The Impact of the 2007 Reforms on the Information Environment in the Chinese A-share Market

Abstract

This thesis examines the impact of China's 2007 reforms on the information environment in the Chinese A-share market. The 2007 reforms introduced profound changes in the information disclosure regulations and accounting standards in the Chinese stock market. The reforms were expected to improve the information environment in the Chinese stock market by requiring continuous disclosure, prohibiting "selective disclosure" of private information, and converging Chinese accounting standards with IFRS. The influence of the 2007 reforms is examined from four aspects over the pre- and post-reform periods spanning the period 1 January 2005 to 31 December 2008: (i) the quantity of information disclosed by Chinese listed companies; (ii) the earnings forecast error and earnings forecast dispersion of financial analysts in the Chinese A-share market; (iii) the abnormal return around earnings announcements; and (iv) the transaction costs of stocks and the possibilities of informed trading in the Chinese stock market. The main findings of the research are as follows: 1. The quantity of information disclosed by companies increased significantly after the 2007 reforms, suggesting that the reforms enhanced the level of information disclosure by companies in the Chinese A-share market. 2. The earnings forecast accuracy by local financial analysts decreased in the post-reform period, which is contrary to expectations and suggests that the information environment of local financial analysts worsened after the reforms. On the other hand, the earnings forecast accuracy of foreign financial analysts did not change significantly. 3. The abnormal return or price reaction around the earnings announcement dates increased significantly after the 2007 reforms, suggesting a larger information gap between companies and investors in the Chinese A-share market. This result is also contrary to expectations, and it indicates that the information environment of investors in the Chinese stock market has deteriorated in the post-reform period. 4. The bid-ask spread increased in the post-reform period, which is also consistent with a poorer information environment for local financial analysts and investors in the Chinese A-share market. However, in the post-reform period, there was a significant decrease in the adverse selection component of bid-ask spread. These results suggest that informed trading decreased after the 2007 reforms, which indicates a reduced level of "selective disclosure" of private information to local analysts. Overall, I find that the impact of the 2007 reforms on the information environment in the Chinese stock market was two-fold. On the one hand, the reforms enhanced the level of information disclosure by Chinese listed companies and led to an increase in the level of public information given to the market; on the other hand, the reforms prohibited "selective disclosure" by companies and caused a decrease in the amount of private information given to the market. Consequently, an effect of the reforms is that they impaired the information environment of local financial analysts, caused deterioration in the information environment of investors, and increased the transaction costs in the Chinese A-share market. However, it also reduced the level of informed trading in the Chinese stock market.