This study investigates 36 TDRs’ stock performance from 1998 to 2012 compared with the stock performance of matched individual stocks and the Taiwan stock market.
The results exhibit that TDRs underperform the matched control firms and the stock market in three years after TDRs listing on TWSE. TDRs have higher risks than matched firms but lower risks than the market (standard deviation), lower systematic risk (beta), lower risk-free-rate-adjusted excess returns (Sharpe ratio), lower industry-adjusted excess returns (Information ratio), lower excess returns (Jensen’s alpha), lower risk premium in the third year following the listing on TWSE (Treynor ratio), and lower abnormal returns (CAPM). In the longer period (year 3 to year 9), TDRs do not have excellent performance on the seven indices compared to both matched control firms and the stock market.
Furthermore, we explore whether the operating performance before and after TDRs listing have changed, and whether those changes related to the earnings management with discretionary accruals. The findings show that TDRs have relatively lower financial operating performance (ROA and ROE) in the post-listing period as compared to those in the pre-listing period. However, the discretionary accruals for TDRs exhibit insignificant differences around the list year.
Our main contributions are twofold. First, we provide preliminary results respect to TDRs’ stock performance using seven indices (standard deviation of stock returns, Sharpe ratio, beta, information ratio, Jensen’s alpha, Treynor ratio, and abnormal returns) to investors, government, and the authorities. We believe our findings provide useful information for their decision making. More importantly, our findings indicate that TDRs have lower stock performance are consistent with the decision by which the government
55
stopped promoting TDRs on November 11, 2013. Second, we also find that TDRs operating performance (ROA and ROE) decrease significantly after listing on TWSE.
However, we fail to find supportive evidences on accruals earnings management surrounding the year of listing. Even so, we cannot deny two possibilities. First, the model we used to measure discretionary accruals may be misspecified. There are several models to measure discretionary accruals, such as Healy (1985), DeAngelo (1986), Jones (1991), Dechow (1995) and Kothari (2005) model. Our findings of insignificant difference in discretionary accruals before and after TDRs’ listing may be altered if we choose different models.
There are some limitations in this research. First, we use firm-years instead of firm-quarters, which is because TDRs’ quarterly financial data is incomplete due to the exemption of TDRs’ financial reports. Using firm-years might weaken the validity of our test compared to use firm-quarters. In our test, we set year 0 as the last day of the list year.
However, in reality, TDR listings occurred throughout year 0, so potential noise may occur. Second, we cannot include 2013 as our sample period is limited by the regulations of TDRs’ home market. Each TDR has its own mandated report date of financial reports, which is not consistent with other TDRs or Taiwan listed companies. As a result, our study cannot get complete financial information in 2013. Third, because there were only 5 TDRs listed exceed four years (which appear in the column year 4 to year 9 of Table 10 and Table 11) and those 5 TDRs cannot on behalf of all TDRs. Thus, our findings are more supportive to the stock performance within three year after listings. Fourth, because the trading volume of TDR is low27, the results only provide a preliminary results for DR in Taiwan market. The results on DRs belong to other markets may differ from this study.
The results of this paper provide three directions for future research. First, to find
27 See Table 1.
56
out the reasons of TDRs’ decreased operating performance after listing, we can use other discretionary accruals models or real earnings management models. Second, on February 12, 2014, the government cancelled the regulation that TDRs will be delisted from TWSE if the outstanding shares of TDRs less than 10 million.28 Because many TDRs’ delisting were due to this policy, this revised policy may improve TDRs’ performance. Future studies can investigate the performance of TDRs after this deregulation. Third, future studies can study the investment decision on individual TDR. Although the stock performance of TDRs are on average worse than those of the matched samples and the market, perhaps there are some well-performed TDRs. Finally, there may be some important factors that influence TDRs’ stock performance, such as the dividend ratio or the regulations of their home markets. Future studies are encouraged to include those factors.
28 See Chinatimes- http://www.chinatimes.com/newspapers/20140212000272-260210
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Appendix A: Summary of World’s Major Securities Markets
Table A-1
Market Capitalization of World’s Major Securities Markets (Unit: USD Billion) Stock Ex.
