Long Institute Research Priorities 2011-12
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Document obstacles to Chinese Foreign Direct Investment in US, perceptions and realities.
Antecedents, consequences, and efficiency of US/China mergers & acquisitions.
Define and assess the importance of “indigenization” for Chinese business strategies.
Comparison of the emphasis on growth vs. stability in corporate strategy.
Assess the convergence and divergence of financial markets in 2 countries.
Comparison of US and Chinese innovation and successes, including radical vs. incremental innovation.
Antecedents and consequence of US/China collaboration in R&D and the development of IP.
The influence of HR on entry strategies for the US and China.
Comparison of the importance of personal relationships vs. institutions in the 2 business systems.
Comparison of business norms via meta-analysis, interviews, and/or in-basket studies.
How do Chinese develop executive leadership.
Antecedents, consequences, and efficiency of US/China commercial disputes.
Energy (green) commerce – implications for consumers, companies, and competition in the US and
China, and global implications.
Accepted Grant Proposals (followed by short summaries)
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David Hirshleifer (Merage), Ming Jian and Huai Zhang (both at Nanyang Technological University),
“Superstition, Financial Decision Making, and the Valuation of Newly Listed Chinese Firms”
Joanna Ho (Merage) and Yaotang Wang (Nanjing University), “Chinese Reverse Mergers in the U.S.
Stock Markets”
Robin Keller (Merage), Tianjun Feng (Fudan), and Yitong Wang (Merage). “A Cross-National Study of
Food Safety Management: Comparisons between the U.S. and China”
Kaye Schoonhoven and Yang Gong (both Merage), “Radical and Incremental Innovation in the
Nanotechnology and New Energy Source Industries in China”
Yunzen Wang (UC Riverside), “Technology Transfer Policies/Mechanisms, and Their Effect on USChina Economic Development and Trade”
Shi Zhang (UCLA), “Building Brands in Greater China: Perspectives and Challenges for Chinese
Entreprenuers”
Yu Zhang (UCLA), “Convergence and Divergence of Capital Market Practices across Borders: A
Comparison of Capital Market Pressure on Publically-Listed Firms in China and the US”
Lu Zheng (Merage), Shu Lin (Nanjing University), Shu Tian (Fudan), “Do US and Chinese
Shareholders Respond Differently to the Same Piece of Information?
Kevin Zhu (UCSD), “E-Commerce Platform Innovation and the Impact on Retailers: A Comparative
Study of the US and China”
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Olufunmilayo Arewa (UCI School of Law) and Lingyun Goa (Fudan School of Law), “Comparison of
the Securitization Transactions in the US and China from a Legal Perspective” [tentative]
#1
“Superstition, Financial Decision Making, and the Valuation of Newly Listed Chinese Firms”
David Hirshleifer (Merage), Ming Jian and Huai Zhang (both at Nanyang Technological University)
The opening ceremony of the Beijing 2008 Summer Olympic Games started at 8:08 p.m. on August 8, 2008.
This unlikely set of numbers was selected because 8 is a lucky number in Chinese culture. In this project we
examine whether such numerological beliefs affect the firm behavior and stock prices of Chinese firms. We use
the China IPO (Initial Public Offering) market to test for managerial superstition, or catering by managers to
investor superstition. Listed stocks in China are identified by numerical listing codes, which raise the question
of whether investors prefer stocks with lucky listing codes, and if so, whether firms take advantage of this when
taking firms public.
Our evidence to date suggests a higher frequency of lucky relative to unlucky listing codes. This suggests that
managers, in obtaining listing codes, either share, or cater to, investor superstition. We also perform tests of
whether superstition affects market valuations. Our tests so far indicate that newly listed firms with lucky listing
codes are initially traded at a premium after controlling for known determinants of firms’ valuation multiples.
Furthermore, the lucky number price premium dissipates within three years after IPO. As a result, lucky number
firms experience interior post-IPO returns. We will also test for earnings management by firms that choose
lucky listing numbers.
The Chinese IPO market is an ideal domain for testing for managerial superstition and catering to investor
superstition. The values of IPO stocks are especially volatile and uncertain. The lack of concrete objective
information upon which to base valuations maximizes the space for superstition to play a role. Individual
investors (whom we would expect to be especially prone to superstition) participate heavily in the market.
