Forthcoming Articles

2. Statistical Studies of Financial Reports and Stock Markets
*Shyam Sunder, Yale University

Abstract
It is often claimed that statistical studies of covariation between financial and stock market data can help set better financial reporting policy. Such covariation, even when it can be estimated, tells us little about which financial reports help make better financial decisions. A case in support of such claims remains to be made.

4. Dividend Increases and Future Earnings
Ashiq Ali , University of Texas at Dallas
*Oktay Urcan, London Business School

Abstract
We examine the relation between dividend increases and unexpected changes in future earnings. This issue has been the subject of numerous empirical studies. However, the extant evidence on this issue is inconclusive. We allow for the fact that investor demand for dividend paying stocks is time-varying and the market pays a premium for such stocks when the demand is high. Moreover, when the dividend premium is high, dividend increases could be due to managers catering to high demand for dividends by investors (Baker and Wurgler, 2004a; and Li and Lie, 2006). We find that when the dividend premium is low, there is a significant positive relation between dividend increases and unexpected future earnings changes, consistent with the signaling theory of dividends. However, when the dividend premium is high, the relation between dividend increases and unexpected future earnings changes is insignificant. This finding suggests that when the dividend premium is high, managers increase dividends primarily to cater to investors’ demand for dividends rather that to signal an increase in the future profitability of the firm. Finally, as is the case with prior studies, we find an insignificant relation between dividend increases and unexpected changes in future earnings when we constraint the relation to be constant over time.

Discussion: Ramgopal Venkataraman, Southern Methodist University, USA

5. Anticipatory and Implementation Effects of FIN 46 on the Behavior of Different Market Participants
Umit G. Gurun, University of Texas at Dallas
Alina Lerman, Yale School of Management
Joshua Ronen, New York University

Abstract
We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants’ decisions as manifested in a variety of financial indicia. We find that financial analysts’ idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher information risk, as evidenced by reduced earnings
response coefficients, in anticipation of the guidance. We attribute these effects to a perceived increase in information risk and decrease in accounting information quality. We find that the actual implementation of the new rules reversed some, but not all, of these effects. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar reaction to the apparent change in information risk either in anticipation or upon implementation of the new guidance. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies lowered the ratings of these firms only marginally more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the fundamentals of FIN 46 firms even under the prior limited disclosure regime.

Discussion: Ram T. S. Ramakrishnan, University of Illinois at Chicago

5. The Effects of Correlated Demand on Pricing, Inventory, and Production
*Suresh Govindaraj, Rutgers University
Mahesh Kumar, University of Maryland
Bharat Sarath, Rutgers University

Abstract
Existing explanations for price discrimination in products and services invoke reasons like customer segmentation, information rents, transactions costs, or inventory constraints. By contrast, we propose the sellers’ objective to smooth profits as a possible explanation. We show that when sellers carry multiple products, the spread in buying and selling prices of any product depends not only on its own profits and inventory position, but also on the correlations of these variables with the other products. Consequently, sellers may price the same product differently depending on the range of products that they carry.

Discussion: Masako N. Darrough, The City University of New York

6. Impact of Market Segmentation on Value-Relevance of Accounting Information: Evidence from China
Shu-hsing Wu, Chang Jung Christian University
Stephen Lin, Florida International University
*Shu-hsing Li, National Taiwan University
Meihua Koo, California State Polytechnic University, Pomona

Abstract
This study examines how the market segmentation policy in China affected value-relevance of accounting information. We find that the price difference between A- and B-shares significantly decreased after the market segmentation policy was diminished in 2001. We also find that the association between A-share price and accounting information increased after 2002. Although the association between share price and accounting information became much weaker for B-shares during the transition period of 2000-2002, this association also increased after 2002. This study provides evidence on how market condition and information environment affect the association between share price and accounting information in China.

Discussion: Albert Tsang, Chinese University of Hong Kong

7. Management Accounting Information Systems: A Case of a Developing Country-Vietnam
*Michèle Pomberg, University of Southern Illinois
Hamid Pourjalali, University of Hawaii at Manoa
Shirley Daniel, University of Hawaii at Manoa
Marinilka Barros Kimbro, Seattle University

Abstract
This study discusses the relationship between management accounting information systems and the relevance and usefulness of those systems in hospitals in Vietnam. In particular, it investigates how hospitals have improved/intend to improve their accounting activities and how they have tried to implement known managerial (accounting) systems to improve efficiencies. The study shows the influence of management accounting in hospitals in an environment that is rapidly changing from centrally governed to a more open capital market environments. Based on survey data from 53 hospitals in Hanoi and surrounding provinces, the study reports whether those environmental changes have resulted in actual or planned changes in management accounting activities. Our results show that in response to environmental and regulatory changes, Vietnamese hospitals have improved accounting functions and are planning to continue their development further. However, the improvement is not always in-line with what is expected in Western countries.

