Advertisement

Hello, is anybody there? Corporate accessibility for outside shareholders as a signal of agency problems

  • Michael Firth
  • Chen LinEmail author
  • Sonia Man-lai Wong
  • Xiaofeng Zhao
Article
  • 56 Downloads

Abstract

In this paper, we develop a corporate accessibility measure for publicly listed firms in China based on their responses to outside market participants’ attempts to communicate with them (via telephone, e-mail, and online discussion forum), and examine whether the provision of corporate accessibility signals the incidence of agency problems. We find robust evidence that non-accessible firms are associated with more agency problems, manifested in greater tunneling of corporate resources through inter-corporate loans and related-party transactions, greater consumption of managerial slack, more earnings management, and a higher probability of committing corporate fraud. We also find that non-accessible firms are more likely to conduct value-destroying acquisitions than accessible firms. Furthermore, we find that non-accessible firms underperform accessible firms in both firm valuation and operating performance. Overall, our results suggest that a firm’s decision to provide corporate accessibility is a value-relevant signal for informing investors of the severity of agency problems in publicly listed firms.

Keywords

Corporate accessibility Agency problems Direct communications Signaling 

JEL classification

G30 D82 M41 

Notes

Acknowledgements

We thank Patricia Dechow (the editor) and two anonymous referees for their constructive feedback and valuable comments. We also appreciate the helpful comments from K. Philip Wang, Ignacio Requejo, Cong Wang, Yuanyuan Zhang, Jingyuan Li, and Jin Gao and the seminar participants at Zhongnan University of Economics and Law, the Seventh China Finance and Investment Forum, and EFMA. We also thank Zhengjia Guo for her excellent research assistance. Wong thanks the Government of the Hong Kong Special Administrative Region of PRC for funding support (GRF LU391113). Lin acknowledges the financial supports from the National Natural Science Foundation of China (No. 71790601 and 71728009).

