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Article
Publication date: 17 September 2019

Raheel Safdar, Mirza Sultan Sikandar and Tanveer Ahsan

The purpose of this paper is to investigate whether liquidity risk (i.e. the returns’ vulnerability to the unexpected changes in overall market liquidity) is a priced risk…

Abstract

Purpose

The purpose of this paper is to investigate whether liquidity risk (i.e. the returns’ vulnerability to the unexpected changes in overall market liquidity) is a priced risk factor in China. Moreover, it investigates the potential role of a stock’s information quality in reducing its liquidity risk during the period of post-non-tradable shares reforms in China.

Design/methodology/approach

The authors collect data of all the A-share issuing firms listed either on the Shanghai Stock Exchange or Shenzhen Stock Exchange during the period 2006–2016. The authors perform two-stage cross-sectional regression testing. First, the authors perform firm-specific time-series regressions of excess returns over Fama–French’s three-factor model and a liquidity factor. Second, to test whether firm-specific liquidity risk is a priced risk factor, the authors apply Fama and MacBeth’s regressions.

Findings

Firm-level asset pricing tests provide substantial evidence for market pricing of liquidity risk in China. The authors find a significant negative association between information quality and liquidity risk. The authors also find that the reduction in liquidity risk induced by better information quality is substantial enough to reduce required returns. These findings are robust to alternative measures of liquidity risk and information quality.

Practical implications

The study underscores that a policy initiative to enhance the information environment can significantly reduce the market volatility in China.

Originality/value

To the best of authors’ knowledge, this is the first study that considers the Shanghai Stock Exchange as well as Shenzhen Stock Exchange to investigate market pricing of liquidity risk in China.

Details

China Finance Review International, vol. 9 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

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Article
Publication date: 11 March 2019

Raheel Safdar, Naveed Iqbal Chaudhry, Sultan Sikandar Mirza and Yan Yu

This study aims to examine the role of principal–principal (P–P) agency conflict in shaping the information environment of firms in China. Moreover, it investigates…

Abstract

Purpose

This study aims to examine the role of principal–principal (P–P) agency conflict in shaping the information environment of firms in China. Moreover, it investigates whether audit quality and analyst following play any role in moderating the effects of P–P agency conflict.

Design/methodology/approach

The authors used principal component analysis to synthesize a measure of P–P agency conflict and used accruals quality as measure of information quality. They used two-step Arellano Bond system GMM estimators to cope with potential endogeniety in the model. Moreover, they also performed subsample analyses based on state ownership to ensure the robustness of findings.

Findings

The results of this paper provide evidence that high P–P agency conflict is associated with poor information quality in China. But this is not true for subsample of state-owned enterprises. Moreover, better audit quality and high analyst following mitigate the negative effects of high P–P agency conflict on information quality but only in subsample of non-state-owned enterprises.

Originality value

The findings of this paper are important, as they contribute in literature on forces shaping the information environment of firms. Moreover, it presents audit quality and analyst following as external governance mechanisms to alleviate the negative consequences of the P–P agency conflict vastly embedded in the ownership structure of firms in China.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 1
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 6 November 2017

Raheel Safdar and Chen Yan

This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China.

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Abstract

Purpose

This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China.

Design/methodology/approach

The authors used accruals quality (AQ) as their measure of information risk and performed Fama-Macbeth regressions to investigate association of AQ with future realized stock returns. Moreover, two-stage cross-sectional regression analysis was performed, both at firm level and at portfolio level, to test if the AQ factor is priced in China in addition to existing factors in the Fama French three-factor model.

Findings

The authors found poor AQ being associated with higher future realized stock returns. Moreover, they found evidence of market pricing of AQ in addition to existing factors in the Fama French three-factor model. Further, subsample analysis revealed that investors value AQ more in non-state owned enterprises than in state owned enterprises.

Research limitations/implications

The study sample comprises A-shares only and the generalization of the findings is limited by the peculiar institutional and economic setup in China.

Originality/value

This study contributes to market-based accounting literature by providing further insight into how and if investors value information risk, and it seeks to fill gap in empirical literature by providing evidence from the Chinese capital market.

Details

Accounting Research Journal, vol. 30 no. 4
Type: Research Article
ISSN: 1030-9616

Keywords

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Article
Publication date: 7 November 2016

Raheel Safdar and Chen Yan

The purpose of this paper is to investigate whether income smoothing helps to reduce volatility in reported earnings and which firms are more inclined to be engaged in…

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2809

Abstract

Purpose

The purpose of this paper is to investigate whether income smoothing helps to reduce volatility in reported earnings and which firms are more inclined to be engaged in income smoothing.

Design/methodology/approach

The authors used negative correlation between pre-managed earnings of a firm and its discretionary accruals (DAs) as proxy for income smoothing and the firms having more negative correlation coefficient are expected to have lower volatility in their reported earnings. The authors used Kothari et al.’s (2005) version of modified-Jones model to estimate DAs and used least squares estimations to investigate the research questions using six-year (2007-2012) sample of non-financial firms listed over Karachi Stock Exchange, Pakistan.

Findings

The authors found that firms experiencing more volatility in economic activities and smaller firms are more aggressively involved in income smoothing. Moreover, a predominant majority (72.2 per cent) of firms in the sample are involved in income smoothing through accruals manipulation. Also, the authors found that firms which are more aggressively involved in income smoothing have lesser volatility in reported earnings. Lastly, the level of DAs per se does not have any impact on income smoothing.

Research limitations/implications

The proxy used for income smoothing, though the authors consider it to be better, is not the only one used in literature and the sample is limited to Pakistan.

Originality/value

This study adds to earnings management literature by providing evidence on extensive accrual manipulation for income smoothing in Pakistan.

Details

Journal of Accounting in Emerging Economies, vol. 6 no. 4
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 15 February 2016

Raheel Safdar and Chen Yan

– The purpose of this paper is to investigate information risk in relation to cost of capital and, also, whether information risk is a priced risk factor in China.

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1272

Abstract

Purpose

The purpose of this paper is to investigate information risk in relation to cost of capital and, also, whether information risk is a priced risk factor in China.

Design/methodology/approach

The authors used accruals quality (AQ) as the measure of information risk and employed multiple regression analysis and Fama-Macbeth regressions to investigate association of AQ with cost of capital and future realized stock returns, respectively. Moreover, two-stage cross-sectional regression analysis is performed, both at firm and at portfolio levels, to test if an AQ factor is a priced risk factor in China.

Findings

The authors found poor AQ being associated with higher cost of equity but this relationship is not significant in subsample of state-owned enterprises (SOEs). The results do not support any association between AQ and cost of debt in China. Further, the authors found poor AQ being positively associated with future realized stock returns and the authors also found evidence of market pricing of an AQ factor in addition to existing factors in Fama-French three-factor model in firm level analysis. However, subsample analysis revealed that AQ is not priced in case of SOEs.

Research limitations/implications

The study sample is comprised of A-Shares only and the generalization of the findings is limited by the peculiar institutional setup and other unique characteristics of Chinese capital market.

Originality/value

This study contributes to literature by providing novel findings on the relationship between information risk and cost of capital in Chinese context and it provides further insight into how and if investors value information risk.

Details

China Finance Review International, vol. 6 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

Content available
Article
Publication date: 6 November 2017

Tracy Artiach

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462

Abstract

Details

Accounting Research Journal, vol. 30 no. 4
Type: Research Article
ISSN: 1030-9616

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Expert briefing
Publication date: 25 April 2016

These plans have intensified pressure on Prime Minister Nawaz Sharif, who has been implicated, together with his family, in the Panama papers. In parallel, the military…

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