Governance and Performance Implications of the Delisting Regulation - Evidence Form the Chinese Stock Market
Henry He Huang
Yeshiva University - Sy Syms School of Business
September 30, 2009
This paper examines governance and performance implications of the delisting regulation in China, which designates firms with two consecutive losses as Special Treatment (ST) firms and delists such firms should two more consecutive losses occur. We find firms that subsequently become ST firms have greater agency problem (as indicated by divergence of ownership) but comparable governance mechanisms to matching firms. We also find evidence that, after becoming ST firms, these firms reduce their agency problem without significant changes in governance structure and financial performance. Further evidence suggests that ST firms engage in earnings management after the first year of loss in an effort to improve their profitability. Our study suggests that agency problem plays an important role in financial performance, and delisting regulation does not necessarily leads to improvements in governance and performance; rather it might force firms to engage in earnings management.
Keywords: delisting regulations, distressed firms, corporate governance, earnings management
JEL Classification: G33, G34, G38
Date posted: October 6, 2009