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					  Market Segmentation and Value Relevance
of Accounting Information: Evidence From A-
share and B-share Chinese Markets




      Heibatollah Sami
      Haiyan Zhou

      Temple University
Objectives

Investigate the relevance of earnings and book
 value of equity to the pricing of A-shares and B-
 shares on Chinese stock markets
Investigate the difference in value relevance of
 accounting information prepared under IAS vs.
 Chinese GAAP
Investigate value relevance of accounting
 information in earlier years vs. later years
Motivation

 Recent research in value relevance literature

   Haw, Qi and Wu (1998) examine the value relevance of
    accounting information for all B-shares and H-shares. They find
    that earnings under Chinese GAAP were positively and
    significantly related with market returns, but the reconciliation
    under IAS and HK GAAP was not.

   Chen, Chen and Su (1999) investigate all A-shares and find that
    both BV and E are value relevant.

   However, neither HQW (1998) nor CCS (1999) address the
    comparative value relevance in the two segments.
Motivation
  Eichenseher (2000) studies all A-shares and B-shares
   on Shanghai Exchange and finds that E is value
   relevant while BV is not. He finds no significant
   difference in the value relevance of accounting
   information between A-shares and B-shares.

  Bao & Chow (1999) study value relevance of Acct.
   Info. Based on Chinese GAAP vs. IAS, using B-share
   prices only
Developments in stock markets and
 accounting practices over the past decade
 Table 1 Growth of A-share market


                                              1991   1992   1993   1994   1995    1996    1997    1998    1999    2000




Number of listed companies                    14     53     183    288    312     515     720     826     924     1059




Market capitalization (in 100 mill. RMB)      109    1048   3531   3515   3317    9475    17078   19185   26173   47615




Annual trading volume (in 100 mill. Shares)   3      38     234    999    685     2483    2491    2109    2807    4556




Annual Trading Amount (in 100 mill. RMB)      --     --     --     8116   39912   21257   30500   23529   30940   60156
Table 2 Growth of B-share Market


                                                1993   1994   1995   1996   1997   1998   1999   2000



  Number of listed companies                      40     58     70    85     101    107    108    114



  Market capitalization (in 100 mill. RMB)       148    133    134   346     356    216    331    611



  Annual trading volume (in 100 mill. shares)     16     25     31    71      88     61    123    201



  Annual Trading Amount (in 100 mill. RMB)       310    914    539   990    2056    756   1346   3204
Contribution

 This paper is the first one to address the difference
  between the value relevance of accounting information
  in the two segments. This comparison has implications
  for recent moves toward IAS replacing local GAAP.
  For the purpose of comparison, the paper uses firms
  issuing both A-shares and B-shares
 To investigate whether the enhanced market regulations
  and institutional services increase usefulness of
  accounting information, the study also compares earlier
  years vs. later years
 The paper uses observations from the two exchanges in
  more years than previous work
Hypotheses 1a and 1b

H1a (in alternative form): The accounting
 information is value relevant in both A-
 share and B-share markets

H1b (in alternative form): The value
 relevance of accounting information in the
 B-share market would be higher than in
 the A-share market.
Hypotheses 2a and 2b

H2a (in alternative form): The accounting
 information for A-shares is more value relevant
 to the domestic investors' decisions in later
 years than in earlier years

H2b (in alternative form): The accounting
 information for B-shares is more value relevant
 to the international investors' decisions in later
 years than in earlier years
Model

Ohlson (1995) Model
    P t = a0 + a1 BVt + a2 E t + a3 V t + e
    P t = stock price per share at time t;
    BVt = book value of equity per share at time t;
    E t = accounting earnings for the period ending at
     time t.
    V t = other nonrandom information that may
     explain stock price at time t.
Research Design

P   t
         A   = a0tA+ a1tABVt + a2tAE t + etA   (2a)



P   t
         B   = a0tB+ a1tBBVt + a2tBE t + etB   (2b)
Measures of Value
Relevance

 The significance of value relevance of
  earnings and book value is assessed through
  respective t-statistics, adj. R-square and
  Vuong (1989) test.

