S-Share and H-Share Firms - Two Smart Rats or Merely Three Blind Investors?

Ling Mei Cong
Curtin University of Technology
Australia

Alistair Brown
Curtin University of Technology
Australia

Greg Tower
Curtin University of Technology
Australia

J-L.W. Mitchell Van der Zahn
Curtin University of Technology
Australia

Abstract:
Bonding theory (Stulz 1999; Coffee 1999, 2002) posits firms nations with poor legal, accounting, and governance standards can distinguish themselves from other home nation firms by cross-listing on a foreign market with higher standards. There are long lingering questions of legal, accounting, and governance standards in the People’s Republic of China (PRC) that may have provided an impetus for a substantional number of PRC firms to establish listings abroad.Recently there has been significant critisms of the earnings quality of PRC firms with a listing abroad (e.g., RateFinancials Inc., 2007). This raises questions about how effectively PRC firms listing overseas bond with standards of the foreign jurisdiction. Criticisms at present are generally based on anedotal evidence using small sample sizes.
Our study attempts a more rigorous and in-depth analysis of the earnings quality of PRC firms listed abroad. Specifically, we examine the earnings quality of PRC firms with an established primary foreign listing on either the Hong Kong Stock Exchange (HKSE) (H-Share firms) or Singapore Stock Exchange (SGX) (S-Share firms). Also, we investigate whether underlying economic determinants of earnings quality differ between H-Share and S-Share firms. Earnings quality (based on 2004 to 2006 annual report data) is calculated for 166 PRC primary foreign listed firms (69 H-Share firms and 97 S-Share firms). Average earnings quality of the pooled-sample is generally poor or neutral with earnings quality of H-Share firms being statistically significantly higher than S-Share firms. Empirical tests, meanwhile, indicate several differences in the underlying economic determinants of earnings quality of H-Share and S-Share firms. Overall, our findings have significant ramifications for the global investment community and regulatory authorities. For example, findings support the recent introduction by PRC authorities of new regulations designed to ensure PRC firms seeking to list overseas satisfy necessary performance standards.