Concentrated Stock Ownership and Price-Leading-Earnings Effect in East Asia

Abstract

This study draws on the corporate governance literature to identify the important factor that underlies the stock price formation process and to explain cross-sectional difference in the extent to which future earnings information is capitalized in current stock returns. We examine the effect of stock ownership structure (i.e., divergence level of cash flow rights and voting rights) on the extent to which stock prices lead accounting earnings in nine East Asian economies: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand, and the Philippines. We find that stock returns of firms with larger divergence between cash flow rights and voting rights incorporate future earnings news earlier than firms with smaller divergence between cash flow rights and voting rights. The results are robust to the control of size, past growth, loss, and the sign of current returns. Our results indicate the importance of ownership structure in explaining the cross-sectional variation in price informativeness about future earnings.

Keywords: Price-Leading-Earnings, Ownership Structure, East Asian Economies, Divergence between Cash Flow Rights and Voting Rights