References

  1. Aggarwal, R., Erel, I., Ferreira, M., & Matos, P. (2011). Does governance travel around the world? Evidence from institutional investors. Journal of Financial Economics, 100, 154–181.CrossRefGoogle Scholar
  2. Aharony, J., Lee, C.-W. J., & Wong, T. J. (2000). Financial packaging of IPO firms in China. Journal of Accounting Research, 38, 103–126.CrossRefGoogle Scholar
  3. Akerlof, G. A. (1970). The market for "lemons": Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84, 488–500.CrossRefGoogle Scholar
  4. Allen, F., Qian, J., & Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77, 57–116.CrossRefGoogle Scholar
  5. Ang, J. S., Cole, R. A., & Lin, J. W. (2000). Agency costs and ownership structure. The Journal of Finance, 55, 81–106.CrossRefGoogle Scholar
  6. Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010). The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50, 179–234.CrossRefGoogle Scholar
  7. Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50, 296–343.CrossRefGoogle Scholar
  8. Bushee, B. J., Gerakos, J. J., & Lee, L. F. (2018). Corporate jets and private meetings with investors. Journal of Accounting and Economics, 65, 358–379.CrossRefGoogle Scholar
  9. Bushee, B. J., & Miller, G. S. (2012). Investor relations, firm visibility, and investor following. The Accounting Review, 87, 867–897.CrossRefGoogle Scholar
  10. Cai, H., Fang, H., & Xu, L. C. (2011). Eat, drink, firms and government: An investigation of corruption from entertainment and travel costs of Chinese firms. Journal of Law and Economics, 54, 55–78.CrossRefGoogle Scholar
  11. Chen, G., Firth, M., Gao, D. N., & Rui, O. M. (2006). Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 12, 424–448.CrossRefGoogle Scholar
  12. Chen, K. C., & Yuan, H. (2004). Earnings management and capital resource allocation: Evidence from China's accounting-based regulation of rights issues. The Accounting Review, 79, 645–665.CrossRefGoogle Scholar
  13. Chen, S., Sun, S. Y., & Wu, D. (2010). Client importance, institutional improvements, and audit quality in China: An office and individual auditor level analysis. The Accounting Review, 85, 127–158.CrossRefGoogle Scholar
  14. Chen, W., Hribar, P., & Melessa, S. (2018). Incorrect inferences when using residuals as dependent variables. Journal of Accounting Research, 56, 751–796.CrossRefGoogle Scholar
  15. Chen, Z. (2003). Capital markets and legal development: The China case. China Economic Review, 14, 451–472.CrossRefGoogle Scholar
  16. Cheng, Q., Du, F., Wang, X., & Wang, Y. (2016). Seeing is believing: Analysts’ corporate site visits. Review of Accounting Studies, 21, 1245–1286.CrossRefGoogle Scholar
  17. Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86, 59–100.CrossRefGoogle Scholar
  18. Dhaliwal, D. S., Radhakrishnan, S., Tsang, A., & Yang, Y. G. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87, 723–759.CrossRefGoogle Scholar
  19. Diamond, D. W., & Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46, 1325–1359.CrossRefGoogle Scholar
  20. Donelson, D. C., McInnis, J. M., Mergenthaler, R. D., & Yu, Y. (2012). The timeliness of bad earnings news and litigation risk. The Accounting Review, 87, 1967–1991.CrossRefGoogle Scholar
  21. Durnev, A., & Kim, E. (2005). To steal or not to steal: Firm attributes, legal environment, and valuation. The Journal of Finance, 60, 1461–1493.CrossRefGoogle Scholar
  22. Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? The Journal of Finance, 65, 2213–2253.CrossRefGoogle Scholar
  23. Dye, R. A. (2001). An evaluation of “essays on disclosure” and the disclosure literature in accounting. Journal of Accounting and Economics, 32, 181–235.CrossRefGoogle Scholar
  24. Fan, J. P. H., & Wong, T. J. (2005). Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research, 43, 35–72.CrossRefGoogle Scholar
  25. Fan, J. P. H., Wong, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and post-IPO performance of China's newly partially privatized firms. Journal of Financial Economics, 84, 330–357.CrossRefGoogle Scholar
  26. Firth, M., Gao, J., Shen, J., & Zhang, Y. (2016). Institutional stock ownership and firms’ cash dividend policies: Evidence from China. Journal of Banking & Finance, 65, 91–107.CrossRefGoogle Scholar
  27. Firth, M., Rui, O. M., & Wu, W. (2011). Cooking the books: Recipes and costs of falsified financial statements in China. Journal of Corporate Finance, 17, 371–390.CrossRefGoogle Scholar
  28. Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.CrossRefGoogle Scholar
  29. Gul, F. A., Cheng, L. T. W., & Leung, T. Y. (2011). Perks and the informativeness of stock prices in the Chinese market. Journal of Corporate Finance, 17, 1410–1429.CrossRefGoogle Scholar
  30. Healy, P. M., & Palepu, K. (2001). Information asymmetry, corporate disclosure and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRefGoogle Scholar
  31. Hobson, J. L., Mayew, W. J., & Venkatachalam, M. (2011). Analyzing speech to detect financial misreporting. Journal of Accounting Research, 50, 349–392.CrossRefGoogle Scholar