 The relative significance of coefficients is
  assessed through the differential t-statistics
  and Christie (1990) test.
Sample

Sample: firms with both A-shares and B-
 shares outstanding during 1994 -2000
Data: Taiwan Economics Journal Database
Currency translation
  1 USD = 8.29 RMB
  1 HKD = 1.07 RMB
Table 3: Sample

          A-share                       B-share

          Shanghai   Shenzhen   Total   Shanghai   Shenzhen   Total

  1994    25         14         39      25         14         39

  1995    25         21         46      25         21         46

  1996    27         28         55      27         28         55

  1997    29         29         58      29         29         58

  1998    33         33         66      33         33         66

  1999    34         33         67      34         33         67

  2000    34         36         70      34         36         70

  Total   207        194        401     207        194        401
Variables

P is the price per share at the end of the
 fourth month after the fiscal year t;
BV is book value per share at the end of
 fiscal year t;
E is earnings per share for the fiscal year
 t.
Table 4 – Descriptive Statistics

   Panel A. A-Shares


   Variable                   Mean              Std Dev             Minimum             Median         Maximum

   P                          9.998               4.744               1.521              8.825             20.582

   E                          0.215               0.350               -0.651             0.197              1.051

   BV                         2.547               1.059               0.070              2.379              5.073

   VOL                        0.280               0.298               0.010              0.173              1.957



   Panel B. B-shares


   Variable            Mean           Std Dev             Minimum              Median            Maximum

   P                          3.266               2.723               0.431              2.016              9.542

   E                          0.174               0.364               -0.706             0.156              1.026

   BV                         2.493               1.207               -0.510             2.316              5.577

   VOL                        0.084               0.089               0.000              0.057              0.542
Table 5 – Pearson Correlation
Coefficients for A-shares (Panel A)

          P          E          BV      VOL
   P      1.000
          0.000


   E      0.171***   1.000
          0.001      0.000


   BV     0.169***   0.708***   1.000
          0.001      0.000      0.000


   VOL    0.044      0.022      0.032   1.000
          0.380      0.661      0.523   0.000
Table 5 – Pearson Correlation
Coefficients for B-shares (Panel B)

         P          E          BV      VOL
  P      1.000
         0.000


  E      0.331***   1.000
         0.000      0.000


  BV     0.314***   0.715***   1.000
         0.000      0.000      0.000


  VOL    0.297***   0.061      0.054   1.000
                               0.280
         0.000      0.226              0.000
Result 1

The value relevance of earnings and book
 value are significant for A share market
 and B share market
   Table 6 (Panel A)
Panel A. Cross-sectional Difference
          Model (2a)                                                Model (2b)                                     Diff. t-stat.a           Vuong
                                                                                                                                         (1989) Z-
           BV              E                Adj. R-    F-stat.      BV            E            Adj. R-   F-stat.   BV           E        test
                                            square                                             square
Pooled Sample (GLS)
          0.426           1.406             0.029      6.957        0.358         1.662        0.117     27.549
          (4.551)***      (1.616)*                                  (11.257)***   (7.238)***                       6.706      5.622        17.189
Time-Series Sample (OLS)
1994      -0.909          1.876             -0.010     0.806        -0.054        2.097        0.320     9.944
          (-1.197)        (0.840)                                   (-0.739)      (4.142)***                       0.458      3.302        6.367
1995      -0.641          1.428             -0.013     0.703        -0.073        1.924        0.354     13.366
          (-1.114)        (0.959)                                   (-0.438)      (4.307)***                       0.676      3.348        5.378
1996      0.721           7.235             0.357      10.269       0.145         3.871        0.403     19.243
          (0.858)         (3.630)***                                (0.407)       (4.100)***                       -0.451     0.470        6.134
1997      1.356           3.872             0.315      14.112       0.403         2.366        0.423     21.917
          (2.767)***      (1.097)                                   (1.243)       (2.873)***                       -1.524     1.776        14.079
1998      0.638           1.827             0.232      10.862       0.303         1.041        0.482     31.282
          (4.984)***      (0.824)                                   (2.395)***    (2.757)***                       -2.589     1.933        7.234
1999      0.987           0.143             0.078      3.785        0.368         0.542        0.418     24.776
          (3.589)***      (0.074)                                   (3.395)***    (1.437)*                         -0.194     1.363        7.333
2000      -0.069          2.497             0.067      1.253        0.146         1.856        0.199     9.573
          (-0.372)        (0.586)                                   (5.104)***    (2.859)***                       5.476      2.273        7.281
Mean cross-sectional t-statistics                                                                                  0.265      2.066
Christie (1990) Z-statistics under zero-correlation assumption                                                     0.689      5.356***
Christie (1990) Z-statistics under perfect-correlation assumption                                                  0.260      4.024***
Result 2

