Short-sale refinancing and earnings response coefficient: evidence from China

Abstract

Purpose Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed companies remains unclear. This paper aims to examine the impact of short-sale refinancing on earnings quality after the short-selling constraints have been released. The authors further explore whether this impact is subject to the nature of property rights and shareholding structures. Design/methodology/approach This study is based on a sample of A-share firms in China for the period 2014–2016. The authors use earnings response coefficients (ERC) as a proxy for earnings quality. To empirically examine this issue, a matching sample is generated by using propensity score matching method (PSM) to reduce sample selection bias. Findings This study provides evidence that deregulation of short selling has positive external effect on corporate governance. The results indicate that the potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. However, the impact of short selling on earnings quality varies for companies with different nature of property rights and shareholding structure. Originality/value To the best of the authors’ knowledge, this is the first study to investigate the relationship between short selling and earnings quality in the unique setting of short-sale refinancing. This study provides new evidence on the impact of short selling at the micro level and calls for further deregulation of short selling. In addition, this study contributes to existing studies on short-sale refinancing by examining an emerging market.

Tax Avoidance towards Tax Ratio after Tax Amnesty Program

“…Tax savings are based on aspects of legality and rationality, while tax evasion is not, because it is said that tax avoidance is between tax savings and evasion [7]. There are various views on tax avoidance, some of which are the opinion in terms of capital, where tax avoidance is a way of obtaining temporary capital for business activities because it is used as debt financing and leverage in society with certain interests, the media, and so on [10]. One of the users of the company's financial statements is the government.…”

“…The results of a study conducted by Abdullah et al (2019) revealed that there is a negative relationship between profitability and the value of the tax burden paid and reported by the company, namely when increased profitability has an impact on decreasing the tax burden paid and reported by the company which in turn reduces government tax revenues and potentially lower tax ratio [13]. Tax avoidance activities reduce corporate tax burden [10]. The dependence of corporate taxpayers on debt is a motivation to find other sources of funding, namely from tax avoidance [20].…”

The Inhibitory Effect of the Deregulation Short-Sale on Private Equity Placement

“…As a financial transaction system, the short-selling mechanism gives investors the right to profit from the company’s “bad news” investment. Existing literature has confirmed that short-selling mechanism plays the information effect in the market ( Li and Liu, 2021 ), also as an external governance mechanism, inhibits corporate earnings management ( Liu et al, 2021 ), which is reflected in inhibiting over-investment ( Chang et al, 2015 ), adjusting investment decisions ( Jin et al, 2015 ), promoting corporate innovation ( Quan and Yin, 2017 ), reducing financing behavior ( Gu and Zhou, 2017 ), improving corporate investment efficiency ( Wang and Wang, 2018 ), and improve the quality of corporate environmental information disclosure, increase in hard disclosures especially ( Xie et al, 2021 ). Faced with the increased risk of stock price downside caused by the short-selling mechanism, the company’s management may reduce the accuracy of performance forecasts ( Li and Zhang, 2015 ), disclose the company’s “bad news” in a timely manner ( Clinch et al, 2016 ), shorten the bond issuance period to transmit signals to improve the market information environment ( Wang et al, 2020 ), influence investor behavior, and the severity of fully impounding negative information in the short run ( Huang et al, 2021 ; Li and Liu, 2021 ).…”

“…In particular, the China securities market is very speculative, and if the stock price falls sharply, it may cause the risk of a stock price crash. Liu et al (2021) found that potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. Therefore, after the relaxation of short-selling control, major shareholders will weigh the gains and the corresponding losses caused by short-selling ( Gu and Zhou, 2017 ).…”

“…As an innovative financial transaction system, the short-selling mechanism not only affects the pricing efficiency of the stock market, but it also plays a role in corporate governance ( Karpoff and Lou, 2010 ; Rennekamp et al, 2020 ; Liu et al, 2021 ). According to the design of the short-selling mechanism trading system, investors are encouraged to tap the company’s “bad news” to make investment profits, and short-selling investors have a strong incentive to short-sell the stocks of companies with misconduct such as interest encroachment to obtain investment returns ( Massa et al, 2015 ; Stephana et al, 2021 ).…”