  32. Hope, O.-K., & Thomas, W. B. (2008). Managerial empire building and firm disclosure. Journal of Accounting Research, 46, 591–626.CrossRefGoogle Scholar
  33. Jian, M., & Wong, T. J. (2010). Propping through related party transactions. Review of Accounting Studies, 15, 70–105.CrossRefGoogle Scholar
  34. Jiang, G., Lee, C. M. C., & Yue, H. (2010). Tunneling through intercorporate loans: The China experience. Journal of Financial Economics, 98, 1–20.CrossRefGoogle Scholar
  35. Karpoff, J. M., Lee, D. S., & Martin, G. S. (2009). The cost to firms of cooking the books. Journal of Financial and Quantitative Analysis, 43, 581–611.CrossRefGoogle Scholar
  36. Kirk, M. P., & Vincent, J. D. (2014). Professional investor relations within the firm. The Accounting Review, 89, 1421–1452.CrossRefGoogle Scholar
  37. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163–197.CrossRefGoogle Scholar
  38. Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47, 241–276.CrossRefGoogle Scholar
  39. La Porta, R., Shleifer, A., & López de Silanes, F. (1999). Corporate ownership around the world. Journal of Finance, 54, 471–517.CrossRefGoogle Scholar
  40. Leuz, C., Triantis, A., & Wang, T. Y. (2008). Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations. Journal of Accounting and Economics, 45, 181–208.CrossRefGoogle Scholar
  41. Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54, 525–622.CrossRefGoogle Scholar
  42. Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45, 221–247.CrossRefGoogle Scholar
  43. Lin, K., Piotroski, J., Yang, Y.G., & Tan, J., 2012. Voice or exit? Independent director decisions in an emerging economy. Working paper.Google Scholar
  44. Liu, Q., & Lu, Z. (2007). Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective. Journal of Corporate Finance, 13, 881–906.CrossRefGoogle Scholar
  45. Luo, W., Zhang, Y., & Zhu, N. (2011). Bank ownership and executive perquisites: New evidence from an emerging market. Journal of Corporate Finance, 17, 352–370.CrossRefGoogle Scholar
  46. Masulis, R. W., Wang, C., & Xie, F. (2007). Corporate governance and acquirer returns. The Journal of Finance, 62, 1851–1889.CrossRefGoogle Scholar
  47. Mayew, W. J., & Venkatachalam, M. (2012). The power of voice: Managerial affective states and future firm performance. Journal of Finance, 67, 1–43.CrossRefGoogle Scholar
  48. McNichols, M. F., & Stubben, S. R. (2008). Does earnings management affect firms’ investment decisions? The Accounting Review, 83, 1571–1603.CrossRefGoogle Scholar
  49. Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215–260.CrossRefGoogle Scholar
  50. Murphy, D. L., Shrieves, R. E., & Tibbs, S. L. (2009). Understanding the penalties associated with corporate misconduct: An empirical examination of earnings and risk. Journal of Financial and Quantitative Analysis, 44, 55–83.CrossRefGoogle Scholar
  51. Peni, E., & Vähämaa, S. (2010). Female executives and earnings management. Managerial Finance, 36, 629–645.CrossRefGoogle Scholar
  52. Piotroski, J. D., & Roulstone, D. T. (2005). Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations? Journal of Accounting and Economics, 39, 55–81.CrossRefGoogle Scholar
  53. Piotroski, J.D., Wong, T.J., 2012. Institutions and information environment of Chinese listed firms. Capitalizing China. University of Chicago Press, 201–242.Google Scholar
  54. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52, 737–783.CrossRefGoogle Scholar
  55. Soltes, E. (2014). Private interaction between firm management and sell-side analysts. Journal of Accounting Research, 52, 245–272.ttGoogle Scholar
  56. Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87, 355–374.CrossRefGoogle Scholar
  57. Stubben, S. R. (2010). Discretionary revenues as a measure of earnings management. The Accounting Review, 85, 695–717.CrossRefGoogle Scholar
  58. Sun, Q., & Tong, W. H. S. (2003). China share issue privatization: The extent of its success. Journal of Financial Economics, 70, 183–222.CrossRefGoogle Scholar
  59. Verrecchia, R. E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32, 97–180.CrossRefGoogle Scholar
  60. Wang, Q., Wong, T. J., & Xia, L. (2008). State ownership, the institutional environment, and auditor choice: Evidence from China. Journal of Accounting and Economics, 46, 112–134.CrossRefGoogle Scholar
  61. Xu, N., Li, X., Yuan, Q., & Chan, K. C. (2014). Excess perks and stock price crash risk: Evidence from China. Journal of Corporate Finance, 25, 419–434.CrossRefGoogle Scholar
  62. Zou, H., Wong, S., Shum, C., Xiong, J., & Yan, J. (2008). Controlling-minority shareholder incentive conflicts and directors’ and officers’ liability insurance: Evidence from China. Journal of Banking & Finance, 32, 2636–2645.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  • Michael Firth
    • 2
  • Chen Lin
    • 1
    Email author
  • Sonia Man-lai Wong
    • 2
  • Xiaofeng Zhao
    • 2
  1. 1.University of Hong KongPok Fu LamHong Kong
  2. 2.Lingnan UniversityTuen MunHong Kong

Personalised recommendations