How China’s Draft Rules May Affect Foreign Investors; Proposed Rules Target Structure Known as Variable Interest Entity

http://www.wsj.com/articles/how-chinas-draft-rules-may-affect-foreign-investors-1422412416

Earlier postings: (1) Proposed Draft Legislation on VIE Structures (Link); (2) US SEC Cautions Companies on Consolidation Analyses Using VIE (Variable Interest Entity) (Link)

How China’s Draft Rules May Affect Foreign Investors; Proposed Rules Target Structure Known as Variable Interest Entity

GILLIAN WONG And JURO OSAWA

Jan. 27, 2015 9:33 p.m. ET

VIE

HONG KONG—China’s proposed new rules on foreign investment will help the Chinese government re-exert control over the flood of foreign money and interests coming into the country’s booming Internet industry. That is likely to be a boon for Alibaba Group Holding Ltd. and Chinese Internet companies like it, investors, executives and lawyers say. But for foreign shareholders of those companies as well as Western Internet firms trying to operate in China, the rules could be a double-edged sword, they say.

“The objective, as with everything the Chinese government does, is to maintain control,” said attorney Antony Dapiran, a Hong Kong-based partner at Davis Polk & Wardwell LLP who has advised the kinds of Chinese companies that would be affected by the new rules. Continue reading

Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=2ab3c412-cbcb-4194-a5c2-c9aed97a8fbd%40sessionmgr4001&vid=0&hid=4113

Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management.

Mei Feng1 Gramlich, Jeffrey D.2 Gupta, Sanjay3

Accounting Review. Nov2009, Vol. 84 Issue 6, p1833-1876. 44p. 1 Diagram, 9 Charts, 1 Graph.

Abstract:

We investigate the use, determinants, and earnings effects of special purpose vehicles (SPVs). Based on a proxy of SPV activity that can be applied to a broad cross-section of firms over time, we find a two-and-a-half fold monotonic increase in the percentage of firms using at least one SPV during the eight-year period from 1997 through 2004. Tobit regressions of the determinants of SPV use show that SPV activity increases with financial reporting incentives and economic and tax motivations, but strong corporate governance tends to mitigate their use. In addition, the evidence is consistent with SPVs arranged for financial reporting purposes being associated with earnings management, whereas the same does not appear to be the case for SPVs set up mainly for economic, tax, and other reasons.

Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133

Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133

Jongmoo Jay Choi Temple University – Department of Finance; Temple University; Temple University – International Business

Connie X. Mao Temple University – Fox School of Business and Management; Temple University – Department of Finance

Arun Upadhyay University of Nevada, Reno

October 21, 2014
The Accounting Review (Forthcoming)
Fox School of Business Research Paper No. 15-043

Abstract: 
Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether FAS 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings smoothing methods. Based on a sample of S&P 500 non-financial firms during 1996-2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing.