Publications by year
Wang P (In Press). A Modified Ohlson (1995) Model and its Applications. The European Accounting Review
Wang P, Peng Z, Christodoulou D
(In Press). Bridging the Gap between Stock Price and Bottom-Line Accounting Numbers. Review of Accounting Studies
Bridging the Gap between Stock Price and Bottom-Line Accounting Numbers
We develop a method for extracting ‘other information’ from the articulation between bottom-line Abstract
accounting numbers and stock prices. We posit that ‘other information’ captures future earnings
growth originating from conservative accounting recognition principles as demonstrated by Penman
and Zhang (2020) and Penman and Zhu (2022), as well as nonzero net present value investment
opportunities. Our findings confirm that ‘other information’ is strongly associated with various
proxies for expected future earnings growth and firm risk attributes. Furthermore, we show how
a structural expected return model incorporating our ‘other information’ estimates can predict
out-of-sample future stock returns and generate sizeable long-short return spreads.
Wang P, Harris R (In Press). Model-Based Earnings Forecasts vs. Financial Analysts’ Earnings Forecasts. British Accounting Review
(2021). The empirical corporate finance research on defined benefit pension plans.
The empirical corporate finance research on defined benefit pension plans
This dissertation consists of three main chapters. The first main chapter examines the implications of the defined benefit (DB) pension deficits on firms’ expected future growth from a market perspective. I introduce a novel method in estimating a firm’s expected growth rate based on all available public information, including companies’ financial statements, stock prices and analysts’ forecasts of future earnings. The empirical evidence shows that firms’ expected growth rates are negatively associated with the funding status of DB pension plans. Theoretically, the mechanism through which markets incorporate a pension plan’s funding status into a firm’s growth expectation is its pension deficit, which commonly increases its cost of capital and restricts its contemporary investments. As a result, the DB pension plan deficits negatively affect firms’ growth ability from the market perspective. I also find that the market tends to consider pension information and other factors – for example, financial constraints, profitability, and the period of growth expectation – to evaluate the overall effect on firms’ growth. The evidence suggests that the negative impact of the current pension deficits on a firm’s growth expectation stems from investors noting that future investments in operating activities may decline with the DB pension contributions. Abstract
To determine whether the market integrates pension information into a firm’s growth prediction, I initially examine pension information transformation among various stakeholders. In the second main chapter, I further demonstrate the existence of asymmetric information for the most severely underfunded firms. The empirical evidence supports my hypothesis that pension information is not sufficiently trans parent for the most severely underfunded firms. Thus, investors require extra risk compensation, which is reflected in a higher expected stock return. This asymmetric information hypothesis is supported by a striking post earning price drift for positive and negative earnings surprises. I also examine a firm’s merger and acquisition deal announcement effect. If an acquirer has high asymmetric information, its stock tends to be recognised as overpriced. Therefore, the market will not take an optimistic view of this deal if they use their stock as a payment means. Indeed, the evidence shows that the higher portion of cash in total payment has a higher abnormal return around the announcement date for a target firm’s stock price. Notably, this finding seems to be restricted to the most severely underfunded firms.
The natural cash outflow for mandatory pension contributions is predictable for managers. Because managers are inner stakeholders with an information advantage on a DB pension plan’s actual status, it is rational to assume they could anticipate subsequent mandatory pension contributions and adopt a suitable liquidity strategy in advance. In the third main chapter, I examine whether firms increase cash holding in response to the anticipated pension contributions. The evidence suggests that when the firm sponsors the most severely underfunded pension plans, the precautionary excess cash holding will increase if the firm is financially constrained. Moreover, the value of excess cash holding is reduced for the most severely underfunded pension plans since the excess cash is mainly held for subsequent pension contributions. If firms need to compensate for severe pension deficits, investors will undervalue the excess cash holdings. The finding further demonstrates the investors determine the value of cash reserves by how the cash reserves will be used.
(2019). Essays in Empirical Corporate Finance.