There is opportunity to measure mispricing both contemporaneously (though valuation ratios) and ex post
through correction of mispricing.
#2
“Chinese Reverse Mergers in the U.S. Stock Markets”
Joanna Ho (Merage) and Yaotang Wang (Nanjing University)
Chinese private companies have increasingly used the reverse merger (RM) as a vehicle to go public in the U.S.
stock markets, in order to avoid incurring the high costs associated with initial public offerings (IPOs). Using
data from the U.S. market, researchers argue that the reduced benefits of an IPO for smaller firms have
prompted them to go public via an alternative method, such as a reverse merger. The popularity of going public
via RM by Chinese private companies is evidenced in the increasing number of Chinese RMs in the U.S. stock
markets from 27 deals in 2004 to 78 deals in 2010, with a total number of RM more than 370. The growing
popularity of and prevalent frauds involving companies from Chinese RMs have drawn attention from media
and the general public. In a recent speech, Luis Aguilar, Commissioner of SEC, considered the rise in RMs
involving companies from China and other countries a “disturbing trend.” He also state that “notwithstanding
the SEC rulemaking of a few years ago to respond to abuses involving shell companies, we are seeing
increasing problems. While the vast majority of these Chinese companies may be legitimate businesses, a
growing number of them are proving to have significant accounting deficiencies or being vessels of outright
fraud”, and that “there appear to be systematic concerns with the quality of auditing and financial reporting”
(U.S. Securities and Exchange Commission 2011). Accordingly, the SEC has conducted extensive
investigations of Chinese RMs and found evidence of fraud, as was the case with Duoyuan Printing and which
led to its subsequent delisting from the NYSE on April 4, 2011.
Despite the increasing attention paid to Chinese RMs by regulators and investors, their impact on the U.S. stock
markets has not been examined by rigorous academic research. Therefore, in this proposed study we aim to
investigate the following six issues concerning Chinese RMs:
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We will examine the characteristics of Chinese RMs, and then compare differences between Chinese
RMs, U.S. RMs, and IPOs.
We will study the incentives and factors, both internal and external, which may explain Chinese
companies’ taking reverse merger in the U.S.
We will compare the changes in accounting and stock performance before and after the RM transactions.
We will study the role of corporate governance (e.g., ownership structure and board independence) in
the target firm’s performance after the RM transaction.
We will explore whether accounting and auditing information can help investors and regulators to
distinguish between good and bad Chinese RMs.
We will also examine whether investor sentiment contributes to the rapid growth of Chinese RMs.
#3
“A Cross-National Study of Food Safety Management: Comparisons between the U.S. and China”
Robin Keller (Merage), Tianjun Feng (Fudan), and Yitong Wang (Merage)
The United States has witnessed a number of food safety crises, from mad-cow disease to contaminated
spinach. According to the Centers for Disease Control, food-borne diseases result in approximately 76 million
human illnesses in the U.S. every year, including 325,000 hospitalizations and 5,200 deaths. Food safety crises
are even more serious in China, with recent food safety incidents having been widely covered in the media,
including melamine-contaminated milk, swill-cooked dirty oil, and dyed steamed buns. During the 2008
Chinese milk scandal, melamine was added to milk to cause it to appear to have a higher degree of protein
content, leading to an estimated 300,000 victims, with six infants dying from kidney stones and other kidney
damage, and 860 babies hospitalized. The food safety incidents led to national panic and overwhelmingly low
confidence in domestic food for Chinese consumers. In May 2011, the Supreme People’s Court of China
emphasized that they will deal severely with actions of companies in violation of food safety regulations and
relentlessly punish criminal activities in accordance with law.
