Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms
JOSEPH D. PIOTROSKI1, T. J. WONG2and TIANYU ZHANG2
Journal of Accounting Research
Volume 53, Issue 2, pages 405–459, May 2015
This paper tests the proposition that politicians and their affiliated firms (i.e., firms operating in their province) temporarily suppress negative information in response to political incentives. We examine the stock price behavior of Chinese listed firms around two visible political events—meetings of the National Congress of the Chinese Communist Party and promotions of high-level provincial politicians—that are expected to asymmetrically increase the costs of releasing bad news. The costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies. The result will be fewer stock price crashes for the affiliated firms during these event windows, followed by an increase in crashes after the event. Consistent with these predictions, we find that the affiliated firms experience a reduction (an increase) in negative stock return skewness before (after) the event. These effects are strongest in the three-month period directly preceding the event, among firms that are more politically connected, and when the province is dominated by faction politics and cronyism. Additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events, suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms’ information environment.
Rev. Financ. Stud. (2015) 28 (6):1701-1736.
The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?
Massimo Massa, Bohui Zhang, Hong Zhang
We hypothesize that short selling has a disciplining role vis-à-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for thirty-three countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.
Stock manipulation: Rudraksh Cap-Tech
4 May 2015
With just around 250 retail shareholders, the share price of Rudraksh Cap-Tech shot up a stupendous 1182% in just a year
Rudraksh Cap-Tech (earlier known as Jolly Leasing & Finstock) deals in financial services. Though ostensibly it has a varied list of service offerings, no details of contracts undertaken, contract values or even the number of clients are mentioned either on the website or the annual report. Over the past seven quarters (June 2013 to December 2014), it has generated revenues of just about Rs2 lakh-Rs3 lakh each quarter. Net profit averaged just around Rs60,000 each quarter. This did not hamper trading in the stock which has only 242 retail shareholders. The share price shot up a stupendous 1182%, to Rs85.90 in April 2015, from Rs6.7 in May 2014. In the nine-month period, from 6 May 2014 to 12 February 2015, the stock was consistently hitting the upper circuit, rallying 1400% to Rs100 from around Rs7. Since then, trading has been volatile. In March 2015, the stock had an average trading volume of Rs23 lakh a day, up from about Rs2,000 a day in May 2014. Rudraksh was hauled up several times in the past for regulatory non-compliance issues, but no strict action has ever been taken against the management. Will this blatant price manipulation go unnoticed as well?
Firms act to meet new 20-cent rule
5 May 2015
The Straits Times
Over one in 5 SGX counters trading below that amount consolidating their shares
MORE than a fifth of an estimated 250 mainboard-listed stocks trading below 20 cents have proposed consolidations to comply with the Singapore Exchange’s new rule aimed at curbing speculation and market manipulation here.
Introduced on March 2, the new Minimum Trading Price (MTP) rule of 20 cents a share takes effect on March 1 next year. The year’s grace period gives firms time to get their six-month average share price above 20 cents. Continue reading
May 4, 2015 11:28 am
Exchanges urged to do more to oust tricksters
Philip Stafford in London and Gregory Meyer in New York
The renowned freewheeling and aggressive environment of futures trading is now firmly under the microscope with the industry keen to show it can still police itself. The arrest of UK trader Navinder Singh Sarao for four years of alleged market manipulation of equity futures has shone a fierce spotlight on the dubious trading practices known as spoofing and layering, and done little to improve the reputation of markets.
The crackdown was reinforced last Thursday by the 60-day banning of two traders from the United Arab Emirates on the Chicago Mercantile Exchange for alleged gold futures manipulation. Now traders are being reminded of the need to not only have adequate financial resources, but also exhibit “good moral character, a good reputation and business integrity,” as the CME’s rules state. Continue reading