Essays in Empirical Corporate Finance
I investigate how the firm diversification affects the value of large customers and large suppliers, and how the presence of large customers affects corporate payout policy. In Chapter Two, I report the findings that that the value of large customers for shareholders is lower in diversified firms than single-segment firms. I also find that more resources are allocated to a weak segment in a diversified firm when the segment has large customers, and that a diversified firm gives more trade credit to large customers than single-segment firms. Moreover, by using the setting of tariff cut as an exogenous shock, I find that a reduction in the level of large customers is associated with a decrease (an increase) in the value of single-segment firms (diversified firms). Furthermore, I find that the presence of large customers is associated with a higher (lower) announcement return for non-diversifying M&As (diversifying M&As). The results support the hypothesis that firm diversification affects the value of large customers for shareholders through the perspective of bargaining position. Chapter Three examines the relation between firm diversification and the value of large suppliers for shareholders. I find that the value of large suppliers for shareholders is higher in diversified firms than single-segment firms. The presence of large suppliers is positively valued by shareholders in diversified firms through the perspective of relationship-specific investments. In addition, I examine the setting of tariff cut and find that a reduction in the ratio of the purchases made by all suppliers is associated with an increase (a decrease) in the value of single-segment firms (diversified firms). In the event study of M&As, I find that the presence of large suppliers increases both the announcement return and the operating performance of a diversifying M&A. I conclude that the results support the hypothesis that firm diversification affects the value of large suppliers for shareholders through the perspective of relationship-specific investments. Abstract
Finally, in Chapter Four, I examine whether large customers affect corporate payout policy. In terms of share repurchases, I find that both the cumulative abnormal return and the net change in operating performance around the announcement of share repurchases are lower with the presence of large customers. In terms of dividends, I find that both the cumulative abnormal return around the announcement of an increase in dividends are higher with the presence of large customers. In addition, a firm with the presence of large customers prefers to use share repurchases rather than increase dividends. Also, the presence of large customers reduces the level of total payout. I conclude that the presence of large customers has a different value consequence between share repurchases and dividends as two forms of corporate payout policy either through the channel of bargaining position or the channel of relationship-specific investments.
(2019). Essays in Empirical Corporate Finance.
Essays in Empirical Corporate Finance
This thesis contains three empirical papers on labor unions and corporate cash holdings, payout policy. Previous literature about firms' financial choices, such as corporate cash holdings, dividend payouts, and share repurchases, has focused on the effects of firm-level financial characteristics. This thesis investigates whether labor unions affect these financial policies in the international settings. Abstract
The second chapter examines the relation between the presence of labor unions and corporate cash holdings in the international setting. Firms in countries with higher union membership have less corporate cash holdings. This negative relation is stronger for firms in countries with weak employment protection legislation, firms in countries with a high degree of labor bargaining centralization, and financially constrained firms. Moreover, the market value of corporate cash holdings is lower for firms in countries with high union membership. The number of strikes and lockouts is higher in countries with more corporate cash holdings. It suggests that firms strategically choose corporate cash holdings to gain a bargaining position with labor in an international setting.
The third chapter examines the relation between the presence of labor unions and firms' dividend payouts. Firms in countries with higher union membership have more dividend payouts. This positive relation is stronger for firms in countries with weaker employment protection legislation, firms in countries with a higher degree of labor bargaining centralization. Moreover, this chapter conducts a smaller sample analysis and find that the announcement return and operating performance around the date of dividend increases (decreases) are positively (negatively) related to the union membership. In addition, the number of strikes & lockouts is higher in countries with less corporate payout. It suggests that firms strategically payout dividend to gain the bargaining position with labor in the international setting.
Chapter 4 examines the relation between the presence of labor unions and firms' share repurchases. Firms in countries with higher union membership have more share repurchases. This positive relation is stronger for firms in countries with weaker employment protection legislation, firms in countries with a higher degree of labor bargaining centralization. Similar with Chapter 2, this chapter finds that the announcement return and operating performance around the date of share repurchase are positively related to the union membership in small sample analysis. In addition, the number of strikes & lockouts is higher in countries with less share repurchases. It suggests that firms strategically increase share repurchases to gain the bargaining position with labor in the international setting.
Overall, these results are consistent with the bargaining hypotheses and suggest that firms strategically make financial choices against labor unions all over the world.
(2017). Future Realized Return, Firm-Specific Risk and the Implied Expected Return. Abacus DOI
Wang P, Ashton D
(2015). Conservatism in residual income models: theory and supporting evidence. Accounting and Business Research
, Volume 45
(Issue 3), 387-410.
Conservatism in residual income models: theory and supporting evidence
In this paper, we develop a framework for evaluating the impact of conservative accounting on the Abstract
structure of residual income models of equity valuation. We explore specific examples of both
unconditional and conditional conservatism and observe a common mathematical structure. We
proceed to generalise our model and identify the joint dependency of conservatism and the
persistence of abnormal earnings on the weights attached to book values, earnings and dividends.
We are able to show theoretically the likely numerical impact of conservatism on price-earnings
ratios and under valuations produced by residual income models. We investigate empirically the
interaction between conservatism and persistence and find they accord well with the theory
developed. We briefly discuss the implications for testing of the effect of conservatism on
valuation and linear information dynamics.
