Taming the "Casino Stocks": Impact of Enhanced Visibility via Shanghai Hong Kong Stock Connect on Firms' Information Environment Open Access

Abstract

In this paper, I investigate whether enhanced visibility by allowing foreign participation in the domestic capital market improves the supply, demand and overall information in the market. Using the Shanghai Hong Kong Stock Connect (where foreign investors are allowed to trade in stocks listed in the Shanghai Stock Exchange through Hong Kong) as a natural experiment, the author documents an improved supply (lower earnings aggressiveness), higher demand (greater analyst forecast accuracy), greater incentives for managers to meet or beat market expectations, and an overall improvement in the information environment for the connected firms. The results contribute to the current literature by (1) circumnavigating the endogeneity issues of whether foreign investments lead to higher firm-specific information, or higher firm-specific information leads to greater foreign investments; and (2) when enforcement of securities law is weak and costly to implement, whether improving domestic firms' visibility by allowing them to be traded in a developed capital market increases corporate transparency and the information environment of the domestic capital market. The findings should be of interest to policymakers as the results suggest that when enforcement is costly, greater transparency may be achieved by allowing foreign participation in the domestic market.

Table of Contents

1 Introduction 4

2 Institutional Background 8 3 Literature Review and Hypothesis Development 12 3.1 Visibility and Earnings Aggressiveness . . . . . . . . . . . . . . . . . . . . . . . . 12 3.2 Visibility and Analyst and Manager behavior . . . . . . . . . . . . . . . . . . . . 14 3.3 Visibility and Stock price synchronicity . . . . . . . . . . . . . . . . . . . . . . . 15 4 Research Design 17 4.1 Earnings Aggressiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.2 Manager and Analyst behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3 Stock price synchronicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5 Data and Empirical Results 23 5.1 Sample Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.2 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.3 Propensity score matching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.4.1 Earnings Aggressiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.4.2 Analyst Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.4.3 Manager Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.4.4 Stock price synchronicity . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6 Conclusion 32 7 References 34 List of Tables 1 The number of firms participating in Shanghai - Hong Kong Stock Connect . . . 38 2 Descriptive Statistics as of 31st December 2012 (in $ millions) . . . . . . . . . . . 39 3 Propensity Score Matched Sample . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2 4 The effect of Shanghai Hong Kong Stock Connect on Earnings Aggressiveness . . 41 5 The effect of Shanghai Hong Kong Stock Connect on Analyst Forecast Accuracy 42 6 The Effect of Shanghai Hong Kong Stock Connect on Firms' Incentives to Manage Market Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7 Effect of Shanghai Hong Kong Stock Connect on Stock Price Synchronicity . . . 44

About this Master's Thesis

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School	Laney Graduate School
Department	Business
Degree	MS
Submission	Master's Thesis
Language	English
Research Field	Business Administration, General Business Administration, Accounting
Keyword	Information environment Visibility
Committee Chair / Thesis Advisor	Dichev, Ilia, Emory University
Committee Members	Waymire, Gregory, Emory University Swaminathan, Anand, Emory University

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