by bei haochen 02050099 bba accounting · 2005. 11. 28. · as mentioned above, the study on...

A Study on Value Relevance of Hong Kong Stock Market:

Comparison on

Constituent Stocks and Non-constituent Stocks

BY

BEI Haochen

02050099

BBA Accounting

An Honours Degree Project Submitted to the

School of Business in Partial Fulfillment

of the Graduation Requirement for the Degree of

Bachelor of Business Administration (Honours)

Hong Kong Baptist University

Hong Kong

April 2005

Acknowledgement First, I would say this project is larger than any one I have done before. And, this project

could never be finished without the helps and care from many other people. I really hope

to take this opportunity to say “thank you” to those who have helped me in this period of

time.

Especially, I want to express my thankfulness to Dr. Lin, my supervisor of this project.

As the department head of Accounting and Law Department of Hong Kong Baptist

University, he is busy with all kinds of works. However, he still spared lots of precious

time to me and other students on our projects and gave me many valuable suggestions

and supervision on my project.

In addition, I would like to acknowledge every one else who gave me help, support or

encouragement when I was doing this project, including my family and friends.

a

Abstract

“Is that accounting information disclosed by the listed companies really helpful?” This is

a question asked often not only by those amateur investors, but also many professional

brokers and analysts. According to past research experiences, different stock market has

different value relevance. This study’s purpose is to check the value relevance of Hong

Kong stock market, especially the differences of value relevance between those

constituent stocks and non-constituent stocks. Standing on the common perspective, the

constituent stocks would be more value relevant than non-constituent stocks. Because

most people consider them be more important, more public-concerned and more reliable.

This prediction contains some grounds. According to the study in this paper, this

assumption is true as the accounting numbers of constituents stocks provide better value

relevance under return model. And there is no significant difference on value relevance

between them under price model.

b

Table of Content Page Acknowledgement a

Abstract b

1. Introduction 1

2. Study Background

2.1 Introduction on Hong Kong Hang Seng Index 3 2.2 Literature Review 5

3. Methodology

3.1 Value Relevance Models 8 3.2 Sample Selection and Data Collection 11

4. Findings and Analysis

4.1 Description on Statistics Result 12 4.2 Description on Regression Test Result 16 4.3 Analysis and Discussion 20

5. Limitations 22

6. Conclusions 23

7. References i

8. Appendix iv

c

A Study on Value Relevance of Hong Kong Stock Market: Comparison on Constituent Stocks and Non-constituent stocks

1. Introduction

Hong Kong is one of the most important financial centers in Asia and even in the world,

and its capital market is also one of the largest stock markets in the world. Till November

2004, the total market capitalization of those stocks in Hang Seng Index ranked 9th

among all global markets1. Moreover, along with the economy development in Mainland

China, Hong Kong stock market has taken an important role as an international capital

market for those Mainland companies to raise funds. More and more “red chips” or

“H-shares” are listed in Hang Seng Index, which further enhance the importance of Hong

Kong stock market.

Together with the growth of stock market in Hong Kong, more and more investors

concern about the value relevance of Hong Kong Stock Market, which indicates the

usefulness of accounting information in equity valuation. Actually the “value relevance”

of accounting information has become one of the main topics in capital market

accounting research in the literature ( Collins et al. 1997; Holthansen and Watts, 2001;

Barth et al.2001; Kothari 2001; Frank 2002). Originally, such studies are mainly focused

on US market. However, recently, we can find more and more related researches on

non-US markets, even some emerging markets, such as the China Stock Market, while up

to now, such studies on Hong Kong Stock Market have seldom been conducted. It is

believed that there is a necessity to analyze the value relevance of Hong Kong Stock

Market, since it is such an important capital market and it contains lots of large

1 “ Analyze Hong Kong Stock Market’ s Development on Perspective of Statistics” 01-02-2005 http://www.tdctrade.com/econforum/boc/chinese/boc050201c.htm

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companies from Hong Kong and China. Also, it is not surprising that most investors have

the interests on usefulness of accounting numbers provided by those companies listed in

Hong Kong on stock valuation.

This study provides an empirical investigation on the usefulness of accounting numbers

in Hong Kong stock market. Due to the limitation of condition, it is unfeasible to include

all listed companies in the study sample. Instead, two groups of companies are chosen

that it is possible to make comparison on them. The first group is composed of all

constituent stocks in Hang Seng Index. The Hang Seng Index currently comprises 33

constituent stocks which are representative of the market. The second group includes 33

non-constituent stocks, which are picked up to match the first group. Regression has been

run to test the association of accounting information and market variables for these two

groups of companies. It is believed the test on constituent stocks could generate material

evidence on the value relevance of whole Hong Kong stock market. Meanwhile, the

comparison between constituent stocks and non-constituent stocks would provide the

reliability to use constituent stocks to represent whole Hong Kong stock market.

The following sections of this paper are organized as bellow: A brief introduction on

Hang Seng Index, and review of prior studies on “value relevance”, followed by

methodology description and sample and data collection. Then the study findings and

limitations will be presented. Finally there is a conclusion.

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2. Study Background

2.1 Introduction on Hong Kong Hang Seng Index

Hang Seng Index (HSI) was established by Hang Seng Index Services Ltd, which is a

wholly owned subsidiary of Hang Seng Bank, in 1964. Since its birth, HSI has become

the main barometer of Hong Kong stock market. The following chart is the development

of Hang Seng Index in the past several decades.

