Value-relevance of accounting information and shareholding structure in emerging capital markets : evidence from Chinese listed companies

Abstract

This study focuses on the value-relevance of accounting information and the relationship between market value and different types of shareholding in the context of China. The market valuation theory suggests that market value is in a linear relationship with the accounting figures such as book value and net profit. This theory has been widely accepted and tested in most developed markets such as the U. S. A, the U. K., the Netherlands, France and Germany etc. Generally, accounting information is found to be value relevant in these countries, implying that book value and net profits are playing significant roles in explaining the market value. Does the market valuation theory hold in emerging markets such as China? This is an empirical question; it is also the major objective of this thesis. China's economic development and institutional settings are unique in many ways. Firstly, the whole economic system is in a transitional period in which the planned economy is gradually replaced by the market economy. Secondly, the newlyemerged listed companies are transformed from the former SOEs and display a series of distinctive features. The most significant one is that the nearly two-thirds of the shares are controlled by the government and these shares are not tradable. Thirdly, despite the phenomenal expansion in size, China's stock market is still a typical emerging market plagued by a host of inherent problems. These problems have distorted the market infon-nation such as share prices. Fourthly, from the fund-based accounting system to the IAS-based accounting standards, Chinese accounting has undergone a series of revolutionary changes to bring the accounting regulations in line with both international conventions and the overall economic environment of China. Despite the fact that China has largely adopted the IASs in constructing its accounting regulatory regime, significant differences exist between the two. The central objectives of this study are two-fold: 1) to investigate the value relevance of accounting figures in the unique context of China; 2) to examine the effects of different types of shareholding on the market value of listed companies, in particular the state shareholding and legal-person shareholding. The results seem to suggest that accounting infonnation contained in the Chinese financial reports, e. g. book value and net profits, is playing a significant role in explaining the market value in China's stock market. This finding is of particular interest because it indicates that the market valuation theory can be applied not only to developed markets, but also to the emerging ones such as China. As for the relationship between ownership structure and market value, the results of this study seem to lead me to believe that both state and legal-person shareholdings have significant impacts on the market value, however their effects appear to be different.