The value relevance of accounting
 information in A-share market is smaller
 than B-share market
   Table 6 (Panel A)
Panel A. Cross-sectional Difference
          Model (2a)                                                Model (2b)                                     Diff. t-stat.a           Vuong
                                                                                                                                         (1989) Z-
           BV              E                Adj. R-    F-stat.      BV            E            Adj. R-   F-stat.   BV           E        test
                                            square                                             square
Pooled Sample (GLS)
          0.426           1.406             0.029      6.957        0.358         1.662        0.117     27.549
          (4.551)***      (1.616)*                                  (11.257)***   (7.238)***                       6.706      5.622        17.189
Time-Series Sample (OLS)
1994      -0.909          1.876             -0.010     0.806        -0.054        2.097        0.320     9.944
          (-1.197)        (0.840)                                   (-0.739)      (4.142)***                       0.458      3.302        6.367
1995      -0.641          1.428             -0.013     0.703        -0.073        1.924        0.354     13.366
          (-1.114)        (0.959)                                   (-0.438)      (4.307)***                       0.676      3.348        5.378
1996      0.721           7.235             0.357      10.269       0.145         3.871        0.403     19.243
          (0.858)         (3.630)***                                (0.407)       (4.100)***                       -0.451     0.470        6.134
1997      1.356           3.872             0.315      14.112       0.403         2.366        0.423     21.917
          (2.767)***      (1.097)                                   (1.243)       (2.873)***                       -1.524     1.776        14.079
1998      0.638           1.827             0.232      10.862       0.303         1.041        0.482     31.282
          (4.984)***      (0.824)                                   (2.395)***    (2.757)***                       -2.589     1.933        7.234
1999      0.987           0.143             0.078      3.785        0.368         0.542        0.418     24.776
          (3.589)***      (0.074)                                   (3.395)***    (1.437)*                         -0.194     1.363        7.333
2000      -0.069          2.497             0.067      1.253        0.146         1.856        0.199     9.573
          (-0.372)        (0.586)                                   (5.104)***    (2.859)***                       5.476      2.273        7.281
Mean cross-sectional t-statistics                                                                                  0.265      2.066
Christie (1990) Z-statistics under zero-correlation assumption                                                     0.689      5.356***
Christie (1990) Z-statistics under perfect-correlation assumption                                                  0.260      4.024***
Result 3

The accounting information for A-shares
 is more relevant to market prices in later
 years than in earlier years, but not for B-
 shares.
Table 6 (Panel B)
 Panel B. Time-series Difference
           Model(2a)                                Model(2b)                                              Diff. T-stat.b
           BV            E                Adj.R-    BV               E            Adj.    BV       E               BV         E
                                          square                                  R-      (2a)     (2a)            (2b)       (2b)
                                                                                  squar
 Time-Series Sample (OLS)                                                         e
 1994      -0.909        1.876            -0.010    -0.054           2.097        0.320
           (-1.197)      (0.840)                    (-0.739)         (4.142)***           -        -
 1995      -0.641        1.428            -0.013    -0.073           1.924        0.354
           (-1.114)      (0.959)                    (-0.438)         (4.307)***           0.083    0.119           0.301      0.165
 1996      0.721         7.235            0.357     0.145            3.871        0.403
           (0.858)       (3.630)***                 (0.407)          (4.100)***           1.972    2.671           0.845      -0.207
 1997      1.356         3.872            0.315     0.403            2.366        0.423
           (2.767)***    (1.097)                    (1.243)          (2.873)***           1.909    -2.533          0.836      -1.227
 1998      0.638         1.827            0.232     0.303            1.041        0.482
           (4.984)***    (0.824)                    (2.395)***       (2.757)***           2.217    -0.273          1.152      -0.116
 1999      0.987         0.143            0.078     0.368            0.542        0.418
           (3.589)***    (0.074)                    (3.395)***       (1.437)*             -1.395   -0.75           1.000      -1.320
 2000      -0.069        2.497            0.067     0.146            1.856        0.199
           (-0.372)      (0.586)                    (5.104)***       (2.859)***           -3.961   0.512           1.709      1.422
 Adjusted mean time-series T-statistics                                                   0.138    -0.042          0.974      -0.214
 Christie (1990) Z-statistics under zero-correlation assumption                           0.325    -0.103          2.345***   -0.514
 Christie (1990) Z-statistics under perfect-correlation assumption                        0.133    -0.042          0.958      -0.210
 Table 7 (Panel B)
               model(3a)                                     model(3b)                           Diff. T-statb.
               BV              E              Adj.R-         BV           E            Adj. R-   BV               E        BV        E
                                              square                                   square    (3a)             (3a)     (3b)      (3b)
Time-Series Sample
1994           -0.668          0.886          -0.018         -0.022       2.249        0.430
               (-0.820)        (0.350)                       (-0.115)     (4.820)***             -                -
1995           -0.837          1.763          0.001          -0.044       1.883        0.359
               (-1.406)        (1.146)                       (-0.263)     (4.219)***             -0.586           0.226    -0.148    -0.601

1996           0.711           7.260          0.344          0.148        3.899        0.391
               (0.804)         (3.510)***                    (0.412)      (4.006)***             2.210            2.364    0.675     -0.213