Up to the end of 2004, there are total 1096 companies listed in HKSE. However, only a

few of them are chosen to HSI to represent the whole stock market, which are called

Hang Seng Index constituent stocks. The Hang Seng Index currently comprises 33

constituent stocks (see Appendix 1) which are representative of the market. The

aggregate market capitalization of these stocks accounts for about 70% of the total

market capitalization of the Hong Kong stock market. Every working day, the change in

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prices of those constituent stocks leads the change of HSI. The exact formula to calculate

the HSI is showed below:

Constituent stocks of the HSI are selected by a rigorous process of detailed analysis,

supported by extensive external consultation. To be eligible for selection, a company: 1

1. must be among those that constitute the top 90% of the total market capitalisation

of all ordinary shares listed on the SEHK (market capitalisation is expressed as an

average of the past 12 months);

2. must be among those that constitute the top 90% of the total turnover on the

SEHK (turnover is aggregated and individually assessed for eight quarterly

sub-periods for the past 24 months);

3. should normally have a listing history of 24 months; and

4. should not be a foreign company as defined by the SEHK.

From the many eligible candidates, final selections are based on the following criteria:

1. the market capitalisation and turnover rankings of the companies;

2. the representation of the sub-sectors within the HSI directly reflecting that of the

market; and

3. the financial performance of the companies.

As there is a strict selection process, it is reasonable for investors to believe that all 1 Resources from “http://www.hsi.com.hk/”

4

http://www.hsi.com.hk/intro/advisory.pdf


those constituent stock companies are relatively safer to invest (know as Blue Chips), and

their financial reports would be more reliable and more value relevant in the equity

research than those non-constituent stocks.

2.2 Literature Review

As mentioned above, the study on “value relevance” of accounting information is a hot

topic in financial reporting research. In the extant literature, an accounting amount is

defined as value relevant if it has a predicted association with equity market values.

Actually this area is not new in academic research. The literature examining such

associations extends back over 30 years (Miller and Modigliani, 1966), the first study of

which we are aware that uses the term “value relevance” to describe this association is

Amir et al. (1993).1

According to the classification of R.W. Holthausen, R.L. Watts (2001), there are

generally three categories of relevant studies2:

I. Relative association studies compare the association between stock market values

(or changes in values) and alternative bottom line measures. It includes the

comparison on value relevance between two sets of (or more) accounting numbers.

These studies usually test for differences in the R2 of regressions using different

bottom line accounting numbers. The accounting number with the greater R2 is

described as being more value-relevant. This approach is especially useful when it is

1 Quoted from: Barth, M.E.; W.H. Beaver; and W.R. Landsman. (2001) The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of Accounting and Economics 31 p79 2 Quoted from: Holthausen, R.W. and R.L. Watts. (2001) The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31 p5

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necessary to pick up one accounting measures from several alternatives, or set the

priorities to those alternatives.

II Incremental association studies investigate whether the accounting number of

interest is helpful in explaining value or returns (over long windows) given other

specified variables. That accounting number is typically deemed to be value relevant

if its estimated regression coefficient is significantly different from zero. So this

approach examines whether one set of accounting measures has information content

beyond that provided by the other set of accounting information. On the other word,

it tests the value-relevance on the value-added information. This approach is

especially applicable when there is the desire to test the incremental contribution of

other set of measures.

III Marginal information content studies investigate whether a particular accounting

number adds to the information set available to investors. They typically use event

studies (short window return studies) to determine if the release of an accounting

number (conditional on other information released) is associated with value changes.

Among these three categories, most research was done to study first two topics.

Some studies have been done to examine which earning number, calculated under a

particular accounting standard, is more highly associated with stock market values or

returns (over long windows).( Alford et al. 1993; Joos and Lang 1994; Barth et al. 1999)

6


For example, researchers can make a comparison between the association of accounting

numbers under China GAAP and IAS.

Further more, there are some other studies using incremental approach, the most common

way to do this research is to examine the relevance of one additional explanatory variable,

such as the reconciliation numbers between Chinese GAAP and IAS.

Up to now, many researchers have examined the association between the combinations of

earnings, change in earnings and book value and contemporaneous stock price or

returns.1 While on the earlier date, most researchers had to analyze the US stock market.

For example, many studies were conducted to compare the value relevance of accounting

numbers under US GAAP and a non-US GAAP. One possible reason for this

phenomenon is that US stock market is quite mature and most information necessary for

research is available. While we are seeing more and more investigations on the

value-relevance of accounting information in non-US markets. This trend is caused by

the availability of research methodology from earlier research on US market and the

trend of globalization which let investors pay more attention to the global stock markets2

(e.g., Alford et al. 1993; Amir et al. 1993; Barth and Clinch 1996; Chan and Seow 1996;

Graham and King 1998). Some of this kind of studies have been done to study one of the

most important emerging markets---China stock market. For example, Ben-Hsien Bao

and Lynne Chow (1999) compared the value-relevance of earnings numbers under China

GAAP and IAS for those companies listed in the China stock market. While Haw, Qi, 1 Quoted from: Alex D.; Suresh R; Joshua R; (2001) Is stock price a good measure for assessing value-relevance of earnings?An empirical test. Working paper, New York University 2 Quoted from: Charles J P Chen; Shimin Chen; Xijia Su (2001) Is accounting information value-relevant in the emerging China stock market? Journal of International Accounting, Auditing and Taxation

7


Wu (2000) focus on value relevance of earnings in the case of A Shares in the China

stock market. More recently, Lin et al. (2004) investigate the value-relevance in both

A-shares and B-shares under China GAAP and IAS. Meanwhile, this research added an

incremental element, which is the earnings reconciliation between the two sets of

accounting standards.

However, there are few studies in this area conducted on Hong Kong stock market. Some

studies are found about the value-relevance in Hong Kong property market. Still, no

recent research on value-relevance on Hong Kong stock market could be found. Instead,

there is a study called “Analysts' Earnings Forecasts and the Value Relevance of 20-F

Reconciliations from non-U.S. to U.S. GAAP”, mentioned indirectly the value relevance

of Hong Kong stock market.

3. Methodology

3.1 Value Relevance Models

Up to now, there are two main types of valuation models in the value relevance literature,

namely return model and price model. The return model tests the relationship between

stock returns, especially annual stock returns and accounting earnings and earning

changes. Return model is not a new research model; similar return approach was used by

Ball and Brown in their seminal paper in 1968. And the return model was improved along

with this type of research’s progress. In 1991, Easton and Harris popularized a specific

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9

version of the annual return model including both earnings and earnings changes, which

was widely used by many similar studies later onTP1 PT (e.g., Amir et al. 1993; Cheng et al.

