency aggregation.

This paper agree with Dechow and Schrand ( 2004 ) ‘s position. Three conditions should be satisfied if a company is considered to hold high gaining quality. First, if reflects current runing conditions. Second, it good predicts future runing status. Third, it truly reflects the company ‘s intrinsic value.

Ownership construction

Shleifer and Vishny ( 1997 ) specify the ownership construction as the concentration in a house ‘s ownership and the individuality of a house ‘s proprietors. It influences a house ‘s corporate administration, its schemes and its public presentation.

Jensen and Meckling ( 1976 ) see that ownership construction concerns “ the comparative sums of ownership claims held by interiors ( direction ) and outsides ( investors with no direct function in the direction of the house ) ” .

Borbosa and Louri ( 2002 ) think that ownership construction is an incentive device for cut downing the bureau costs, which can be used to protect belongings rights, which can non be to the full contracted out.

How to measure net incomes quality?

There are two chief methods to measure the net incomes quality.

The first method is the accrual quality theoretical account. This theoretical account foremost suggested by Dechow and Dichev ( 2002 ) . In his attack, “ the estimated remainders from house specific arrested developments of working capital accumulations on yesteryear, nowadays, and future hard currency flow from operation gaining control entire accumulations appraisal mistake by direction and are viewed as an reverse step of net incomes quality ” . Francis et Al. ( 2005 ) add two excess variables which are “ alteration in gross and belongings, works and equipment ( PPE ) for more complete word picture of the relation between accumulations and hard currency flow ” to the Dechow and Dichev ‘s accrual quality theoretical account.

The other theoretical account is ESC ( net incomes response coefficient ) theoretical account. This theoretical account is under efficient market hypothesis. ESC steps and evaluates the gaining quality from the market ‘s facet. It can utilize the information supported in a company ‘s proclamation to estimation of the alteration in a stock monetary value. ( Hotchkiss & A ; Strickland,2003 )

Ownership concentration, ownership mix and net incomes quality

Ownership construction can be defined as two dimensions: ownership concentration and ownership mix.

Hill and Snell ( 1988 ) show that ownership construction affect house ‘s public presentation as the ownership concentration motivates invention that leads to value maximization. Fan and Wong ( 2002 ) find out East Asiatic houses that higher concentration is associated with lower net incomes infromativeness, consistent with the entrenchment hypothesis that commanding stockholders have higher inducements to pull strings net incomes in order to conceal straight-out expropriation.

Alchian ( 1977 ) and Shleifer ( 1998 ) indicate that province ownership entails inferior administration quality compared to private ownership because of a catching ability job. Sing the formal literature, I predict that ownership concentration will take to a weaker entrenchment consequence in in private owned companies than in state-owned companies.

China has its ain particular ownership classification strategy. Sun and Tong ( 2002 ) sort the house ‘s share-holders into three chief groups: province, legal individual and tradable A and B portion. Each of them hold about 30 % of the entire stock in these listed houses.

Sun et Al. ( 2002 ) suggest that the relation between province ownership and public presentation belongs to an upside-down U-shape. While Wei and Varela ( 2003 ) claimed that the relation could be convex in fact.

Alchian ( 1961 ) suggests that private ownership houses should surpass authorities ownership houses on companies ‘ public presentation.

Harmonizing to Aharoni ( 2000 ) , proprietors of private houses who have the gross rights and residuary control rights have an inducement to supervise the direction behaviour closely, thereby act uponing a house ‘s public presentation positively.

Anna and Lin ( 2003 ) conclude that fiscal public presentation of assorted ownership construction companies tends to be hapless compared with other types of ownership construction companies.

Research inquiries

The aim of this paper is to analyze how ownership construction in Zhejiang state listed companies affects the companies ‘ net incomes quality. More specifically, I examine how ownership concentration influences the net incomes quality in a company and the relationship between ownership individuality and net incomes quality. The specific inquiries of the research are:

  1. What is net incomes quality?
  2. How to measure net incomes quality?
  3. What is ownership construction?
  4. What is ownership construction in China?
  5. Whether and how ownership concentration influences net incomes quality?
  6. What is the relationship between ownership individuality and net incomes quality?

Methodology

Research doctrine and attack

My paper belongs to functionalist paradigm. It is an nonsubjective ordinance. ( Jill Colllis & A ; Roger Hussey,2003 ) . The construction of my paper follows as that: starting point is theory. I will hold a reappraisal of the bing literature on net incomes quality, ownership construction and the relationship between ownership construction and net incomes quality. The literature reappraisal will concentrate on the fondness of ownership concentration and ownership mix on net incomes quality. Then hypothesizes are logically deduced from theory. I will give two hypothesizes in this paper. After that it is tested through observation. Several theoretical accounts will be used to prove the hypothesizes if they are positive. Furthermore, method is a specific research technique to roll up and analyse informations. It is good tantrum with theory, hypothesis and methodological analysis. ( Bob Ryan, Robert Scapens & A ; Michael Theobald,1992 ) . My paper chiefly uses quantitative method. It involves roll uping and analysing numerical informations and using statistical trials. I use cross-sectional multivariate arrested development analysis to prove the relationship between different variables. As for information, I chiefly use bing secondary informations. I collect informations from China Stock Marketand Accounting Research Database ( CSMAR ) and company ‘s one-year study.

Research design

Ownership construction and net incomes quality and testable hypothesis

My survey focal point on the relationship between ownership construction and net incomes quality. Ownership has two dimensions: ownership concentration and individuality of ownership. I believe both of them have influenced net incomes quality in Zhejiang listed companies on SHSE. My general hypothesizes are: H1: The relationship between shareholding concentration and net incomes quality follows an upside-down U-shape form. H2: The house ‘s net incomes quality is positively correlated with the fraction of legal individual portions, but it neither negatively correlated nor uncorrelated with the fraction of province portions and tradable A-share held largely by persons.

