Impact of market segmentation on value-relevance of accounting information: evidence from China

Discussion: the impact of market segmentation on the value-relevance of accounting information: evidence from China

“…However, recent studies, for example, Barton et al (2010) call for caution in selecting the accounting variables for investor input from different countries. One implication of the results provided by Wu et al (2012) is that researchers could arrive at mistaken inferences about the value relevance of accounting information (i.e. earnings and book value of equity) if the same performance indicators used in the USA studies are not equally important in other countries, or other important indicators of corporate performance are omitted from the analysis (e.g.…”

“…As a result, the information environments of firms issuing both A-and B-shares are predicted to improve because of the possibility that the better informed domestic investors can transfer the superior information they learnt about firms in the A-share market to investors in the B-share market. Wu et al (2012) maintain the assumption that Chinese domestic investors have an information advantage relative to foreign investors, and the cost of transferring information about a firm from one stock market to another stock market is low. However, given that prior literature has provided opposite views and evidence on this issue leads to the potential for alternative explanations for their findings.…”

“…Although Wu et al (2012) do not examine the fundamental questions discussed above, their test designs are based on the assumption that Chinese domestic investors are indeed better informed than foreign investors. As a result, the information environments of firms issuing both A-and B-shares are predicted to improve because of the possibility that the better informed domestic investors can transfer the superior information they learnt about firms in the A-share market to investors in the B-share market.…”

“…Following this line of research, Wu et al (2012) address the question of whether and how the change in the information environment resulting from the relaxation of China's market segmentation policy (MSP) in 2001 has affected the value relevance of accounting information in China. The relaxation of the MSP removed the restriction on Chinese domestic investors (who were allowed to trade A-shares issued by Chinese listed firms only) trading of B-shares.…”

“…The relaxation of the MSP removed the restriction on Chinese domestic investors (who were allowed to trade A-shares issued by Chinese listed firms only) trading of B-shares. Using a sample of Chinese listed companies that issue both A-and B-shares, and comparing the R-square of the regressed share price or return on earnings and book value of equity during the pre-and post-MSP periods, Wu et al (2012) find that (a) there is a significant improvement in the value relevance of accounting information following the relaxation of the MSP for firms issuing both types of shares and (b) the improvement in value relevance is bigger for B-shares than for A-shares. The authors interpret their findings as being consistent with the increased information transmission between A-share investors, who are better informed domestic investors, and B-share investors, who are less informed foreign investors.…”