1993; Marton 1997; Haw et al. 1998, J P Chen et al. 2001). Moreover, the return model is

designed to be deflated by lagged stock price, which is suggested by Biddle et al. (1995),

to mitigate the potential heteroscedasticity problemTP2 PT (Harris & Muller; Kothari 2001). So

in this paper, this model is also adopted, assuming earnings and earnings changes, which

are deflated by the lagged price level, are associated with stock returns. So our model is:

R BjtB=φ B0B+φ B1BEPSBjtB/P Bjt-1B+φ B2 BΔEPSBjt B/P Bjt-1B+π Bjt (1)B

P

PWhere:

RBjt B= annual stock return for firm j at time period t

EPSBjtB/PBjt-1 B = earnings per share deflated by beginning stock price for the firm j

at time period t

ΔEPSBjtB/PBjt-1 B = change in earnings per share deflated by beginning stock price

for the firm j at time period t

πBjtB = the error term

Applying this model, we will assess the level of association between the earnings,

earning changes and stock returns for stocks in the Hong Kong market.

In addition, we can employ the price model to test the value relevance of the accounting

numbers to price valuation in the Hong Kong stock market. This model is comparatively

TP

1PTQuoted from: Charles J P Chen; Shimin Chen; Xijia Su (2001) Is accounting information value-relevant in the

emerging China stock market? Journal of International Accounting, Auditing and Taxation TP

2PTQuoted from: Lin (2004) Value relevance of international accounting standards harmonization: Evidence from A-

and B-Share in China


10

“new” as it was developed by Ohlson. (Ohlson 1995) This model examines the relation

between stock price, book value and earnings. According to Charles J P Chen et al.

(2001), that price model contains two advantages over the return model. First, if stock

markets anticipate any components of accounting earnings and incorporate the

anticipation in the beginning stock price, i.e. prices leading earnings, return models will

bias earning coefficients towards zero. But the price models yield unbiased earnings

coefficients because stock prices reflect the cumulative effect of earnings information

( Kothari and Zimmerman, 1995). Second, return models prescribe our assessment on

value relevance of accounting earnings, however, Ohlson’s price models included both

accounting earning and book value to test the association with the firm’s market valueTP1 PT.

Based on Ohlson model, we can get the model applicable to our research object-----Hong

Kong stock market.

P BjtB = β B0B+β B1BBVPS BjtB+β B2BEPSBjtB+η Bjt (2)B

Where:

PBjt B= stock price of firm j at the end of the fiscal year period t

BVPSBjtB= book value per share of owner’s equity for the firm j at time period t

EPSBjtB = earnings per share for firm j at time period t

ηBjtB= the error term

Like many other recent papers, this study will use both models to assess the information

usefulness, in other words, the accounting numbers’ value relevance in the context of

Hong Kong stock market. In such studies, researchers usually view RP2 P and coefficients on

TP

1PT Charles J P Chen; Shimin Chen; Xijia Su (2001) Is accounting information value-relevant in the emerging China

stock market? Journal of International Accounting, Auditing and Taxation


explanatory variables as reflection of value relevance1. The details about the data and

samples are presented in the next section.

3.2 Sample Selection and Data Collection

As mentioned in the previous parts, the constituent stocks of Hang Seng Index are quite

representative for test on the value relevance of Hong Kong stock market. They are

barometers for the entire Hong Kong stock market. So all 33 constituent stocks are

picked up into the first sample group (Group A). On the other hand, to see whether the

test results would be different if non-constituent stocks are applied, a similar sample

group (Group B) is selected to match the Group A. Group B also consists of 33 stocks.

The only condition to confine the stocks in this group is it comprises same number of

stocks in one industry as Group A. For example, according to the classification of HSI

Services Ltd, there are 4 main kinds of industries for Hong Kong listed companies,

including “Finance”, “Utilities”, “Properties” and “Commerce & Industry”. More

concretely, some of the companies could be classified into “consolidated Enterprises” if

they render several kinds of business simultaneously. According to this kind of

classification, the Group A companies could be classified as:

Classification No. of stocks

Finance 4

Utilities 4

Industry 6

1Quoted from: Alex D.; Suresh R; Joshua R; (2001) Is stock price a good measure for assessing value-relevance of earnings?An empirical test. Working paper, New York University

11


Properties 5

Consolidated Enterprises 14

The Group B matches the Group A in this criterion. This would make these two groups

be more comparable. With the Group B, we can make a comparison between constituent

stocks and non-constituent stocks and check if those blue chips stocks are more value

relevant (the accounting information is more useful) as generally expected.

The testing period is fixed into 3 years for both models. To enhance the relevance of this

study, the most recent fiscal year data were selected. That is the year 2001, 2002 and

2003 (because some companies haven’t provided their latest accounts information up to

the time this study starts, the year 2004 is excluded).

Appendix 2 provides the information about the Group B companies.

4. Findings and Analysis

4.1 Description on Statistics Result All necessary data in this study about both Group A and Group B companies were

collected from many sources, including “data stream”, the website of HKEX and Yahoo

Finance. The following tables are a summarized description on those data.

