Abstract
This study examines the impact of Shenzhen Stock Exchange’s (SZSE) information disclosure ratings on investment efficiency in China. Based on a sample of Chinese A-share listed companies on the SZSE from 2001 to 2018, we discover that superior information disclosure ratings improve investment efficiency after controlling for various firm- and industry-level variables. Our findings remain valid after various robustness tests and using instrumental variables to address the endogeneity problem. Specifically, we find that improving information disclosure ratings help firms attract more investor attention, which leads to higher investment efficiency. In addition, this information disclosure effect is more pronounced for underinvestment firms and firms on the main board than for smaller firms on SEM (small- and medium-sized enterprise) and GEM (growth enterprise market) boards. Our evidence supports the idea that regulatory activities for information disclosure ratings of companies listed on China’s stock exchanges improve investment efficiency.
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Notes
The Shanghai and Shenzhen Stock Exchanges in China implemented a stock listing rule in 1998 that stated that stocks of firms with abnormal financial or other abnormal conditions would be given special treatment (ST) or a delisting risk notice to inform investors about the risk of these stocks.
The split share structure reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders to be more strongly related to share price movements. Prior to the reform, domestic A-shares were divided into tradable and non-tradable shares. As a result of the reform, holders of non-tradable shares compensated holders of tradable shares to make their shares tradable (see Li et al. (2011)).
We find that the second-largest shareholder ratio (SECOND) is positive and significant in Model 2, presented in Table 5, suggesting that the presence of other large shareholders, besides the largest shareholder, is positively associated with investment efficiency.
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The funding of Dr. Yu was provided by Ministry of Science and Technology, Taiwan.
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Appendix 1
Appendix 1
1.1 Information disclosure self-evaluation form for SZSE listed firms
This appendix lists the 52 questions for evaluating the information rating of firms listed on the SZSE. The evaluation period is from May 1st in the previous year to April 30th in the current year. The evaluation measures three dimensions of information disclosure ratings: quality of information disclosure, compliance with the SZSE instructions and requirements, and the degree of investor protection. The three dimensions are labeled in the last column. SZSE will assign each firm an A, B, C, or D rating based on the evaluation results. Each question must be answered by a “Yes” or “No.” Firms with all " No " answers for the 52 questions qualify for an A rating. Firms with any “Yes” for the first 10 questions receive a D rating. Firms with any “Yes” for the subsequent 19 questions qualify for a C rating. Firms with any “Yes” for the last 23 questions qualify for a B rating.
Item | Questions/Indicators | Dimension |
|---|---|---|
Any answer of “Yes” for the following 10 questions receive a D rating | ||
1 | The annual or semiannual report included a disclaimer of opinion or adverse opinion by the auditor | Quality |
2 | The annual report provided a nonstandard unqualified opinion by the certified public accountant. The related items in the report violated the accounting principle and related disclosure regulations. The firm did not provide the correlated annual report and audit report within the time limit regulated by the SZSE | Quality |
3 | Severe mistakes or false data existed in the accounting report and were not corrected by the firm within the time limit | Quality |
4 | The firm did not disclose the periodical report in time | Compliance |
5 | The conclusion of the nature of profits provided by the annual quick performance report was severely inconsistent with the data in the annual report | Quality |
6 | Mistakes in the accounting report altered the nature of profits | Quality |
7 | The firm was punished by the CSRC or its agencies, condemned by the SZSE, or criticized more than three times | Compliance |
8 | The firm’s stock and its derivatives were issued a delisting warning, other risk warning, suspended warning, or were delisted. The firm did not provide a report to the SZSE within the regulated time limit or disclose the public's relevant information | Compliance |
9 | The firm provided non-operating funds to its director, supervisor, manager, and controlling shareholder. The maximum daily amount was larger than RMB 10 million or accounted for more than 5% of its net assets | Compliance |
10 | The firm provided a warranty or financial support to outsiders worth more than RMB 50 million and accounted for more than 10% of its net assets | Compliance |
Any answer of “Yes” for the following 19 questions qualify for a C rating | ||
1 | The firm modified and revised its information disclosure report more than five times by 7% or more of its content | Quality |
2 | The annual or semiannual report provided a qualified opinion by the auditor or a disclaimer of opinion because of large uncertainty regarding the firm’s sustainable performance | Quality |
3 | The firm did not disclose the performance report or expected performance report in time | Quality |
4 | The differential of performance data from the expected annual report and actual annual report was more than 50%, and the absolute value was more than RMB 5 million or from different categories of the report | Quality |
5 | The amount of profits influenced by mistakes in the accounting report was at least 50% of the modified net profits belonging to shareholders’ interests, and the absolute value was above RMB 5 million or induced a slight change in the property of profits | Quality |
6 | The recent accounting year's realized profits were lower than 50% of their expected value (if the firm made a profit) | Protection |
7 | The self-evaluated controlling report or audit report indicated a severe problem regarding the firm’s control in the recent accounting report | Compliance |
8 | Because of a violation of employees' information transparency principle, private information was disclosed by the public media, inducing the stock and its derivatives to be suspended at least twice | Compliance |
