Preannouncement and event-period private information acquisition : a trading volume analysis of AH-shares in mainland China and Hong Kong markets

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Preannouncement and event-period private information acquisition : a trading volume analysis of AH-shares in mainland China and Hong Kong markets

 

Author: Law, Man Wah
Title: Preannouncement and event-period private information acquisition : a trading volume analysis of AH-shares in mainland China and Hong Kong markets
Degree: D.B.A.
Year: 2011
Subject: Stock exchanges -- China.
Stock exchanges -- China -- Hong Kong.
Hong Kong Polytechnic University -- Dissertations
Department: Graduate School of Business
Pages: xi, 128 leaves : ill. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2525958
URI: http://theses.lib.polyu.edu.hk/handle/200/6657
Abstract: Trade volume is generated primarily by differences in information (Verrecchia, 2001; Schneible and Stevens, 2005). Hence, an understanding of difference in private information acquisition by a cross-section of investors is fundamental to an understanding of market reactions to earnings, the focus of one of the primary streams of research in the accounting and finance literature (Bailey et al., 2006). In this empirical study, I examine the effects of private information acquisition by investors on abnormal trading volume around earnings announcements. Specifically, I investigate and compare the effects of preannouncement and event-period private information acquisition by different groups of investors of the same sample of firms across two segmented markets - mainland China and Hong Kong (AH-companies). A- and H-shares of a Chinese firm have the same firm-level factors, but face different institutional environments. With the control for firm fundamentals, I can focus on the differences in investors' behavior across the two markets. Then I extend my empirical study to incorporate the effects of institutional holding and reactions to bad vs. good earnings announcements across the two markets. Using the data of 43 AH-share listed companies spanning a period from 1997 to 2007, I find that: i) H-shares investors acquire and develop more event-period private information, whereas it is uncertain whether investors of A-share investors acquire and develop more preannouncement private information. ii) H-share institutional investors acquire and develop more event-period private information, whereas it is uncertain whether A-share institutional investors acquire and develop more preannouncement private information. iii) A-share investors acquire and develop more preannouncement private information in the case of bad earnings announcement vs. good ones, whereas it is uncertain whether H-share investors acquire and develop more event-period private information.
Overall, the results provide empirical evidence on the association between abnormal trading volume and preannouncement and event-period private information acquisition, and lend support to the theoretical model of trading volume around public earnings announcements (Kim and Verrecchia, 1997). They are also consistent with prior studies that institutional investors possess superior information processing skill and hence they can generate more private information out of the public earnings announcement than individual investors. I undertake a sensitivity test on the adoption of International Financial Reporting Standards (IFRS) of AH-companies in 2005, and the results still hold. They are also robust to additional tests using data of full year earnings announcements vs. interim ones, as well as different proportions of tradable shares in A-shares and H-shares of the same AH-company. The contributions of my study are: i) It adds to the study on trading volume which, according to Bamber et al. (2010), is a relatively unexplored area of capital market research. ii) It extends the study of Bailey et al. (2007) to China with an added element of institutional differences across two segmented markets of the same country China, with each governed by different systems. iii) It enriches the literature regarding the effect of preannouncement and event-period private information acquisition by institutional investors across two segmented markets. iv) It adds to the volume based study of AH-share listed companies. Extant literature on AH-companies is mostly on price, value relevance of accounting information and cost of equity. Volume based study on cross-listed companies in two segmented markets can be widened to other areas, such as the comparison of foreign companies cross listed in overseas markets and mainland China (International Board) in the future.

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