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13

Table 1

Descriptive Statistics on Return Model, Group A--2001

Model: RBjtB=φB0B+φB1BEPSBjtB/PBjt-1B+φB2BΔEPSBjtB/PBjt-1B+πBjtB

Variable Mean Std. Dev Min Max N

R Bjt B -0.105 0.335 -0.766 0.838 31EPSBjtB/PBjt-1 B 0.057 0.030 0.006 0.145 ΔEPSBjt B/PBjt-1B -0.002 0.043 -0.090 0.181

Table 2




R Bjt B -0.001 0.302 -0.436 0.787 32EPSBjtB/PBjt-1 B 0.042 0.152 -0.073 0.139 ΔEPSBjt B/PBjt-1B -0.024 0.174 -0.967 0.101

Table 3




R Bjt B 0.340 0.459 -0.310 2.074 33 EPSBjtB/PBjt-1 B 0.040 0.180 -0.952 0.126 ΔEPSBjt B/PBjt-1B 0.011 0.067 -0.081 0.354

Table 4

Descriptive Statistics on Return Model, Group A— Entire Pool



R Bjt B 0.083 0.416 -0.766 2.074 96EPSBjtB/PBjt-1 B 0.046 0.137 -0.952 0.145 ΔEPSBjt B/PBjt-1B -0.005 0.110 -0.967 0.354

Table 5


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Descriptive Statistics on Return Model, Group B--2001



R Bjt B -0.029 0.366 -0.634 0.905 29EPSBjtB/PBjt-1 B -0.004 0.329 -1.333 0.406 ΔEPSBjt B/PBjt-1B -0.003 0.355 -0.961 1.345

Table 6




R Bjt B 0.146 0.517 -0.637 1.692 32EPSBjtB/PBjt-1 B -0.182 1.350 -5.750 2.577 ΔEPSBjt B/PBjt-1B -0.151 1.078 -4.930 2.862

Table 7




R Bjt B 0.616 0.926 -0.332 4.341 32EPSBjtB/PBjt-1 B 0.139 0.556 -1.134 2.765 ΔEPSBjt B/PBjt-1B 0.396 1.502 -1.703 6.330

Table 8

Descriptive Statistics on Return Model, Group B— Entire Pool



R Bjt B 0.253 0.703 -0.637 4.341 93EPSBjtB/PBjt-1 B -0.016 0.877 -5.750 2.765 ΔEPSBjt B/PBjt-1B 0.083 1.116 -4.930 6.330

Table 9

Descriptive Statistics on Price Model, Group A--2001

Model: PBjtB = βB0 B+βB1 BBVPSBjtB+βB2 BEPSBjtB+η BjtB Variable Mean Std. Dev Min Max N


15

PBjt B 24.216 26.880 2.050 91.250 32BVPSBjt B 15.853 18.018 -1.680 71.440 EPSBjt B 1.384 1.401 -0.110 5.290

Table 10




Table 11




Table 12

Descriptive Statistics on Price Model, Group A—Entire Pool



Table 13

Descriptive Statistics on Price Model, Group B--2001


PBjt B 4.608 8.353 0.040 33.200 32BVPSBjt B 4.889 6.793 -0.040 31.920


16

EPSBjt B 0.478 1.101 -0.480 3.950

Table 14



PBjt B 4.620 8.434 0.020 34.400 32BVPSBjt B 4.947 7.118 0.060 34.290 EPSBjt B 0.353 0.832 -0.820 3.260

Table 15



PBjt B 6.783 12.971 0.050 51.000 33BVPSBjt B 4.936 7.527 0.040 37.080 EPSBjt B 0.425 0.835 -0.230 3.700

Table 16

Descriptive Statistics on Price Model, Group B—Entire Pool



4.2 Description on Regression Test Result

As mentioned in the Methodology part, linear regression tests have been conducted on

both groups. Such tests could show us the value relevance of those accounting

information.. The following tables express the results of the regression tests.


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Table 17

Regression Results on Return Model, Group A


φ B0 B φ B1 B φ B2 B R P2

PBadj B N 2001 -0.550 7.763 -3.775 0.406 31

(sig) (0.000) (0.000) (0.004)

2002 -0.297 4.934 -3.759 0.257 32

(Sig) (0.011) (0.004) (0.012)

2003 0.185 2.435 5.248 0.180 33

(Sig) (0.051) (0.006) (0.023)

Entire Pool 0.051 0.715 0.112 0.041 96

(Sig) (0.258) (0.029) (0.781)

Based on Group A, when stock returns are regressed on earning and earning changes in

return model, the coefficients are significant at 0.01 level on earnings and at 0.05 level on

earning changes. Both variables, earnings and earning changes, are regarded as

significantly related to stock returns in any single year. However, when the all 3-year data

are pooled together, the earning changes is not significantly related to stock returns any

more, though earnings still keeps a tight relationship with returns. And accounting

earnings are positively associated with stock returns in all 3 years. The earning changes,

nevertheless, changes from a negative relationship with stock returns to a positive one in

2003. A possible reason for this change may due to other macro economic factors’

influences. For example, the adjustment of interest rates and tax rates may affect the

earnings of companies in various industries. Some big events, such as SARS, may affect

the earning performances of most Hong Kong companies. As the positive and negative

relationship between earning changes and stock returns changes within the testing period,

the earning changes could have little association with the returns regarding the whole


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period, which is proved by the findings above. The R P2PBadjB in each year is in a satisfactory

level and indicates that this model (with two explanatory variables) are relevant to stock

returns till a certain limit.

Table 18

Regression Results on Return Model, Group B


φ B0 B φ B1 B φ B2 B R P2

PBadj B N 2001 -0.027 0.242 0.195 0.042 29

(sig) (0.684) (0.276) (0.342)

2002 0.169 -0.025 0.181 0.039 32

(Sig) (0.072) (0.913) (0.525)

2003 0.623 0.520 -0.201 0.004 32

(Sig) (0.001) (0.205) (0.187)

Entire Pool 0.262 0.215 -0.064 0.022 93

(Sig) (0.001) (0.071) (0.492)

Compared to results from Group A, both earnings and earning changes are less value

relevant no matter considering each single year or 3-year as a pool. ExceptφB1 Bto entire

pool, the coefficients of earning and earning changes are not significant, which reflects

that these two explanatory variables are not relevant to stock returns. In addition, the

small R P2PBadj Bindicates the two variables (earning and earning changes) cannot well explain

the stock returns. There is much other information relevant to stock returns for

non-constituent stocks not included in return model.