In 2010, according to the US-China Business Council, China was the second largest trading partner for the US
and the US was the largest trading partner for China, of which food is a significant portion of the trade. In
addition, food safety incidents tend to have had international impact on the globalized food chains. For the US,
the outbreaks of food safety incidents in China result in both opportunities and challenges. On one hand, as the
incomes of 1.3 billion Chinese people continue to rise, demand for more and higher quality food products from
the US will keep growing. For example, since the 2008 Chinese milk scandal, more and more Chinese parents
have chosen to purchase infant formula made in the US (eg, Similac and Enfamil are two popular brands in
China), although it costs much more than Chinese domestic brands. On the other hand, American consumers
may be more concerned about the safety and quality of food imported from China as food safety incidents
happen frequently in China. In addition, sometimes American companies also worry about food exports to
China during the outbreak of food incidents in the US. For example, China restricted imports of beef made in
America during the mad cow disease crisis. Similarly, the outbreaks of food safety incidents in the US create
both opportunities and challenges to China’s business.
We plan on a multi-stage, multi-year collaborative research project to conduct a cross national study on food
safety management in the US and China from the perspective of consumers, firms, and policy-makers.
#4
“Radical and Incremental Innovation in the Nanotechnology and New Energy Source Industries in
China”
Kaye Schoonhoven and Yang Gong (both Merage)
Our focus is on two new science-based industries: the first is new sources of energy (solar) and the second is
nanotechnology. China’s modern technology development began in 1986 when the 386 Program was created to
encourage new technology development. With a blueprint for the Technology Development Zones (TDZ), the
first national zone was created in 1988 in Beijing. By 1994, 53 national TDZ were created throughout China,
and the new firms within them have produced the surge in China’s new technical and innovative capabilities.
China’s recent 12th 5-year Plan focuses on the “Magic 7” industries which include “New energy” and “New
materials”. Within these, we will focus on the new firms in the solar and nanotechnology industries. The
government expects many new innovative ventures will be created, and that they will develop both radical &
incremental innovations. There are two TDZ’s which focus on our targeted industries, Hangzho and Suzhou
provinces, where we will interview at start-ups younger than five-years.
The research question: since China has a short history of building its high technology industries, its pool of
experiences managers and engineers is not substantial. This means that for many founders, they start with no
experience in the (new) industry, no knowledge of how successful firms are organized, no knowledge of how to
turn their good ideas into innovative products, nor how to build a market presence in the competitive technology
industries. We will investigate how 60 new ventures in two new industries (solar energy and nanotechnology)
build their innovative capabilities. Developing innovative capabilities is among the first organization attributes
required for firms wishing to produce a stream of innovative products and technologies. Essentially we will
study how China is building indigenous innovative capabilities through new technology-based firms.
#5
“Technology Transfer Policies/Mechanisms, and Their Effect on US-China Economic Development and
Trade”
Yunzen Wang (UC Riverside)
This research is to study how technology transfer policies and mechanisms affect the dynamics and outcome of
economic development and trade between US and China, the two largest economies in the global market.
Over the past quarter century, the Chinese government opened its market to the world and geared up for an
unprecedented economic development. To be comparative at the national and international levels, Chinese firms
need state of the art technologies. With the intention of supporting long-term self-sufficiency in technology,
Chinese foreign investment regulations include numerous provisions and mandates for foreign technology
transfer. Understanding the real threat of future competition, however, foreign firms are naturally unwilling to
transfer their proprietary technologies. Indeed, even though the Chinese economy has sustained an impressive
growth rate over the past quarter century, its firms compete predominantly through their lower costs in various
labor-intensive industries, rather than on advanced technology.
In addition to trying to equip its industries with modern technology, the Chinese government needs to build up
its infrastructure. While having to rely on foreign firms to provide the capabilities for completing these projects,
the Chinese government of course has a keen interest in using these projects as an opportunity to obtain
technologies. To this end, the government adopted an overall procurement strategy called “bundled
procurement for technology transfer”. That is, when bidding for a project, foreign suppliers are required to
transfer their underlying technologies to Chinese state-owned firms that intend to compete with the current
suppliers in the future market.
This research will focus on studying the implications of the “bundled procurement for technology transfer”
mechanism. At the micro level, we will answer the following questions: With Chinese government adopting
such a procurement policy: 1) what are the US or other foreign technology suppliers’ optimal strategies to bid
for technology provision? 2) under what conditions will suppliers offer their best technologies? 3) does the
buyer (Chinese government through its state-owned firms) benefit from using such a bundled strategy,
compared with, say, procuring separately for the completion of the project for current consumption, and for
technology transfer to participate in future competition? 4) by bundling, does the buyer need to pay a much
higher price on the current project?
