The Effect of Corporate Governance on Market Reactions to Earnings: A Comparison of A Class and B Class shares in the People's Republic of China

  • Fure-Jiu Jih

Student thesis: Doctoral Thesis

Abstract

The primary objective of this dissertation is to examine the role of corporate governance in the performance of publicly listed corporations. The normative research suggests that stronger corporate governance should lead to better market performance and a firm’s governance practice should have a positive effect on its market value.
This research focuses on Chinese capital markets because of their unique characteristics with respect to elements of corporate governance. In the Chinese stock markets, a company issues A-shares which are subject to Chinese governance and is referred as an A-shares company. A company that issues A-shares and B-shares which are subject to Western governance is referred as an AB-shares company.
The primary differences between A-shares governance and AB-shares governance are board independence, accounting standards, audit quality and ownership of stocks. These differences in governance characteristics provide for a direct comparison of the effects of governance structure on market reactions to earnings in a developing market.
An event study is used to isolate the firm’s unique response to an earnings announcement as measured by the abnormal returns (CAR- Cumulative Average Residuals). Using a matched pair design the effect of governance structure on market reactions to earnings is assessed.
The results indicate the impact of governance structure on market reactions to earnings is not significant and there is no difference between market reactions to the earnings of B-shares based on IAS and market reactions compared with the earnings of A-shares based on Chinese GAAP.
The results suggest that the market response to earnings prepared under Western standards and governance does not improve the market’s perception of earnings quality in the Chinese stock markets. Consequently, it is questionable that Western corporate governance practices are applicable in developing countries
Date of Award27 Sep 2008
LanguageEnglish
Awarding Institution
SupervisorRaymond McNamara (Supervisor)

Cite this

The Effect of Corporate Governance on Market Reactions to Earnings: A Comparison of A Class and B Class shares in the People's Republic of China
Jih, F. (Author). 27 Sep 2008

Student thesis: Doctoral Thesis