Table 19

Regression Results on Price Model, Group A


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Model: PBjtB = β B0 B+βB1 BBVPSBjtB+βB2 BEPSBjtB+ηBjtB β B0 B β B1 B β B2 B R P

2PBadj B N

2001 -2.025 0.576 12.357 0.917 32

(Sig) (0.328) (0.000) (0.000)

2002 2.154 0.107 11.931 0.853 33

(Sig) (0.291) (0.399) (0.000)

2003 2.267 -0.034 16.438 0.910 33

(Sig) (0.254) (0.782) (0.000)

Entire Pool 0.986 0.228 13.340 0.869 98

(Sig) (0.445) (0.004) (0.000)

Apparently from this result, the earnings are extremely relevant to stock prices in price

model. The coefficients on earning are significant at 0.01 level in each testing year and

the entire pool. However, except 2001, the book value information is not value relevant

to stock prices in other two years. If regarding to the entire pool, the both coefficients on

book values and earnings are significant at 0.01 level. A possible reason for the poor

value relevance of book value in 2002 and 2003 is that equity’s usefulness in valuation

was influenced significantly by other factors, probably macro economy factors. Such

factors even forced book value got a negative relationship with prices in 2003.

Meanwhile, the whole model is quite value relevant as the RP2PBadjB value is large.

Table 20

Regression Results on Price Model, Group B

Model: PBjtB = βB0 B+βB1 BBVPSBjtB+βB2 BEPSBjtB+ηBjtB β B0 B β B1 B β B2 B R P

2PBadj B N

2001 0.829 0.089 7.003 0.963 32

(Sig) (0.029) (0.024) (0.000)

2002 1.173 0.047 9.112 0.861 32

(Sig) (0.106) (0.754) (0.000)

2003 0.591 0.094 13.684 0.861 33

(Sig) (0.578) (0.783) (0.000)


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Entire Pool 0.537 0.323 7.778 0.818 97

(Sig) (0.329) (0.007) (0.000)

Similar to the results from Group A, accounting earnings of companies in Group B are

also extremely relevant to stock prices. RP2PBadj Bof group is also quite large. Book values are

value relevant for 2001 and entire pool too. The book value was also influenced by other

factors in 2002 and 2003. However, to Group B, the book value stays in a positive

relationship with stock prices.

4.3 Analysis and Discussion

It is expected that Group A would have better value relevance than Group B. This

expectation is established upon some practical assumptions. First, Group A contains

constituent stocks which would lead the change of Hang Seng Index. Moreover, most

constituent stocks companies are blue chips companies. As the leading big companies in

various industries, better information disclosing systems are expected for those

companies. Sometimes, investors believe that accounting information from those big

dogs is more reliable than those small companies, even after the crash of Enron. The

following analysis could check whether these assumptions can be held.

From the return model results, it is not difficult to find that this Group A’s accounting

numbers are more value relevant. The coefficients are significant at 0.01 level on

earnings and at 0.05 level on earning changes in any single year. However, there are no

significant relationships between earnings, earning changes and stock returns for Group B


21

companies. So the usefulness of accounting earnings and earning changes for those

non-constituent stocks is quite limited. Instead, it is reasonable to use accounting

numbers to determine stock prices of constituent stocks as they are highly associated. So

the assumption above assumption is supported by the results of return model tests. It

seems that investors can rely on the earnings disclosed by big companies. In contrast,

they should hold a quite conservative attitude toward earnings from those medium and

small companies in stock returns valuation.

Nevertheless, according to the results from price model tests, earnings of both Group A

and Group B companies show high value relevance this time. It is the most imprinting

finding in this study that accounting earnings of companies listed in Hong Kong, no

matter constituent or non-constituent, have strong and conclusive explanatory power on

stock prices. It is strong because the accounting earnings, as an explanatory variable, are

highly correlated to stock prices. The coefficients on earnings are significant at 0.01 level

for every testing year and the whole pool. It is conclusive because the RP2PBadjB value is very

large. It is an extremely high amount among similar studies, which proves that the price

model with two explanatory variables can well explain the stock prices for Hong Kong

stock market. Besides, not much other information is correlated to stock prices. So as a

relevant variable in this model, accounting earnings’ explanatory power on stock prices is

conclusive and huge. On the other word, their accounting earnings are incredibly useful

for prediction on prices in Hong Kong stock market. Comparatively, book values are less

relevant than earnings for both Group A and Group B companies. Except 2001, the

significant levels of book value in 2002 and 2003 are not satisfactory and the book value


cannot explain the stock prices. In these two years, there may be other factors influencing

book value. However, it is believed that in Hong Kong stock market, earnings are more

value relevant than book value. A possible reason for this is that in Hong Kong stock

market, the investors usually position the stock price for a company according to its

earnings. Investors regard earnings be the most important figure in stock price valuation.

Perhaps the investors prefer to emphasize on the current base figures (earnings) rather

than historical base figures (book value).Referring to our original assumption, companies

from both groups have similar value relevance this time. Their accounting earnings are all

useful in terms of stock valuation, but not book values.

5. Limitations

This study on value relevance of Hong Kong stock market is rather basic and has some

limitations.

Firstly, the testing period is quite short. There are only three years for the testing period

(2001-2003). Comparing to other similar researches, 3 years is relatively short. Moreover,

Hong Kong stock market fluctuated a lot during this period along with many big events,

such as the breakings of technology bubbles, SARS and CEPA. So the test results may

just be extraordinary results in a special period and cannot explain the real Hong Kong

stock market.

22


Secondly, the samples size is small in this paper. Only 33 non-constituent stocks are

selected for Group B. Whether these stocks can reasonably represent all non-constituent

stocks is a doubt.

Thirdly, the scope of variables is limited in this paper. Actually, there are only 2

explanatory variables in each model. In the real world, many other accounting numbers

or non-accounting information are also useful in stock valuation. So the models in this

paper are just most basic ones.

6. Conclusions

Through empirical testing of the value-relevance of accounting information to the stock

return and stock price in Hong Kong stock market, it is found that earnings are extremely

useful to explain the stock prices in Hong Kong. Accounting earnings are highly

associated with stock prices for both constituent stocks and non-constituent stocks.

