Financial Reporting Opacity and Price Impact of Blockholder Sales: New Insights from Chinese Data

• In Event: Accounting Issues in China

Abstract

Chinese blockholders were strictly prohibited from selling in the secondary market from 1993 to 2005. A 2005 capital-market reform that removed the trading restrictions led to a large number of sizeable sales of blockholdings. Using this as my research setting, I first document a negative price impact on average for the blockholder sales. More importantly, I show that this negative price impact is increasing in firms’ financial reporting opacity, suggesting that the market considers the sales of high-opacity firms more likely to be information-driven. I further find that the relation is primarily driven by the effect of high opacity among non-managerial blockholders, which suggests that reporting opacity triggers non-managerial blockholders’ information acquisition and thus increases their information advantage. Finally, I demonstrate that the relation between opacity and market reaction is more pronounced among professional investment firms and non-state blockholders, consistent with the expectation that sophisticated investors are more likely to take advantage of reporting opacity and that state blockholder have fewer incentives to do so.

Author

• Han Wu, Norwegian School of Economics