Year
New York Nasdaq London Euronext Germany Tokyo Korea Hong
Kong Singapore Thaila
nd Malaysia Shanghai Shenzhen Taiwan
2004 12,708 3,533 2,865 2,441 1,195 3,558 389 861 218 115 182 314 133 441
2005 13,632 3,604 3,058 2,707 1,221 4,133 718 1,055 257 124 181 286 116 476
2006 15,421 3,865 3,794 3,708 1,638 4,614 834 1,715 384 140 236 918 228 595
2007 15,651 4,014 3,852 4,223 2,105 4,331 1,123 2,654 539 197 325 3,694 785 664
2008 9,209 2,249 1,868 2,102 1,111 3,116 471 1,329 265 103 189 1,425 353 357
2009 11,838 3,239 3,454 2,869 1,292 3,306 835 2,305 481 177 289 2,705 868 659
2010 13,394 3,889 3,613 2,930 1,430 3,828 1,092 2,711 647 278 409 2,716 1,311 818
2011 11,796 3,845 3,266 2,447 1,185 3,325 996 2,258 598 268 396 2,357 1,055 636
2012 14,086 4,582 3,397 2,832 1,486 3,479 1,179 2,832 765 390 467 2,547 1,150 735
2013 17,950 6,085 4,429 3,584 1,936 4,543 1,235 3,101 744 354 500 2,497 1,452 823
Source: TWSE Notes:
1. Since July 2013 the company listed on the Tokyo Stock Exchange includes the data on Osaka Stock Exchange.
2. TWSE excludes TDRs and the firms listed on OTC.
58
Table A-2
Market Capitalization/GDP of World’s Major Securities Markets (Unit：%) Stock Ex.
Year
New York Nasdaq London Germany Tokyo Korea
Hong Kong
Singapore Thailand Malaysia Shanghai Shenzhen Taiwan
2003 101.68 25.53 130.26 44.04 69.65 46.34 450.57 154.69 83.28 145.93 21.94 10.79 120.31
2004 107.21 29.81 127.85 43.37 77.19 55.17 519.27 192.99 71.37 154.50 16.27 8.06 123.09
2005 105.45 28.55 133.94 43.74 100.34 85.00 593.36 205.22 71.56 137.97 12.68 5.12 133.16 2006 115.28 28.89 154.46 56.49 105.78 87.73 903.08 264.48 67.94 156.12 33.82 8.68 158.26 2007 111.56 28.61 134.38 63.15 98.81 106.99 1,281.71 304.10 79.82 173.95 105.73 22.45 166.74
2008 64.44 15.74 70.30 30.54 63.69 50.57 616.88 139.90 37.83 84.96 31.54 7.82 92.76
2009 84.93 23.24 158.37 39.11 65.57 100.02 1,101.36 262.55 67.10 149.83 54.20 17.40 168.52 2010 92.20 26.77 159.65 43.59 69.56 107.65 1,209.19 284.54 87.10 171.75 45.84 22.13 175.70
2011 78.24 25.51 134.35 32.85 56.68 89.23 926.69 230.24 77.53 137.53 32.30 14.46 140.53
2012 89.81 29.22 139.17 43.71 58.33 102.04 1,076.70 276.68 106.62 153.72 30.96 13.98 152.06 Source: TWSE
Note: The data of GDP source from IMF since 2011.
59
Table A-3
Price to Earnings Ratio of World’s Major Securities Markets (Unit: %) Stock Ex.
Year
New York London Tokyo Korea Hong Kong Singapore Thailand Shanghai Shenzhen Taiwan
2004 20.44 14.69 39.00 15.84 18.73 16.60 9.40 24.23 24.63 12.58
2005 18.85 13.97 45.80 10.98 15.57 15.37 9.40 16.33 16.36 17.55
2006 18.16 13.37 36.00 11.40 17.37 13.92 8.10 33.30 32.72 18.98
2007 18.39 11.83 26.70 16.84 22.47 14.74 12.63 59.24 69.74 15.31
2008 19.59 8.88 20.00 8.99 7.26 6.00 7.01 14.85 16.72 9.80
2009 86.91 17.78 NA 23.68 18.13 26.12 25.56 28.73 46.01 110.54
2010 17.50 12.14 45.00 18.96 16.67 12.70 15.35 21.62 44.69 16.04
2011 14.55 10.06 21.00 10.90 9.68 7.67 12.07 13.40 23.11 15.76
2012 15.10 11.52 24.90 12.92 10.50 10.78 18.25 12.30 22.02 23.62
2013 18.98 13.79 26.60 14.95 11.24 12.94 14.60 10.99 27.76 18.04
Source: TWSE Notes：
1. The EPS of companies listed in the first category of Tokyo stock market was negative in June to November, 2009. Thus the PE ratio was not computed.