Instead, the book values are far less value relevant except for 2001. Generally speaking,

the level of value relevance for accounting information under price model is almost the

same for both Group A and B. However, under return model, the earnings and earning

changes from Group A are much more relevant than Group B. Standing on this

perspective, accounting numbers from Group A is superior.

To conclude, this study is just a simple research on the value relevance of accounting

information in Hong Kong stock market. Comparatively, the accounting numbers of

constituent stocks have better value relevance. Due to the limitation of testing period and

23


available data, the findings in this study should be used with caution.

24


7. References

1. Alex D.; Suresh R; Joshua R; (2001) Is stock price a good measure for assessing

value-relevance of earnings? An empirical test. Working paper, New York University

2. Amir, E.;T.S. Harris; and E.K. Venuti. (1993) A comparison of the value-relevance of

U.S. versus non-U.S. GAAP accounting measures using Form 20-F reconciliations.

Journal of Accounting Research 31(Supplement)

3. Bao, B. H. and L. Chow. (1999) The usefulness of earnings and book value for equity

valuation in emerging capital markets: evidence from listed companies in the People’s

Republic of China. Journal of International Financial Management and Accounting 10(2)

p85-104

4. Barth, M.E.; W.H. Beaver; and W.R. Landsman. (2001) The relevance of the value

relevance literature for financial accounting standard setting: another view. Journal of

Accounting and Economics 31 p77-104

5. Biddle, G.C; G.S. Seow; and A.F. Siegel. (1995) Relative versus incremental

information content. Contemporary Accounting Research 12(1) p1-23

6. Cahan S.F.; Courtenay S.M.; Gronnewoller P.L. and Upton D.R. (2000) Value

Relevance of Mandated Comprehensive Income Disclosures. Journal of Business Finance

and Accounting

i


7. Charles J P Chen; Shimin Chen; Xijia Su (2001) Is accounting information

value-relevant in the emerging China stock market? Journal of International Accounting,

Auditing and Taxation 10(1) p1-22

8. Dai Daohua (2005) Analyze Hong Kong Stock Market’s Development on Perspective

of Statistics http://www.tdctrade.com/econforum/boc/chinese/boc050201c.htm

9. David A. John H and Jing Liu (2002) Measuring Value Relevance in a (Possibly)

Inefficient Market. Journal of Accounting Research

10. Holthausen, R.W. and R.L. Watts. (2001) The relevance of the value-relevance

literature for financial accounting standard setting. Journal of Accounting and

Economics 31 p3-75

11. In-Mu Haw; Daqing Qi & Woody Wu (1999) Value Relevance of Earnings in an

Emerging Capital Market: the Case of A-shares in China Pacific Economic Review

12. Koji Ota, (2001) The Value-Relevance of Book Value, Current Earnings, and

Management Forecasts of Earnings. Working Paper (downloadable from SSRN), The

Australian

13. Kothari, S.P., and J.L. Zimmerman. (1995). Price and return models. Journal of

Accounting and Economics 20

ii


iii

14. Lin (2004) Value relevance of international accounting standards harmonization:

Evidence from A- and B-Share in China

15.Ohlson, J.A. (1995) Earnings, book value, and dividends in security valueation.

Contemporary Accoutning Research 11(2)

16. Pascal Dumontier and Real Labelle (1998) Accounting earnings and firm valuation:

the French case. European Accounting Review


iv

8. Appendix

Appendix I

Group A

Hang Seng Index 33 Constituent Stocks

(Effective 9 September 2004)

HU0001.HK UH CHEUNG KONG

Company/Securities Name:

Cheung Kong (Holdings) Ltd.

Principal Activities: Property development and investment, property and project management, hotel operation and investment in securities.

Business Classification:

Properties

HU0002.HK UH CLP HOLDINGS


CLP Holdings Ltd.

Principal Activities:

Electricity generation & supply, power projects in the PRC and other Asian countries, property development.


Utilities

HU0003.HK UH HK & CHINA GAS


Hong Kong and China Gas Co. Ltd., The

Principal Activities: Production, distribution and marketing of town gas and related activities.


Utilities


v

HU0004.HK UH WHARF HOLDINGS


Wharf (Holdings) Ltd., The

Principal Activities: Properties, terminals, transport, hotel & telecommunication operations.


Consolidated Enterprises

HU0005.HK UH HSBC Holdings


HSBC Holdings plc

Principal Activities: Provision of a comprehensive range of banking and related financial services through an int'l network in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa.


Finance

HU0006.HK UH HK ELECTRIC


Hongkong Electric Holdings Ltd.

Principal Activities: Generation and supply of electricity.


Utilities

HU0008.HK UH PCCW


PCCW Ltd.


Provision of telecommunication services, Internet and multimedia services, sale and rental of equipment and technical services. Investment in and development of infrastructure, properties and technology-related business.



HU0011.HK UH HANG SENG BANK LIMITED


Hang Seng Bank Ltd.

Principal Activities: Provision of banking and related financial services.


vi


Finance

HU0012.HK UH HENDERSON LAND DEVELOPMENT COMP


Henderson Land Development Co. Ltd.


Property development and investment, project management, construction, project management, hotel operation, department store operation, finance, investment holding and infrastructure.


Properties

HU0013.HK UH HUTCHISON WHAMPOA LIMITED


Hutchison Whampoa Ltd.


Ports and related services, telecommunications and e-commerce, property and hotels, retail and manufacturing, energy, infrastructure, finance and investments.



HU0016.HK UH SUN HUNG KAI PROPERTIES LIMITED


Sun Hung Kai Properties Ltd.

Principal Activities: Development of and investment in properties for sale and rental purpose.


Properties

HU0019.HK UH SWIRE PACIFIC LIMITED A


Swire Pacific Ltd. 'A'

Principal Activities: Airline services and catering, aircraft engineering, property investment and trading, hotels, industries, trading, marine services, insurance.