1997           1.518           3.574          0.321          0.438        2.419        0.419
               (2.964)***      (1.031)                       (1.334)*     (2.917)***             2.160            -2.479   0.922     -1.089

1998           0.447           1.865          0.331          0.307        1.086        0.492
               (2.456)***      (0.885)                       (2.447)***   (2.896)***             -0.508           -0.146   1.113     -0.021

1999           0.854           0.779          0.091          0.382        0.549        0.415
               (2.965)***      (0.195)                       (3.466)***   (1.451)*               0.509            -0.690   1.109     -1.445

2000           -0.034          3.092          0.295          0.110        1.821        0.248
               (-0.083)        (1.614)*                      (4.074)***   (2.790)***             -3.048           1.419    0.608     1.339

Adjusted mean time-series T-statistics                                                           0.123            0.211    0.698     -0.338
Christie (1990) Z-statistics under zero-correlation assumption                                   0.292            0.505    1.682**   -0.812
Christie (1990) Z-statistics under perfect-correlation assumption                                0.119            0.206    0.687     -0.331
Additional Test 1

Portfolios are formed based on the
 magnitude of systematic risk, growth, firm
 size, privatization level, trading volume,
 and earnings nature.
Generally, B-share portfolios have
 accounting information, especially
 earnings, more relevant to market prices
 than their counterparts in A-share market.
       Table 8

                     A-shares                                             B-shares
                     N      BV           E             Adj.R-   F-stat.   N      BV            E            Adj.R-   F-stat.
                                                       square                                               square
Low risk             201    0.543        0.888         0.027    3.769     201    0.285         1.808        0.168    21.172

                            (1.228)      (0.701)                                 (4.846)***    (4.427)***

High risk            200    0.318        2.087         0.023    3.391     200    0.454         1.369        0.056    6.918

                            (1.631)*     (1.098)                                 (6.135)***    (2.564)***



Low growth           201    2.481        -3.065        0.272    38.399    201    0.974         -0.042       0.300    43.870

                            (26.85)***   (-4.353)***                             (19.48)***    (-0.153)

High growth          200    1.190        0.356         0.148    9.009     200    0.834         1.137        0.187    21.805

                            (2.777)***   (0.295)                                 (18.688)***   (2.740)***



Low privatization    201    0.121        1.281         0.003    1.276     201    0.003         2.034        0.069    8.594

                            (0.672)      (1.061)                                 (0.012)       (3.176)***

High privatization   200    0.790        1.014         0.048    6.110     200    0.683         0.795        0.145    18.128

                            (1.748)**    (0.697)                                 (12.441)***   (1.759)**
      Table 8 (con’d)

                  A-shares                                         B-shares

Small size        201    1.164        2.544       0.015   2.473    201    -0.273        2.698        0.057   6.984

                         (2.22)**     (1.751)**                           (-1.107)      (3.222)***

Large size        200    1.177        1.526       0.114   13.883   200    0.773         0.958        0.198   25.653

                         (9.263)***   (1.005)                             (19.569)***   (3.699)***



Low Volume        200    0.463        -0.73       0.004   0.431    200    -0.070        2.258        0.106   12.973

                         (1.415)*     (-0.328)                            (-0.369)      (3.679)***
High Volume       201    0.428        2.766       0.085   10.294   201    0.629         1.155        0.122   14.949
                         (3.722)***   (2.231)**                           (2.819)***    (1.524)*



Negative income   48     -0.063       2.024       0.012   0.277    83     -0.016        1.280        0.022   0.860

                         (-0.061)     (0.636)                             (-0.047)      (1.023)

Positive income   353    0.467        1.344       0.017   4.109    318    0.413         1.702        0.085   15.571

                         (4.564)***   (0.830)                             (2.410)***    (2.325)**
Additional Test 2

To investigate the effect of audit opinion,
 we estimate a model including a dummy
 variable of audit opinion.
The results of BV and E for A-shares
 qualitatively remain the same. No
 significant results are found for terms with
 dummy variable.
Additional Test 3

The results with all A-shares qualitatively remain
 the same as those with A-shares in the major
 test.
All A-share groups have substantially lower
 coefficients, t-statistics and R-squares than B-
 share groups.
The value relevance in later years is also
 generally higher compared to those in earlier
 years, which adds support for the results of our
 matched samples.
Conclusion

The value relevance in the B-share market
 is higher than that in the A-share market

The value relevance of accounting
 information in A-share market is higher in
 later years than in earlier years, but not
 for B-shares.
Implication

Financial information users
Policy makers
Accounting research literature
Emerging market literature
Future Research

How much accounting information
 contributes incrementally to equity value
 in these markets (event study)
How to isolate the effects of difference in
 investors from those of difference in
 accounting information on value relevance

				
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