Based on the theoretical framework primarily concerning information asymmetry, agency problem, signalling theory and political costs theory, many previous studies have attempted to formulate and test several hypotheses on the influencing factors of the company disclosure level. This section will review the findings of several prior researches as well as establishing hypotheses for the current study.
(1). One of the most remarkable features of Chinese capital market is assumed to be its unique market structure, which comprises of three major segments: A shares which are only sold to domestic citizens in domestic currency; B shares which are only issued for foreign investors in foreign currency, but traded in domestic exchange markets; and H shares which are traded in SEHK in foreign currency.
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Given their different characteristics, such as listing market, listing requirements, accounting standards and reporting environment, their disclosure behaviours and disclosure policies are expected to vary systematically. Therefore, one of the basic intentions of the current study is to test whether companies, of which shares are belongs to the three different market segments, exhibit different disclosure patterns.
At a glance, foreign listing status is a major feature that distinguishes H shares-issuers from the other companies issuing only A or A+B shares. For this feature alone, compliance with Chinese GAAP and IFRS is mandatory for these Chinese firms that issue both A and H-shares. Accordingly, the IFRS-based annual report must be audited by an internationally recognized auditor; while the Chinese GAAP-based annual report may be audited by local accounting firms, and any difference in net incomes between these two sets of accounting information must be reconciled and presented in the financial statement. In that case, companies with A and H shares are subject to additional listing requirements as well as disclosure rules, consequently greater information disclosure can be expected from these companies than the other firms listed only in the domestic market.
Apart from regulatory requirement, H-share companies are also under greater market pressure to disclose more information. Assuming the primary objective for Chinese firms listing on international stock exchanges is to obtain capital at the lowest possible cost, they need to compete with the other SEHK-listed firms of which the westernized corporate governance systems are generally believed to be effective in terms of assuring a high quality financial report through proper internal control systems. Hard to deny that, comparing with other SEHK-listed firms, H-share PRC firms are commonly assumed to have significantly greater adverse selection and moral hazard problems due to their lack of prior trading history, the limited transparency of corporate governance and management control system, and foreign investors’ concern about the magnificent state ownership.
Given these disadvantages raised from information asymmetry and the potential economic consequence of increased discount rate,
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