Governance and Performance Implications of the Delisting Regulation - Evidence Form the Chinese Stock Market

Posted: 6 Oct 2009  

Sakthi Mahenthrian

Butler University

Xiaonong Zhang

Nankai University

Henry He Huang

Yeshiva University - Sy Syms School of Business

Date Written: September 30, 2009

Abstract

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

Suggested Citation

Mahenthrian, Sakthi and Zhang, Xiaonong and Huang, Henry He, Governance and Performance Implications of the Delisting Regulation - Evidence Form the Chinese Stock Market (September 30, 2009). Available at SSRN: https://ssrn.com/abstract=1483362

Sakthi Mahenthrian (Contact Author)

Butler University ( email )

4600 Sunset Avenue
Indianapolis, IN 46208
United States

Xiaonong Zhang

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Henry Huang

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

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