HU0020.HK UH WHEELOCK AND COMPANY LIMITED


Wheelock and Co. Ltd.

Principal Activities: Retailing & trading, financial & commercial services,


vii

property rental & management, sale of property, hotel operation, treasury management & investment.



HU0023.HK UH BANK OF EAST ASIA LIMITED


Bank of East Asia, Ltd., The

Principal Activities: Provision of banking and related financial services, and business, corporate and investor services.


Finance

HU0066.HK UH MTR CORPORATION LIMITED


MTR Corporation Ltd.


Owning and operating the Mass Transit Railway and Octopus smart card system in Hong Kong; properties development and sale; leasing of commercial facilities and provision of other services within the Mass Transit Railway.


Utilities

HU0097.HK UH HENDERSON INVESTMENT LIMITED


Henderson Investment Ltd.


Property development and investment, department store operation, hotel operation, infrastructure, security service, investment holding, information technology development and other services.


Properties

HU0101.HK UH HANG LUNG PROPERTIES LIMITED


Hang Lung Properties Ltd.

Principal Activities: Property investment for rental income, property development for sale, car park management and property management.


Properties

HU0144.HK UH CHINA MERCHANTS HOLDINGS (INT'L


viii


China Merchants Holdings (International) Co. Ltd.

Principal Activities: Ports operation, container manufacturing and related operations, tollroads operation and oil tankers operation.



HU0179.HK UH JOHNSON ELECTRIC HOLDINGS LIMIT


Johnson Electric Holdings Ltd.

Principal Activities: Design, manufacture and marketing of micromotors products.

Business Classification: Industrials HU0203.HK UH DENWAY MOTOR LIMITED


Denway Motors Ltd.


Manufacture, assembly, trading and servicing of motor vehicles and manufacture and trading of motor vehicle related electrical equipment and parts in the PRC, and manufacture and trading of audio equipment in Hong Kong.

Business Classification: Industrials HU0267.HK UH CITIC PACIFIC LIMITED


CITIC Pacific Ltd.


Marketing and distribution, motor vehicles and related services, trading, power and civil infrastructure, property, industrial manufacturing, and communications.

Business Classification: Consolidated Enterprises HU0291.HK UH CHINA RESOURCES ENTERPRISE,LIMI


China Resources Enterprise, Ltd.


Property development and investments, beverage, food processing and distribution, petroleum and chemical distribution, textiles, retail and investments.

Business Classification: Consolidated Enterprises HU0293.HK UH CATHAY PACIFIC AIRWAYS LIMITED


ix


Cathay Pacific Airways Ltd.

Principal Activities: Operating scheduled airline services, airline catering, aircraft handling and engineering.

Business Classification: Consolidated Enterprises HU0330.HK UH ESPRIT HOLDINGS LIMITED


Esprit Holdings Ltd.


Design, licensing, sourcing, manufacturing, wholesale and retail distribution of high quality apparel and related products under the ESPRIT brand name, and Red Earth cosmetics, skin and general body care products.

Business Classification: Consolidated Enterprises HU0494.HK UH LI & FUNG LIMITED


Li & Fung Ltd.


Trading of global consumer products, including garments, fashion accessories, toys and games, sporting goods, furnishings, handicrafts, shoes, travel goods and tableware.

Business Classification: Consolidated Enterprises HU0551.HK UH YUE YUEN INDUSTRIAL(HOLDINGS)


Yue Yuen Industrial (Holdings) Ltd.

Principal Activities: Manufacturing and marketing of athletic footwears, athletic style leisure footwears and casual footwears.

Business Classification: Industrials HU0762.HK UH CHINA UNICOM LTD


China Unicom Ltd.

Principal Activities: Provision of cellular, long distance, data, Internet and paging services in China.

Business Classification: Consolidated Enterprises HU0883.HK UH CNOOC


CNOOC Ltd.


x

Principal Activities: Exploration, development and production of crude oil and natural gas offshore China.

Business Classification: Industrials HU0941.HK UH CHINA MOBILE (HONG KONG) LTD


China Mobile (Hong Kong) Ltd.

Principal Activities: Provision of mobile communications and related services in the PRC.

Business Classification: Consolidated Enterprises HU0992.HK UH LEGEND GROUP LIMITED


Lenovo Group Ltd.

Principal Activities: Provision of advanced information technology ("IT") products and services.

Business Classification: Industrials HU1038.HK UH CHEUNG KONG INFRASTRUCTURE HOLD


Cheung Kong Infrastructure Holdings Ltd.

Principal Activities: Development, investment and operation of infrastructure businesses in Hong Kong, the Mainland and Australia.

Business Classification: Industrials HU1199.HK UH COSCO PACIFIC LIMITED


COSCO Pacific Ltd.

Principal Activities: Container leasing, handling and storage business; container terminal operations.

Business Classification: Consolidated Enterprises HU2388.HK UH BOC HONG KONG (HOLDINGS) LIMITE


BOC Hong Kong (Holdings) Ltd.


Business Classification: Finance


xi

Appendix II

Group B

K M BUS HOLD (62 ) Company/Securities Name:

Kowloon Motor Bus Holdings Ltd., The

Principal Activities: Operation of both franchised and non-franchised public buses in Hong Kong

Business Classification: Utilities

KWOON CHUNG BUS (306 ) Company/Securities Name:

Kwoon Chung Bus Holdings Ltd.

Principal Activities: Provision of non-franchised and franchised bus services in Hong Kong and the PRC.


DATANG POWER (991 ) Company/Securities Name:

Datang International Power Generation Co., Ltd. - H Shares

Principal Activities: Acquire, own and operate existing coal-fired power plants and to develop, construct, own and operate new power plants.


HUANENG POWER (902 ) Company/Securities Name:

Huaneng Power International, Inc. - H Shares

Principal Activities: Development, construction, ownership and operation of large coal-fired power plants throughout China.