Wang P, Huang W
(2015). The implied growth rates and country risk premium: evidence from Chinese stock markets. Review of Quantitative Finance and Accounting
The implied growth rates and country risk premium: evidence from Chinese stock markets
Realized stock market returns are volatile and poor reflections of economic growth and investor expectations in China. In this paper, we estimate simultaneously the implied long run growth rate and cost of equity capital for listed Chinese firms over the period 2004–2012. We find that the implied mean growth rate in earnings is around 10 % and the mean implied cost of capital is about 14.6 %. These suggest that the implied growth rates from companies’ fundamentals are in line with the economic growth and the implied cost of capital is consistent with investors’ expectations. Comparing with estimates for the US markets, we find that the mean country equity risk premium for this largest emerging market is about 6.5 %. Our study has important implications to the Chinese policy makers and international investors. Abstract
(2014). On the relevance of earnings components in valuation and forecasting. Review of Quantitative Finance and Accounting
On the relevance of earnings components in valuation and forecasting
This paper articulates the links between relevance of an earnings component in forecasting (abnormal) earnings and its relevance in valuation in a nonlinear framework. The analysis shows that forecasting relevance does not imply valuation relevance even though valuation irrelevance is implied by forecasting irrelevance. Firstly, I consider an accounting information system where earnings components "add up" to a fully informative earnings number. Secondly, I analyze two accounting systems where a "core" earnings component is the relevant earnings construct for valuation and the second earnings component is irrelevant but may be predictable and relevant in forecasting other accounting items. I find that dividend displacement effect on earnings and the dynamics of individual earnings components are critical in this analysis. © 2013 Springer Science+Business Media New York. Abstract
Harris RDF, Wang P
(2013). An Improved Earnings Forecasting Model. DOI
Ashton D, Wang P
(2013). Terminal valuations, growth rates and the implied cost of capital. Review of Accounting Studies
Terminal valuations, growth rates and the implied cost of capital
We develop a model based on the notion that prices lead earnings, allowing for a simultaneous estimation of the implied growth rate and the cost of equity capital for US industrial sectors. The major difference between our approach and that in prior literature is that ours avoids the necessity to make assumptions about terminal values and consequently about future growth rates. In fact, growth rates are an endogenous variable, which is estimated simultaneously with the implied cost of equity capital. Since we require only 1-year-ahead forecasts of earnings and no assumptions about dividend payouts, our methodology allows us to estimate ex ante aggregate growth and risk premia over a larger sample of firms than has previously been possible. Our estimate of the risk premium being between 3. 1 and 3. 9 % is at the lower end of recent estimates, reflecting the inclusion of these short-lived companies. Our estimate of the long run growth is from 4. 2 to 4. 7 %. © 2012 the Author(s). Abstract
(2013). The role of disaggregation of earnings in stock valuation and earnings forecasting. Accounting and Business Research
The role of disaggregation of earnings in stock valuation and earnings forecasting
This paper compares and contrasts two accounting information systems, the aggregate earnings system and the disaggregated cash flow/accrual system, examining their relative performance in stock valuation and in forecasting of earnings. It finds, in general, that the forecasts of earnings and predicted market values from the cash flow and accrual system have smaller forecasting errors than those from the aggregate earnings system. The adjusted R-squareds from the disaggregated system are in the main higher than those from the aggregated system when considering the explanatory power of the model-predicted values. The results also show that the cash flow and accrual system forecasts dominate the aggregate earnings system forecasts in a large majority of industries. © 2013 Taylor & Francis. Abstract
Ashton D, Wang P
(2013). Valuation Weights, Linear Dynamics and Accounting Conservatism: an Empirical Analysis. Journal of Business Finance and Accounting
Valuation Weights, Linear Dynamics and Accounting Conservatism: an Empirical Analysis
Residual income models provide an important theoretical link between equity valuation and financial statement variables. While various researchers have developed models of how accounting policy impacts on the structure of these models, empirical support for these models is at best weak and frequently contradictory. In this paper, we develop an analytical model, which identifies the dependency between valuation weights in residual income models and the associated structure of earnings information dynamics and accounting conservatism. In contrast to many earlier studies, we find strong evidence of conservatism in our reformulation of the linear dynamics. We proceed to test our predictions of the dependency of the weights on two measures of conservatism, the conventional measure of price-to-book ratio and the recent measure of a C-Score index developed by Khan and Watts (2009) and find that the empirical results accord well with our theoretical predictions in the case of the former but not the latter measure. © 2013 Blackwell Publishing Ltd. Abstract
Wang P, Ashton D, Peasnell K
(2011). Residual Income Valuation
Models and Inflation. European Accounting Review
(3), 459-483. DOI
Pope PF, Wang P
(2005). Earnings Components, Accounting Bias and Equity Valuation. Review of Accounting Studies
(4), 387-407. DOI
Cooke TE, Ashton D, Tippett MJ, Wang P (2004). Linear information dynamics, aggregation, dividends and 'dirty surplus' accounting. Accounting and Business Research, 34(4), 277-297.
(2003). Choosing a valuation operator for pricing assets with long–short spreads: the impact of transaction costs and taxes. The British Accounting Review
(3), 199-214. DOI
Pope P, Wang P
(2003). Discussion of Positive (Zero) NPV Projects and the Behavior of Residual Earnings. Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting
(1-2), 17-24. DOI
Walker M, Wang P
(2003). Towards an understanding of profitability analysis within the residual income valuation framework. Accounting and Business Research
(3), 235-246. DOI