Article2002

The use of accounting information for the valuation of dual-class shares listed on China's stock markets

Gongmeng Chen · Michael A. Firth · Jeong‐Bon Kim

38 citations0/0 files storedAccounting and Business Research

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

This study examines whether accounting data are useful in helping explain the market value of listed firms in China. In particular, we focus our investigation on companies that have issued dual-class shares sold to domestic investors (A-shares) and foreigners (B-shares). Domestic accounting standards (DAS) are used for the financial statements of A-shares while international accounting standards (IAS) are used for B-shares. Our results show that IAS earnings information is incorporated in the prices and returns of B-shares. In contrast, A-share investors appear to place most weight on DAS earnings and only recently has there been an association with IAS information. Book values are value relevant for B-share prices but not for A-share prices. Sensitivity tests show that accounting information is more likely to be impounded in share prices and returns for firms with high individual (i.e. non-government) share ownership. Based on our results, we argue that China's move towards the adoption of IAS will be useful for A-share investors, especially in light of the country's recent accession to the WTO and the consequent opening-up of the economy.

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References

1991Earnings Asan Explanatory Variable for Returns 1995Price and return models 1993A Comparison of the Value-Relevance of U.S. Versus Non-U.S. GAAP Accounting Measures Using Form 20-F Reconciliations 1999The market valuation of IAS versus US-GAAP accounting measures using Form 20-F reconciliations 1996International Accounting Differences and Their Relation to Share Prices: Evidence from U.K., Australian, and Canadian Firms*1998Underpricing and aftermarket performance of IPOs in Shanghai, China 2003IPO underpricing in China’s new stock markets 1999The Usefulness of Earnings and Book Value for Equity Valuation in Emerging Capital Markets: Evidence From Listed Companies in the People's Republic of China

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