This paper examines the effect of guanxi on the relation between firm value and voluntary disclosure of information about new investment projects in China’s institutional setting. We find a negative relation between firm value and voluntary disclosure for firms that rely more heavily on guanxi in their value creation (e.g. non-high-tech firms, and firms located in regions with underdeveloped institutions). This type of firms refrains from detailed voluntary disclosures for fear of revealing sensitive information that may harm their guanxi. They may more incline to use guanxi to lower information asymmetry and the cost of capital. Therefore, they have less motivation of voluntary disclosure. By contrast, for firms that rely less heavily on guanxi and more on other sources of core competencies (e.g. high-tech firms, and firms in high-marketization regions), we find a positive relation between firm value and voluntary disclosure. This type of firms more replies on voluntary disclosure to reduce information asymmetry and financing cost. Such incentives are particularly strong for high value firms. The moderating role of guanxi on the relation between firm value and voluntary disclosure is explained by firms conscientiously balancing the costs and benefits of voluntary disclosure relative to guanxi. Our evidence has implications for research on motives for disclosure and regulation of financial reporting.
{"title":"Do Higher Value Firms Voluntarily Disclose More Information? Evidence from China","authors":"J. Chen, Youchao Tan, Xinsheng Cheng, S. Gong","doi":"10.2139/ssrn.2205403","DOIUrl":"https://doi.org/10.2139/ssrn.2205403","url":null,"abstract":"This paper examines the effect of guanxi on the relation between firm value and voluntary disclosure of information about new investment projects in China’s institutional setting. We find a negative relation between firm value and voluntary disclosure for firms that rely more heavily on guanxi in their value creation (e.g. non-high-tech firms, and firms located in regions with underdeveloped institutions). This type of firms refrains from detailed voluntary disclosures for fear of revealing sensitive information that may harm their guanxi. They may more incline to use guanxi to lower information asymmetry and the cost of capital. Therefore, they have less motivation of voluntary disclosure. By contrast, for firms that rely less heavily on guanxi and more on other sources of core competencies (e.g. high-tech firms, and firms in high-marketization regions), we find a positive relation between firm value and voluntary disclosure. This type of firms more replies on voluntary disclosure to reduce information asymmetry and financing cost. Such incentives are particularly strong for high value firms. The moderating role of guanxi on the relation between firm value and voluntary disclosure is explained by firms conscientiously balancing the costs and benefits of voluntary disclosure relative to guanxi. Our evidence has implications for research on motives for disclosure and regulation of financial reporting.","PeriodicalId":447619,"journal":{"name":"Empirical Asset Pricing II","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132906204","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Existing research suggests that, for a given firm, stock returns and bond prices are positively related, and this implies a negative relation between stock returns and bond spreads. In this paper, we show how takeover risk influences this relation. Bondholders of high-rated firms can suffer losses in a takeover, particularly if the takeover is largely funded with debt, resulting in a more positive (or less negative) correlation between stock returns and bond spread changes. Consistent with this notion and based on a large sample of data covering the period from 1980 to 2000, we find that high-rated firms which are likely to be taken over have a more positive correlation between stock returns and bond spread changes, while target firms with a poison put or an indebtedness covenant have a more negative correlation. Overall, our findings have implications for the pricing and hedging of bonds and default risk based financial products such as credit default swaps.
{"title":"Takeover Risk and the Correlation Between Stocks and Bonds","authors":"Karan Bhanot, S. Mansi, John K. Wald","doi":"10.2139/ssrn.965852","DOIUrl":"https://doi.org/10.2139/ssrn.965852","url":null,"abstract":"Existing research suggests that, for a given firm, stock returns and bond prices are positively related, and this implies a negative relation between stock returns and bond spreads. In this paper, we show how takeover risk influences this relation. Bondholders of high-rated firms can suffer losses in a takeover, particularly if the takeover is largely funded with debt, resulting in a more positive (or less negative) correlation between stock returns and bond spread changes. Consistent with this notion and based on a large sample of data covering the period from 1980 to 2000, we find that high-rated firms which are likely to be taken over have a more positive correlation between stock returns and bond spread changes, while target firms with a poison put or an indebtedness covenant have a more negative correlation. Overall, our findings have implications for the pricing and hedging of bonds and default risk based financial products such as credit default swaps.","PeriodicalId":447619,"journal":{"name":"Empirical Asset Pricing II","volume":"91 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129227363","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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