Discussion: Simon Yu Kit Fung, The Hong Kong Polytechnic University

8. Management Accounting System (MAS) change: Field Evidence
*Laura Zoni, Università Cattolica del Sacro Cuore and SDA Bocconi School of Management
Andrea Dossi, SDA Bocconi School of Management
Marco Morelli, SDA Bocconi School of Management

Abstract
The paper critically discusses one of the prescriptions of traditional control literature according to which the MAS should be adaptive to changes in the organizational and strategic context. Drawing from contingency and institutional theories, the paper drafts a framework to pragmatically identify key phases and features of the management accounting change process to highlight its organizational nature. Using this framework, the paper documents four longitudinal case studies of the design and implementation of management accounting changes. The field studies show how accounting systems are difficult to change despite the formally acknowledged need for change. Findings highlight that the need for change, the technical feasibility of change, the availability of traditional and contemporary methodologies are –alone- insufficient reasons to change. A number of other elements interplay in the process of change ,namely the intended MAS use, the stage of the organization life cycle, the potential impact of change on the organization, and the role of key individuals in linking the phases of the change process.

Discussion: Stewart Jones, University of Sydney

Income Inequality and Structures of International Trade
Firat Demir, *Jiandong Ju, and Yin Zhou, University of Oklahoma

Abstract
The effects of trade openness on within country income inequality in developing countries are found to be inconclusive in existing literature. This study proposes a “threshold effect” to address this issue. We argue that when exports benefit a large portion of population, it is more likely to decrease income inequality within a country; otherwise increasing exports will likely increase the income inequality. Using a data set of 55 developing countries from 1981-2005, we find that if the employment share of manufacturing industry is above (below) a threshold, the increase in the share of manufactures exports reduces (increases) the within-country income inequality.   

JEL codes: D31, F16, O15
Keywords: Within-country income inequality, trade openness, manufacturing sector employment, developing countries

Market development and bank profit efficiency in China: Application of the generalized Malmquist productivity index
Jianhua Zhang, Zhong Xu, and Peng Wang, People’s Bank of China
*Baozhi Qu, City University of Hong Kong

Abstract
We study the total factor productivity of Chinese banks (the generalized Malmquist productivity index) and the impact of market development on bank profit efficiency using a unique sample of 150 Chinese commercial banks for the 1999-2008 period. Employing an output-oriented stochastic distance function approach, our analysis shows that the productivity growth of Chinese banks over time can be attributed mainly to improvements in technical efficiency and technical change. In addition, the efficiency of Chinese banks is heavily influenced by market development variables, including the proportion of non-state business, level of government intervention in the market, competition in the financial industry and competition in credit allocation. The effects of these factors on bank profit efficiency differ depending on the type of banks.

JEL Classification：D24, G21
Keywords: Generalized Malmquist productivity index; market development; bank profit efficiency; China

The Competitive Position of Shanghai in the Asia-Pacific Region:
A Comparative Study
Yi-Cheng Liu and Wen Yang, Tamkang University, Taiwan
*Chao-Cheng Mai, Tamkang University and Academia Sinica, Taiwan

Abstract
This paper looked at twelve International Financial Centers (IFCs) in the Asia-Pacific region by employing hierarchical cluster analysis and principal component analysis and applying them to ten financial variables. This study has demonstrated that as a result of increased foreign financial institutions’ participation and the expansion of markets’ size, Shanghai is fast closing up the gap with other major IFCs. Shanghai might pose a challenge not only to Hong Kong but also to Tokyo in the next few years if China’s government further liberalizes its financial markets to foreigners and augments the range of financial instruments.

JEL Classification: G15, G20
Keywords: International Financial Center, Shanghai, Hong Kong, Asian-Pacific Region

Production Efficiency, Input Price Discrimination and Social Welfare
Kuo-Feng Kao, Tamkang University, Taiwan
*Cheng-Hau Peng, Fu Jen Catholic University, Taiwan

Abstract
This paper re-examines the welfare implications of input price discrimination by considering the possibility of the structural change in the final goods market. When the marginal cost difference is moderate, price discrimination is more socially desirable as the upstream firm serves more downstream firms under price discrimination than uniform pricing. Surprisingly, when the marginal cost difference is sufficiently large, although the upstream monopolist serves more downstream firms and more outputs are produced under price discrimination than uniform pricing, the social welfare is lower under price discrimination. This result runs against those prevailing in the literature without market structural change.

JEL Classification: L13, L16, L43
Keywords: Production Efficiency, Price Discrimination, Vertically Related Markets

Compensation Disclosure in China
Philip Beaulieu, University of Calgary, Canada
Shujun Ding, York University, Canada
*Baozhi Qu, City University of Hong Kong

Abstract
This study examines compensation disclosure and corporate governance in the Chinese stock market. China's unfolding governance reform and the adoption of Western-style disclosure present a quasi- experimental setting to examine the effect of governance mechanisms on levels of disclosure. We code annual reports of Chinese listed companies and use content analysis to obtain a disclosure index. The results are mixed: only two governance mechanisms, audit committees and the proportion of independent directors, affect compensation disclosure. Our results suggest that cultural and social-political factors play a role in compensation disclosure in China. We also find evidence that compensation disclosure is negatively associated with cost of capital of the firm.