2. The arithmetic average PE ratio is replaced by a comprehensive PE ratio since November 2000 of the Korean stock market. The arithmetic average PE ratio is replaced by the weighted average PE ratio since January 2013 of Tokyo stock market.
3. The different agencies for the preparation of the PE ratio formula, computing period selection, and handling about negative net income varies.
60
Table A-4
Turnover Rate of World’s Major Securities Markets (Unit: %) Stock Ex.
Year
New York Nasdaq London Tokyo Korea Hong Kong Singapore Thailand Shanghai Shenzhen Malaysia Taiwan
2004 89.80 249.50 116.60 97.10 147.20 57.70 60.80 144.16 87.00 108.19 38.18 177.46
2005 99.10 250.40 110.10 115.30 206.90 50.30 48.40 92.09 82.10 116.09 30.92 131.36
2006 134.30 269.90 124.80 125.80 171.40 62.10 58.20 75.54 153.80 192.66 30.37 142.19
2007 167.10 303.60 154.20 138.40 192.60 94.10 77.60 66.60 211.00 389.20 57.10 153.28
2008 240.16 743.86 152.73 151.20 196.27 86.04 63.67 71.19 118.01 235.87 33.28 145.44
2009 158.72 492.32 91.14 119.65 241.58 78.95 67.30 87.62 228.78 445.48 33.39 178.27
2010 130.19 340.40 76.13 109.64 176.31 62.17 53.30 94.46 178.47 344.27 32.67 136.74
2011 138.46 293.63 69.22 123.74 194.19 63.64 45.91 80.68 159.51 224.47 32.84 119.87
2012 93.43 200.85 55.74 101.48 138.09 42.33 48.69 70.96 106.56 212.53 27.95 97.33
2013 83.89 179.19 50.61 52.50 77.09 152.89 112.28 43.56 48.48 90.09 290.84 148.43
Source: TWSE
61
Source: TWSE
Notes: The Electronics industry include Semiconductor, Computer and Peripheral Equipment, Optoelectronic, Communications and Internet, Electronic Parts/ Components, Electronic Products Distribution, Information Service, and Other Electronic.
46.90%
Figure A-1
The Industrial Distribution of Listed Company Numbers in Taiwan in 2012
Cement Foods
Plastics Textiles
Elec. & Mach. Elec. Appliance & Cable Glass & Ceramics Paper & Pulp
Steel & Iron Rubber
Automobile Construction
Transportation Tourism
Finance Wholesale & Retail
Conglomerate Others
Chemical Biotechnology & Medical Care
Oil, Gas and Electricity Electronics
62
Source: Financial Supervisory Commission R.O.C 21.46 22.18
30.25 31.90
31.10
28.98 29.80 30.05
31.19 31.10
32.62 33.14
15.0 20.0 25.0 30.0 35.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Figure A-2
The Market Value Percentage of Taiwan Stock Held by Foreign Investors
63
Appendix B: List of Foreign Stock Exchanges or Stock Markets Authorized by the Competent Authority
291. NYSE Euronext Group (1) NYSE
(2) NYSE Euronext (3) NYSE Amex 2. NASDAQ OMX Group
3. London Stock Exchange Group (1) London Stock Exchange (2) Borsa Italiana
4. Deutsche Börse AG Frankfurter Wertpapierborse (FWB) 5. TMX Group Inc. Toronto Stock Exchange
6. Australian Securities Exchange 7. Tokyo Stock Exchange
8. Osaka Securities Exchange 9. Singapore Exchange 10. Bursa Malaysia
11. Stock Exchange of Thailand 12. Johannesburg Stock Exchange
13. Hong Kong Exchanges and Clearing Ltd.
14. Korea Exchange
29 See TWSE- Listing in Taiwan by foreign issuers: Issuance of Taiwan Depositary Receipts- http://www.twse.com.tw/ch/listed/alien_business/download/manual_TDR_en.pdf
64
Appendix C: Rules on TDR Financial Statements
Table C-1: Rules on TDR Financial Statements
■= Before at least 14 days of shareholders meeting. The interval between the end of the fiscal year and shareholders meeting cannot exceed four month.
▲=Do not have to be audited or reviewed.
