Do Investors Turn a Blind Eye to Risk-Factor Disclosures by State-Controlled Firms

59 Pages Posted: 11 Dec 2019 Last revised: 13 Jan 2020

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Yi Yao

Nankai University - Business School

Mei Zhao

Nankai University - Business School

Date Written: November 23, 2019

Abstract

There is scant empirical evidence on how government involvement affects the investor demand for firm-specific information. We fill the void by testing how investors respond to risk-factor disclosures in IPO prospectuses in China, where state-controlled firms receive government-offered implicit insurance against bankruptcy risk, but bear significant agency and political risks. We find an insignificant association between risk-factor disclosure quality and IPO underpricing (or post-IPO stock return volatility) among state-controlled firms. State-offered implicit insurance appears to be the predominant consideration when investors value IPO shares of state-controlled firms, thereby weakening the investor demand for high-quality risk-factor disclosures. Our study highlights the state control effect, which renders high-quality risk disclosures ineffective for state-controlled firms in economies with significant government involvement.

Keywords: State control; State-controlled firms; Risk-factor disclosures; IPO underpricing

JEL Classification: G32; M41; M48; D81

Suggested Citation

Chen, Feng and Yao, Yi and Zhao, Mei, Do Investors Turn a Blind Eye to Risk-Factor Disclosures by State-Controlled Firms (November 23, 2019). Available at SSRN: https://ssrn.com/abstract=3492286 or http://dx.doi.org/10.2139/ssrn.3492286

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Yi Yao (Contact Author)

Nankai University - Business School ( email )

Baidi Road
Tianjin, 300071
China

Mei Zhao

Nankai University - Business School ( email )

Baidi Road
Tianjin, 300071
China

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