Optimal Policy Choice and Asymmetric Information in a Mixed Market
Xianhai Huang, Zhejiang University, China
Qunyan Sun, Sun Yat-sen University, China
*Jie Li, Zhejiang University, China

Abstract
In a market involving an incumbent, a welfare-maximizing public firm, and a potential new entrant, a profit-maximizing private firm with private information in its cost, we investigate a welfare-maximizing government's attitude towards the entry of the private firm and its choices over two policy options: a menu of policies and a uniform policy. The former can screen out the private firm's types while the latter cannot. We consider two different cases of the private firm: the case of a domestic private firm and the case of a foreign private firm. In both cases, we find that allowing the entry of the domestic (resp. foreign) private firm into the original public firm monopoly market is socially optimal. However, in the first case, policy menu always exists and is preferred to uniform policy; in the second case, separation equilibrium does not exist and uniform policy is adopted.

Measuring the Welfare Effects of Intellectual Property Rights Changes on the Korean Pharmaceutical Industry: The Case of Korea–US Free Trade Agreement
Keun-Yeob Oh, Chungnam National University
*Taegi Kim, Chonnam National University

Abstract
This paper shows how to measure the welfare effects of IPR changes under the Korea–US FTA on the Korean economy. After the FTA, patent lifetimes are expected to be extended. During such extension periods, Korean generic drug makers will not be able to sell their drugs, and consumers will have to pay more because of higher prices. The new concepts of effective patent term and price-change mechanism were employed, and patent data for the Korean pharmaceutical industry were used to estimate the parameters needed to measure the welfare effects. The empirical results indicate that the welfare effect will be much smaller than suggested by previous studies. These methods to evaluate the welfare effects can be applied to the cases of other recent FTAs and other kinds of IPR negotiations in international economics.

The Effect of SOX on the Predictability of Future Cash Flows in Litigious and Non-litigious Industries

Hsihui Chang, Drexel University
Sang-Hyun Suh, Tennessee State University
*Edward M. Werner, Drexel University
Jian Zhou, University of Hawaii at Manoa

Abstract
We investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of SOX.  We also examine the information content of discretionary accruals in litigious industries.  We find that discretionary accruals are positively associated with future operating cash flows and that discretionary accruals become even more important to predict future cash flows during the post-SOX period.  Findings also indicate that litigious-industry firms impart greater information content relative to those in non-litigious industries prior to SOX being issued and that the SOX effect on discretionary accruals is weaker for such firms as a result.

Takeover Possibility and Market Response to Loss News under Chinese ST Delisting Regulation
*Henry Huang, Prairie View A&M University
Sakthi Mahenthiran, Butler University
Xiaonong Zhang, Nankai University

Abstract
This study examines whether the market reaction to firms’ second consecutive loss news is influenced by the firms’ likelihood of being taken over. Firms with two consecutive losses in China are subject to the “special-treatment (ST)” delisting regulation. We have two important findings. First, ST firms with certain characteristics (i.e., smaller firms with lower beta, lower accounting performance, higher leverage, and larger ownership concentration) are more likely to be taken over. Second, the market returns for the second consecutive loss news are higher for firms with a higher likelihood of being taken over.

Firm Location and Earnings Management: Korean Evidence
Jong-Hag Choi, Seoul National University
Joseph Comprix, Syracuse University
Helen Hyejin Kwon, Sogang University
*Hye-Jeong Nam, Dongguk University

Abstract
Using 7,245 firm-year observations from Korean listed companies over 2000-2004, we find that firms located in Seoul (the capital city of Korea) or its surrounding metropolitan area (i.e., urban areas) are more likely to manage earnings than firms located in other areas (i.e., rural areas). Discretionary accruals are larger for urban firms than rural firms after controlling for variables that affect the level of accruals. Our findings suggest that due to greater attention from large numbers of investors and other market participants, urban firms face greater pressure to manipulate earnings to satisfy market expectations. However, we fail to find evidence of an association between firm location and increased earnings management for firms audited by Big 4 auditors or firms followed by analysts, which are likely to be more closely monitored by investors and other market participants. These findings are robust in various sensitivity analyses.

Air Transport and Regional Economic Growth in China
Shujie Yao, University of Nottingham
*Xiuyun Yang, Xi’an Jiaotong University

Abstract
Air transport increased exponentially in China over the last 30 years, but studies on this issue are few. This paper aims to fill in this literature gap. It identifies the key determinants of air transport in the Chinese regions for the period 1995-2006. The empirical results based on an augmented production function indicate that air transport is positively related with economic growth, industrial structure, population density, and openness, but negatively related with ground transportation. The development of air transport, however, varies significantly across regions in terms of growth and competition with ground transport. The competition has become particularly intense in recent years, as high-speed railways have become a formidable challenge to air transport between the short- and mid-range transportation routes.