●= Do not need to report, but disclose voluntarily
※= Do not need to report
Company Name
Stock Code
Home Market
Rules on Financial Statements
Fiscal Year Semi-annual Year First-Quarter Third-Quarter
Report Date By Accountant Report Date By Accountant Report Date By Accountant Report Date By Accountant
Serial 910069 SG ■ Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
Medtecs 9103 SG ■ Should be audited 8/14 ▲ ※ ▲ ※ ▲
Tingyi 910322 HK 4/30 Should be audited 9/30 ▲ ● ▲ ● ▲
SMT 910482 HK 10/31 Should be audited 3/31 ▲ ※ ▲ ※ ▲
CCET 9105 TH 3/1 Should be audited 8/15
Should be reviewed
5/16
Should be reviewed
11/14
Should be reviewed
NFA 9106 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
NMG 910708 HK 10/31 Should be audited 3/31 ▲ ※ ▲ ※ ▲
65
Table C-1: Rules on TDR Financial Statements
■= Before at least 14 days of shareholders meeting. The interval between the end of the fiscal year and shareholders meeting cannot exceed four month.
▲=Do not have to be audited or reviewed.
●= Do not need to report, but disclose voluntarily
※= Do not need to report
Company Name
Stock Code
Home Market
Rules on Financial Statements
Fiscal Year Semi-annual Year First-Quarter Third-Quarter
Report Date By Accountant Report Date By Accountant Report Date By Accountant Report Date By Accountant Golden
Meditech
910801 HK 7/31 Should be audited 12/31 ▲ ※ ▲ ※ ▲
Digital China
910861 HK 4/30 Should be audited 9/30 ▲ ● ▲ ● ▲
Z-Obee 910948 HK 7/31 Should be audited 12/31 ▲ ※ ▲ ※ ▲
VMEP Holdings
9110 HK 4/30 Should be audited 9/30 ▲ ● ▲ ● ▲
Kith 911201 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
BH Global 911608 SG ■ Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
Yzjship 911609 SG ■ Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
Taisan Tech.
911611 SG ■ Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
66
Table C-1: Rules on TDR Financial Statements
■= Before at least 14 days of shareholders meeting. The interval between the end of the fiscal year and shareholders meeting cannot exceed four month.
▲=Do not have to be audited or reviewed.
●= Do not need to report, but disclose voluntarily
※= Do not need to report
Company Name
Stock Code
Home Market
Rules on Financial Statements
Fiscal Year Semi-annual Year First-Quarter Third-Quarter
Report Date By Accountant Report Date By Accountant Report Date By Accountant Report Date By Accountant Hu An
Cable
911612 SG ■ Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
Technics Oil & Gas
911613 SG ■ Should be audited 5/15 ▲ 2/14 ▲ 8/14 ▲
Dukang 911616 SG ■ Should be audited 2/14 ▲ 11/14 ▲ 5/15 ▲
HISAKA 911619 SG ■ Should be audited 5/15 ▲ 2/14 ▲ 8/14 ▲
TYCN 911622 TH 3/1 Should be audited 8/14 ▲ 5/15 ▲ 11/14 ▲
MSH 911626 MY 4/30 Should be audited 8/31 ▲ 5/31 ▲ 11/30 ▲
Neo-Neon 911868 HK 7/31 Should be audited 12/31 ▲ ※ ▲ ※ ▲
SIM TECH
912000 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
67
Table C-1: Rules on TDR Financial Statements
■= Before at least 14 days of shareholders meeting. The interval between the end of the fiscal year and shareholders meeting cannot exceed four month.
▲=Do not have to be audited or reviewed.
●= Do not need to report, but disclose voluntarily
※= Do not need to report
Company Name
Stock Code
Home Market
Rules on Financial Statements
Fiscal Year Semi-annual Year First-Quarter Third-Quarter
Report Date By Accountant Report Date By Accountant Report Date By Accountant Report Date By Accountant Good
Friend Int
912398 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
Ju Teng 9136 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
GSH 913889 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
Solargiga 9157 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
Yorkey Optical
9188 HK 4/30 Should be audited 9/30 ▲ ※ ▲ ※ ▲
Source: Market Observation Post System- http://mops.twse.com.tw/mops/web/t132sb05 Note: HK = Hong Kong; SG= Singapore; TH= Thailand; MY= Malaysia.
IFRS= International Financial Reporting Standards; GAAP= Generally Accepted Accounting Principles.