9 | The firm received more than three supervision letters from the SZSE because of illegality | Compliance |
10 | The firm received criticism from the SZSE | Compliance |
11 | A severe problem occurred when the firm applied for an IPO of its stock or derivatives or implemented the profits distribution project, equity incentive plan, and destabilization program of non-tradable shares | Quality |
12 | The firm or its employees failed to cooperate with the SZSE in the form of not replying to inquiries in time, not rectifying problems according to requirements, not accepting a supervision letter, not engaging in a training program, or not reporting abnormal situations on time. Furthermore, the firm refused to correct its activities after the SZSE’s supervision | Compliance |
13 | The absence of the secretary of the board was longer than 6 months | Protection |
14 | The firm provided non-operating funds to its director, supervisor, manager, or controlling shareholder. The maximum daily amount was larger than RMB 3 million and smaller than RMB 10 million or accounted for 1%—5% of its net assets | Compliance |
15 | The firm provided a warranty or financial support to outsiders. The amount was higher than 10 million RMB and accounted for more than 5% of its net assets | Compliance |
16 | The firm did not fulfill its information disclosure obligation but engaged in security or risky investments larger than RMB 50 million and accounted for more than 10% of its net assets | Compliance |
17 | The firm altered its funding purpose, and the accumulated amount was more than 10% of its net assets | Compliance |
18 | Because of a violation of the information transparency principle by the controlling shareholders and ultimate controller, private information was disclosed by the public media, causing the stock and its derivatives to be suspended more than twice | Protection |
19 | The payout policy, profits distribution policy, and program of capital reserve transfers to equity disclosed by the firm were inconsistent with its promises or the relevant laws and regulations | Compliance |
Any answer of “Yes” for the following 23 questions qualify for a B rating | ||
1 | The evaluation period was shorter than 12 months | Protection |
2 | The firm modified and revised its information disclosure report twice by 5% or more of its content | Quality |
3 | The firm’s annual or semiannual report provided a non-standardized audit report by the certified public accountant | Quality |
4 | The firm’s stock or derivatives was suspended because its annual report was not disclosed on time | Compliance |
5 | The differential of performance data from the expected and actual annual reports was more than 20%, and the absolute value was above RMB 2 million | Quality |
6 | The profits influenced by the accounting report's mistakes were equal to or over 20% of the modified net profits belonging to shareholders’ interests, and the absolute value was above RMB 2 million | Quality |
7 | The firm’s operating profits in its initial public offering (IPO) year decreased by more than 50% compared with that in the preceding year if the firm completed its IPO in the most recent accounting year | Protection |
8 | The recent accounting year's realized profits were lower than 80% of the expected value (if the firm made a profit) | Protection |
9 | The firm should provide a corporate social responsibility report but did not disclose it in time, or the content did not comply with the regulations | Compliance |
10 | The firm did not disclose the self-evaluated controlling report in time or did not employ an accounting firm to audit its report | Compliance |
11 | Because of a violation of employees' information transparency principle, private information was disclosed by the public media, causing the stock and its derivatives to be suspended | Compliance |
12 | The firm received a supervision letter from the SZSE because of its illegality | Compliance |
13 | The firm was registered and investigated by the judiciary because of its illegality | Compliance |
14 | The firm or its employees failed to cooperate with the SZSE in the form of not replying to inquiries on time, not rectifying problems according to requirements, not accepting a supervision letter, not engaging in a training program, or not reporting abnormal situations on time | Compliance |
15 | The absence of the secretary of the board was longer than 3 months | Protection |
16 | The firm provided non-operating funds to its director, supervisor, manager, or controlling shareholder | Compliance |
17 | The firm provided a warranty or financial support for outsiders to engage in risky investments or alter the funds' objective | Compliance |
18 | Because of a violation of the information transparency principle by the controlling shareholders and ultimate controller, private information was disclosed by the public media, causing the stock and its derivatives to be suspended | Compliance |
19 | The firm, controlling shareholders, or ultimate controller did not comply with their promises | Compliance |
20 | The director, supervisor, manager, controlling shareholder, or ultimate controller was punished by the CSRC or its agency, received criticism from the SZSE, or two supervision letters | Compliance |
21 | The judiciary registered and investigated the director, supervisor, manager, controlling shareholder, or ultimate controller because of illegality | Compliance |
22 | The director, supervisor, manager, controlling shareholder, or ultimate controller failed to cooperate with the activities of the SZSE including but not limited to not replying to the confirmation of a rumor, not reporting related information on time, or not fulfilling the obligation of information disclosure | Compliance |
23 | The director, supervisor, manager, controlling shareholder, or ultimate controller did not record declaration and commitment to the SZSE. The recorded declaration and commitment contain false contents or major omissions | Compliance |
All answers of “No” for the above 52 questions qualify for an A rating | ||
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Chen, CC., Ho, KC., Li, HM. et al. Impact of information disclosure ratings on investment efficiency: evidence from China. Rev Quant Finan Acc 60, 471–500 (2023). https://doi.org/10.1007/s11156-022-01101-8
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DOI: https://doi.org/10.1007/s11156-022-01101-8
Keywords
- Information disclosure ratings
- Investment efficiency
- Investor attention
- Main board
- Agency problems
- Information asymmetry