Review of Pacific Basin Financial Markets and Policies

This paper inspects whether variable- and fixed-length moving averages (VMA and FMA), and trading range breakout (TRB) rules have prognostic capability and can earn profits superior to buy-and-hold plan, when applied on KSE-100 index of Pakistan stock market during the full sample period January 1, 1997 to December 31, 2013. Full sample results provided empirical evidence for VMA rule that it has significant predictive power and is able to generate profits superior to simple buy-and-hold plan even after inclusion of transaction costs. The highest mean buy returns yielded by VMA, FMA and TRB rules are seen in noncrises periods. The overall implication of this study is that traders in the Pakistan stock market can utilize this information to obtain excess returns on a regular basis.

In this paper, we compare the performance of Islamic stock indices (ISI) and conventional stock indices (CSI) from FTSE, DJ, MSCI, S&Ps and Jakarta series using common risk-return metrics. The sample consists of 64 ISI and CSI, and covers the period from 2002 to 2017. The majority of the stock indices are from the Pacific Rim countries’ stock markets. Additionally, we employ the GARCH-M model to examine the impact of past volatility on spot returns. Findings suggest that the ISI are less sensitive to the average market movements compared to the CSI, but surprisingly offer similar raw returns suggesting primary support for the low risk-high return paradox. On further examination, results reveal that M², Omega, Sharpe and Treynor measures indicate that ISI underperform CSI while Jensen’s alpha and Sortino ratio put ISI ahead of CSI. Moreover, findings show that pre-crisis winners (CSI) were losers during the 2008 crisis but subsequently recovered and ended up with higher returns than ISI. Findings also show that the previous volatility of stock returns can be potentially used for predicting future returns.

This study aims to explore whether various characteristics of chief executive officers (CEO) enhance the impact of CEO overconfidence on a firm’s value after mergers and acquisitions. The study finds that overconfident CEOs have a positive impact on firm value after mergers and acquisitions. The study also shows that overconfidence amongst CEOs can help to explain merger and acquisition decisions and the likelihood of pursuing acquisitions. Young CEOs were also found to significantly increase the impact of CEO overconfidence on a firm’s value after mergers and acquisitions, while female CEOs were found to be more risk averse when compared to their male peers, with lower leverage and less volatility in their firms when compared to firms run by male CEOs.

In 2012, the Chinese government replaced the existing business sales tax with a Value-added tax for some, but not all, Shanghainese firms. The change was intended to reduce the effective tax rate for firms and stimulate capital investment and employment. Of concern is the potential for managerial moral hazard, whereby self-interested managers might appropriate some of the tax savings for themselves rather than use the tax savings as intended. This paper examines the impact of the tax change on the affected firms and finds no significant evidence that the intended positive effects were achieved. Moreover, it also finds no strong evidence of moral hazard. Instead, the paper documents that the tax change seems to have had a deleterious effect on firm performance. Specifically, employee compensation, capital expenditures, and free cash flow are all lower when the tax changes became effective, with the negative impact on cash flows lingering through 2014. An examination of the effective tax rate reveals that the tax change increased rather than decreased the effective tax rate in 2012 and 2013.

We investigate the effect of related party transactions (RPTs) on value relevance and informativeness of accounting earnings for firms based in East Asia. Using a hand-collected sample of 398 listed companies comprising 1194 firm-year observations from Hong Kong, Malaysia, Singapore and Thailand, we find that firms engaging more extensively in RPTs have significantly lower value relevance and lower informativeness of earnings both in the current year and subsequent year than firms engaging less in RPTs. Furthermore, the results indicate that the types of RPTs affect value relevance and informativeness of earnings differently in that the effect of simple and loans RPTs are more negative than complex transactions. The extent of the negative effect of RPTs is lower in Hong Kong and Singapore where investor protection is higher compared to the other two economies. These findings are robust to controlling for firm-specific attributes, corporate governance, ownership structure, earnings quality, and a variety of sensitivity tests. These results are consistent with the conflict of interest view that RPTs compromise the quality of accounting earnings and this leads to the reduction in earnings and market value relationship for firms that engage in RPTs.

The aim of this study is to investigate whether the adoption of convergent-International Financial Reporting Standards (IFRS) in China affects the audit fees of initial public offerings (IPO) firms. An empirical regression analysis using panel data for 1,094 nonfinancial IPOs (excluding season equity offers) of A-shares listed on the Shanghai and Shenzhen Stock Exchanges between 2003 and 2012 is adopted. The results reveal that audit fees increase following convergent-IFRS adoption in China and additionally suggest that convergent-IFRS adoption eases the intense price competition that previously existed in China’s audit market and thus has important policy implications for regulators. To the best of the authors’ knowledge, this study represents the first reported attempt to adopt the IPO setting to examine the effects of convergent-IFRS adoption on audit fees and fills the gap in literature. Using a setting of IPOs enables this paper to further exclude the influence of quasi-rents derived from low-balling after initial audit engagement when testing audit fees.

We examine the effect of dual-class shares on U.S. firm innovation after the exogenous shock of the 1994 North American Free Trade Agreement (NAFTA), which intensified international competition. Using difference-in-differences models, we find that dual-class structure firms become less innovative but improve operating efficiency following NAFTA. We show that dual-class firms in many manufacturing industries reduce innovation, but marginally increase capital expenditures after the agreement, and thus substitute risky innovation with safer, long-term investments. The findings indicate that firms with dual-class structures facing lower competition decrease their stock market related innovation activities. We find that dual-class firms with entrenched managers decrease innovation and improve operating efficiency following NAFTA. Based on the robust results, agency costs and managerial entrenchment could explain these changes in innovations, efficiency, and investments.

The 27th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management was held at National Taiwan University, Taiwan on June 15th and 16th, 2019. The first conference was held at Rutgers University in 1993. Since then, the conference has been held in Hong Kong (1994, 1998), Taipei (1995, 1999. 2003, 2006, 2011, 2016), Bangkok (2000, 2004, 2009), Rutgers (1996, 2001, 2005, 2012, 2018), Singapore (1997, 2002, 2017), Vietnam (2007, 2015), Australia (2008, 2013), China (2010), and Japan (2014). The program co-directors of the conference were Cheng-Few Lee, Rutgers University, USA, and Ming-Jen Lin, National Taiwan University, Taiwan.