WING LUNG BANK (96 ) Company/Securities Name:

Wing Lung Bank Ltd.

Principal Activities: Banking, financial and other related


xii

services.


WING HANG BANK (302 ) Company/Securities Name:

Wing Hang Bank, Ltd.

Principal Activities: Commercial banking and related financial services.


ICBC (ASIA) (349 ) Company/Securities Name:

Industrial and Commercial Bank of China (Asia) Ltd.

Principal Activities: Provision of banking, financial and other related services.


LCH BANK (1111 ) Company/Securities Name:

Liu Chong Hing Bank Ltd.



FE PHARMA TECH (399 ) Company/Securities Name:

Far East Pharmaceutical Technology Co. Ltd.

Principal Activities: Manufacture, marketing and distribution of pharmaceutical products in the PRC.

Business Classification: Industrials

GUANGDONG TANN (1058 ) Company/Securities Name:

Guangdong Tannery Ltd.

Principal Activities: Processing and sale of semi-finished and finished leather; design, manufacture and sale of leather ware products, and merchandise trading.



xiii

YANGTZEKIANG (294 ) Company/Securities Name:

Yangtzekiang Garment Manufacturing Co. Ltd.

Principal Activities: Manufacture and sale of garments and property investment.


SAN MIGUEL HK (236 ) Company/Securities Name:

San Miguel Brewery Hong Kong Ltd.

Principal Activities: Manufacture and distribution of bottled, canned and draught San Miguel beers.


TSINGTAO BREW (168 ) Company/Securities Name:

Tsingtao Brewery Co. Ltd. - H Shares

Principal Activities: Production and sale of beer.


TOP FORM INT'L (333 ) Company/Securities Name:

Top Form International Ltd.

Principal Activities: Design, manufacture, distribution, wholesale, retail & trading of ladies' intimate apparel.


ALLIED PPT (HK) (56 ) Company/Securities Name:

Allied Properties (HK) Ltd.

Principal Activities: Investment, broking and finance, property rental and management services, sales of property and property based investments, and hotel operations.

Business Classification: Properties

TAI SANG LAND (89 ) Company/Securities Name:

Tai Sang Land Development Ltd.


xiv

Principal Activities: Investment holding, property investment, property rental, property development, estate management and agency and distribution of golf accessories.


MAGNIFICENT (201 ) Company/Securities Name:

Magnificent Estates Ltd.

Principal Activities: Hotel and related operations, lease of properties, property trading, securities dealing, treasury operations and investment holding.


PCPD (432 ) Company/Securities Name:

Pacific Century Premium Developments Ltd.

Principal Activities: Property development and investment.


Y.T. REALTY (75 ) Company/Securities Name:

Y. T. Realty Group Ltd.

Principal Activities: Property investment, property trading and providing property management services.


MANDARIN ENT (9 ) Company/Securities Name:

Mandarin Entertainment (Holdings) Ltd.

Principal Activities: Film distribution and licensing, film processing and advertising and promotional services.

Business Classification: Consolidated Enterprises

FOUR SEAS FOOD (60 ) Company/Securities Name:

Four Seas Food Investment Holdings Ltd.


xv

Principal Activities: Trading of frozen meat, seafood and vegetables.


C.P. POKPHAND (43 ) Company/Securities Name:

C. P. Pokphand Co. Ltd.

Principal Activities: Trading of agricultural products, feedmil & poultry operations, production and sale of motorcycles and accessories for automotives, and property and investment holding.


COMPUTER & TECH (46 ) Company/Securities Name:

Computer And Technologies Holdings Ltd.

Principal Activities: Provision of system and network integration services, IT solutions implementation, application development services, enterprise applications, IT operation outsourcing services, and distribution of digital media products.


EGANAGOLDPFEIL (48 ) Company/Securities Name:

EganaGoldpfeil (Holdings) Ltd.

Principal Activities: Design, assembly, manufacturing and distribution of timepieces and jewellery; manufacturing and distribution of leather products; trading of timepiece components, jewellery and consumer electronic products.


HK FERRY (HOLD) (50 ) Company/Securities Name:

Hong Kong Ferry (Holdings) Co. Ltd.

Principal Activities: Property development and investment, ferry and related businesses, travel businesses and hotel operation.


xvi


FAIRWOOD HOLD (52 ) Company/Securities Name:

Fairwood Holdings Ltd.

Principal Activities: Operation of a chain of fast food restaurants in Hong Kong & China, subletting of food counters and property investment .


CLEAR MEDIA (100 ) Company/Securities Name:

Clear Media Ltd.

Principal Activities: Outdoor advertising with a strong focus on bus shelter advertising in China.


ARNHOLD (102 ) Company/Securities Name:

Arnhold Holdings Ltd.

Principal Activities: Import, marketing and distribution of building product and engineering equipment in Hong Kong, Macau and the PRC.


SHOUGANG CENT (103 ) Company/Securities Name:

Shougang Concord Century Holdings Ltd.

Principal Activities: Processing and trading of copper and brass products, manufacturing of steel cords, property development & investment, provides management and information technology services.


DICKSON CONCEPT (113 ) Company/Securities Name:

Dickson Concepts (International) Ltd.

Principal Activities: Trading of luxury goods.


xvii


CHOW SANG SANG (116 ) Company/Securities Name:

Chow Sang Sang Holdings International Ltd.

Principal Activities: Manufacture and retail of jewellery products, the wholesale of precious metals and securities and commodity broking.


CAFE DE CORAL H (341 ) Company/Securities Name:

Cafe de Coral Holdings Ltd.

Principal Activities: Operation of quick service restaurants, fast casual dining, institutional catering and specialty restaurant chains, and food manufacturing.

Chairman: Chan Yue Kwong Michael


STAR CRUISES (678 ) Company/Securities Name:

Star Cruises Ltd.

Principal Activities: Operation of cruise ships and cruises.


by bei haochen 02050099 bba accounting · 2005. 11. 28. · as mentioned above, the study on...

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