Sampling choice

At the terminal of twelvemonth 2009, there are 66 fiscal and non-financial Zhejiang companies listed on SHSE ( Shanghai Stock Exchange ) . I use pooled firm-level informations for 2007, 2008, 2009. The sample choice of this paper follows three rules. First, due to different statutory demands, all Bankss, insurance and unit trusts companies were eliminated from the population of involvement because they present different inducements and chances to pull off net incomes ( Peasnell et al, 2000 ; Abdul Rahman & A ; Mohamend Ali, 2006 ) . Second, “ ST ” and “ PT ” companies are excluded from the samples because they have particular fiscal place and operating results compared with usually operated companies. Third, companies with uncomplete informations revelation in the one-year studies will be eliminated. The concluding sample of this survey consists of 60 non fiscal companies with complete informations for net incomes quality and ownership construction. Net incomes quality informations is gained from the China Stock Marketand Accounting Research Database ( CSMAR ) and any missing fiscal informations were obtained manually from one-year studies. Information for ownership was obtained by analyzing the revelation in one-year studies.

Variables

Dependent variables

There are many ways to measure net incomes quality. In this paper, I choose ERC ( net incomes response correlativity ) to measure companies ‘ net incomes quality. ERC can utilize the information supported in a company ‘s proclamation to estimation of the alteration in a stock monetary value.

Independent variables and controlled variables

In order to prove the hypothesis, we need to happen some independent variables to measure the ownership construction. My primary independent variables across the arrested developments focus on the ownership concentration. CR1, CR10 and H10 will be used as independent variables. After that, FST, FLP and FTA are used as independent variables to measure the ownership mix.

Harmonizing to the Fama-French three-factor theoretical account, hazard, company size and growing will act upon the stock returns. Therefore, I use LEV, SIZE and TQ as controlled variables to stand for these factors severally.

Empirical trial

Using cross-sectional multivariate arrested development, I foremost regress net incomes quality variables on concentration ratios without separating different ownership mix. The intent is to look into whether and how ownership concentration influences net incomes quality. After that, I examine effects on a company ‘s net incomes quality of province portions, legal individual portions and tradable A- portion held mostly by persons severally. In order to prove hypothesis, I will utilize some theoretical accounts. The basic theoretical account to measure net incomes quality is:

The restriction of this thesis

There are still some restrictions in this paper. First, the figure of this paper ‘s sample is non really big. I merely choose Zhejiang listed companies on SHSE. Second, when I choose the controlled variables, I choose SIZE, LEV and TQ but I do non take the sector as a variable. In fact, harmonizing to the former research, sector plays an of import function in net incomes quality. If we classify the samples by the sector, the samples will be really little. It can non explicate the importance of sector in the net incomes quality. Third, I use ERC ( net incomes response coefficient ) to measure companies ‘ net incomes quality. But this theoretical account should be under efficient market hypothesis while if China ‘s capital market is efficient should be considered. Therefore, farther surveies should concentrate on these restrictions and set these factors into research.

Timing

June:

  1. composing debut
  2. completing the portion of literature reappraisal

July:

  1. larning SPSS package
  2. informations assemblage
  3. informations procedure

August:

  1. uncover the findings from the arrested development
  2. analysing the findings of the arrested development
  3. completing the decision of the thesis

September:

  1. complete the bill of exchange of the thesis and making alteration
  2. mention and typesetting of the thesis

Mention:

  • Abdul Rahman, R. and Mohamed Ali, F.H. ( 2006 ) , Board, audit commission, civilization and net incomes direction: Malayan grounds, Managerial Auditing Journal,21 ( 7 ) , 783-804.
  • Agrawal, A. and Chadha, S. ( 2002 ) , Corporate Governance and Accounting Scandals, Working paper, University of Alabama.
  • Alchian, A. , 1961. Some economic sciences of belongings, Santa Monica, CA: Rand Corporation, P2316.
  • Aharoni, Y. ( 2000 ) , The public presentation of state-owned endeavors, in P.A. Toninelli, The Rise and Fall of State-Owned Enterprise in the Western World, Cambridge, Cambridge University Press, 49-72.
  • Bob R, Robert S & A ; Michael T. ( 1992 ) Research Method and Methodology in Finance and Accounting, London, Academic Press.
  • Dechow, P.M. and Dichev, I.D. ( 2002 ) , The quality of accumulations and net incomes: The function of accrual appraisal mistakes, The Accounting Review, Supplement,77, 35-59.
  • Hawkynss. ( 1998 ) , Corporate fiscal coverage and analysis: Text and cases,4th Edition, McGraw-Hill Book, p 132-154.
  • Fan, J.P.H. and Wong, T.J. ( 2002 ) , Corporate ownership construction and the informativeness of accounting net incomes in East Asia. , Journal of Accounting and Economics,33,401-425.
  • Francis, J. , LaFond, R. , Olsson, P.M. and Schipper, K. ( 2005 ) , The market pricing of accrual quality, Journal of Accounting and Economics, 39 ( 2 ) , 295-327.
  • Hotchkiss, Edith S. and Deon Strickland, 2003. Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements, Journal of Finance, 58 ( 4 ) , p.1469-1498.
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  • Shleifer, A. and Vishny, R.W. ( 1997 ) , A study of corporate administration, The Journal of Finance, 52, 737-783.
  • Sun, Q. , Tong, W.H.S. , ( 2002 ) . How does authorities ownership affect house public presentation? Evidence from China ‘s denationalization experience, Journal of Business Finance and Accounting,29 ( 1 & A ; 2 ) , 1-27.
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