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An International Meeting of American Accounting
Association
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Government Involvement, Market Forces, and the Pricing of Earnings: A Comparison of China’s Floating and Non-floating Shares |
Kevin C.W. Chen
Hong Kong University of Science and Technology
Hongqi Yuan
Shanghai University of Finance and Economics
Abstract: This study compares the pricing mechanisms of two classes of stock in China: floating shares that are traded on the stock market and non-floating shares that can only be transferred between government agencies or corporations. We find that the transfer prices of non-floating shares involving government are based primarily on the book value of net assets without considering earnings. Earnings are priced only in the transfers between unrelated private entities. However, due to the illiquidity of shares, the weight of earnings in valuation is much less in transfer prices than in the market prices of floating shares. Finally, transfer prices from all types of transaction are not associated with firm’s investment expenditure, whereas the market prices of floating shares provide some guidance to future investment decisions. Thus, China's unique setting highlights the importance of market forces in generating a price that can reflect earnings information and guide investment decisions.