68
Appendix D: List of Matched Samples
Table D-1 List of Matched Samples
TDR Samples Control Samples
Code Name Code Name
910579 Oceanus Group Ltd. 1203 Ve Wong Corporation 911616 Dukang Distillers Holdings Ltd. 1215 Charoen Pokphand Enterprise
9151 Want Want China Holdings Ltd. 1216 Uni-President Enterprises Corp.
911611 China Taisan Technology Group Ltd. 1476 Eclat Textile Co., Ltd.
912398 Good Friend International Holding Ltd. 1535 China Ecotek Corp.
911612 Hu An Cable Holdings Ltd. 1612 Hong Tai Electric Industrial Corp.
913889 Global Sweeteners Holdings Ltd. 1702 Namchow Chemical lndustrial Corp.
9103 Medtecs International Corp. 1713 Cathay Chemical Works Inc.
910801 Golden Meditech Holdings Ltd. 1714 Ho Tung Chemical Corp.
911622 Tycoons Worldwide Group Ltd. 2030 Froch Enterprise Co., Ltd.
911626 Multi Sports Holdings Ltd. 2114 Hsin Yung Chien Co., Ltd.
911609 Yangzijiang Shipbuilding Ltd. 2201 Yulon Motor Co., Ltd.
9104 Mustek Ltd. 2384 Wintek Corporation
910861 Digital China Holdings Ltd. 2385 Chicony Electronics Co., Ltd 910069 Serial System Ltd. 2460 Gem Terminal Ind. Co., Ltd.
9157 Solargiga Energy Holdings Ltd. 2473 Springsoft Inc.
911608 BH Global Corporation Ltd. 2911 Les Enphants Co., Ltd.
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Table D-1 List of Matched Samples
TDR Samples Control Samples
Code Name Code Name
910482 Sandmartin International Holding Ltd. 3006
Elite Semiconductor Memory Technology Inc.
9105 Cal-Comp Electronics Ltd. 3019 Asia Optical Co., Inc.
9136 Ju Teng International Holding Ltd. 3044 Tripod Technology Corp.
9188 Yorkey Optical International Ltd. 3515 ASRock Inc.
912000 SIM Technology Group Ltd. 3579 San Chih Semiconductor Co., Ltd.
911619 HISAKA Holdings Ltd. 3631 Chernan Metal Industrial Corp.
911602 Hwa Fong Rubber Ltd. 5102 Fu-Chian Tire Co., Ltd.
911868 Neo-Neon Holdings Ltd. 5469 HannStar Board Corp.
910948 Z-Obee Holdings Limited 6166 Adlink Technology Inc.
911610 United Envirotech Ltd. 6803 KD Holding Corp.
9102 Eastern Asia Technology Ltd. 8163 Darfon Electronics Corp.
911613 Technics Oil & Gas Ltd. 8913 Hh Leasing & Financial Corp.
911201 Kith Holdings Ltd. 8933 Ideal Bike Corp.
910708 New Media Group Holdings Ltd. 9906 Hsin Ba Ba Corporation 9101 ASE Test Ltd. L2301 Lite-On Electronics, Inc.
70
Appendix E: 10-year Stock Performance Following TDRs’ Listings
TABLE E-1
The Indices of Stock Performance for TDRs and Control Samples Following 10 years of the Listing Years
Year 0 1 2 3 4 5 6 7 8 9
TABLE E-1 (continued)
The Indices of Stock Performance for TDRs and Control Samples Following 10 years of the Listing Years
Year 0 1 2 3 4 5 6 7 8 9
*, **, *** Significant at 10%, 5%, and 1% levels, respectively, using a two-tailed test.
Table E-1 displays 10-year performance of the seven indices for the TDRs following year which the TDR was listed on TWSE, as well as those for the matched Taiwan listed companies, respectively. The control firms are matched to the same industry, belonging to the same assets quintile in year -1, and matched to the firm with closest net incomes in year -1. SD is standard deviation of stock returns, SR is Sharpe ratio, Beta is market risk (beta), IR is information ratio, Jensen is Jensen’s alpha, TR is Treynor ratio, AR is abnormal returns. n is the number of test firms.
72
TABLE E-2
The Indices of Stock Performance for Full Samples Following 10 years of the Listing Years
Year 0 1 2 3 4 5 6 7 8 9
TABLE E-2 (continued)
The Indices of Stock Performance for Full Samples Following 10 years of Listing Years
Year 0 1 2 3 4 5 6 7 8 9
*, **, *** Significant at 10%, 5%, and 1% levels, respectively, using a two-tailed test.
Table E-2 displays 10-year performance of the seven indices for full samples of TDRs and Taiwan listed companies, following the year which the TDR was listed on TWSE.
SD is standard deviation of stock returns, SR is Sharpe ratio, Beta is market risk (beta), IR is information ratio, Jensen is Jensen’s alpha, TR is Treynor ratio, AR is abnormal returns. n is the number of test firms.
74
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