Foreign primary listings, earnings quality and corporate governance

Abstract

Establishing the firm's primary listing on a foreign capital market rather than a domestic one is a phenomenon virtually unique to People's Republic of China (PRC) firms. Whilst raising countless important questions, PRC foreign primary listing phenomenon has received very limited empirical attention including investigations into the impact of and motivation for a PRC firm to establish primary listing abroad. The main objectives of this study are twofold. Firstly, the study determines if the earnings quality of PRC domiciled firms with a foreign primary listing vary from PRC domiciled counterparts with a domestic primary listing. The analysis particularly focuses on the impact of place-of-listing, place-of-incorporation, and share type. Secondly, using bonding theory empirical tests are performed to determine if the level of corporate governance bonding affects the earnings quality of PRC foreign primary listed firms.Casting earnings quality within a holistic general user perspective, the analysis is performed in two main stages using data derived from the 2006 annual reports. Stage One analysis covers 483 PRC domiciled firms with primary listings in the PRC, Hong Kong or Singapore. Findings in Stage One indicate a significant variation in earnings quality between PRC domiciled firms with a foreign primary listing from PRC domiciled counterparts with a domestic primary listing. Significant variations in earnings quality appear to be driven by the place-of-listing and share type but not the place-of-incorporation. Stage Two analysis focuses specifically on 275 PRC domiciled firms with a foreign primary listing. Results from Stage Two overall do not support the association between corporate governance bonding and earnings quality of PRC foreign primary listed firms.This thesis provides a number of important contributions with implications for different stakeholders. For example, findings assist global investors in developing better investment strategies related to PRC firms that could reduce potential negative wealth transfers. Results also suggest PRC regulators may need to implement stronger policies to ensure closer streamlining of corporate governance practice of PRC foreign primary listed firms.