At the macro level, we will draw implications that are of great interest to policy-makers. In particular, one may
ask: 1) would “bundled procurement for technology transfer” promote and expand a mutually beneficial
relationship between US and China in terms of economic development and trade? 2) would it promote or
discourage governments and firms from investing in innovation and technology development so as to sustain
long terms growth?
#6
“Building Brands in Greater China: Perspectives and Challenges for Chinese Entrepreneurs”
Shi Zhang (UCLA)
My research aims to collect data and cases to illustrate the challenges facing brand building in emerging
markets, and to describe and characterize business models that can help firms’ decision making as to what
routes of development and strategies may be best suited for their firms. The collected data will be complied into
documents that will also be useful for teaching MBAs and executives.
China dominates world manufacturing because of low-cost labor. Although most Chinese companies, an
exceedingly large majority of which are entrepreneurial enterprises, have been content with their role as an
original-equipment manufacturer (OEM), supplying the world’s biggest brands and retailer’s private labels with
products ranging from toys to televisions, some companies have chosen to innovate by establishing brands in
the developed countries.
There are two primarily business models that would help a Chinese entrepreneur move its branded goods
quickly into developed markets. The first is the step-by-step procedure in which products exported from China
penetrate overseas markets through independent distributors serving discount channels. This gradual process
would permit Chinese companies to gain an understanding of customer behavior and to build brand recognition.
In the second model, Chinese companies buy an established brand that has fallen on hard times and then
perhaps move its production to China to benefit from the lower labor costs.
What are the pros and cons and challenges facing the models given the increasing competition in the world
market? South Korea’s Samsung Electronics shows how difficult it can be to build brands. Samsung’s recent
success has largely been attributed to the time and money spent on globalization campaign: first through
exported branded products, then by learning the importance of conducting extensive consumer research and
building its operation facilities in the US, Germany, and Australia, and finally launching its global brand with
more than $1 billion in advertising. Is this hybrid model what Asian companies should adopt to build their
brands in established marketing? Or perhaps the strategy should be to simply stay put in a regional area and
develop strong domestic brands.
#7
“Convergence and Divergence of Capital Market Practices across Borders: A Comparison of Capital
Market Pressure on Publically-Listed Firms in China and the US”
Yu Zhang (UCLA)
Capital market pressure, or the pressure from the capital market on managers for certain behavior and
performance outcomes, such as the quarterly and yearly earnings expected by stock analysts and investors, has
become an important force influencing managerial behavior and decisions in the US. Finance and accounting
scholars have found that pressure from capital market caused manager to manipulate financial reporting. My
own work in strategy and management also found capital market pressure caused managers to change firms’
strategic behavior in product marketing competition.
The phenomenon of capital market pressure may not be unique to the firms listed on the US stock market.
Although scholars in the early 1990s used to argue that the US stock market was very different from the
Japanese and German markets, globalization since the late 1990s has dramatically reduced the gap between the
US and the Japanese and German markets. However, a question remains to examine is whether such
phenomenon also diffuses to other emerging countries, such as China, where the stock market gets established
and developed dramatically in the past two decades. The knowledge about this question is not only important
for us to understand the diffusion of capital market practices from developed countries to emerging countries,
but also to understand the influence of capital market pressure on the long-term competitiveness of Chinese and
US firms, and the competition and cooperation among them.
To my knowledge, this is the first study that examines the divergence and convergence of capital market
pressure phenomenon between China and the US. Understanding the impact of capital market pressure on
Chinese firms is important since capital market pressure has been blamed to cause short-termism for the
publicly-traded firms in the US, yet we don’t know its impact on the Chinese companies. Findings from this
study may contribute to knowledge of corporate governance, international business, and institutional theory.
The study will also inform practitioners in both China and the US, helping them to manage the challenge
imposed by the diffusion of capital market pressure across the border.
#8
“Do US and Chinese Shareholders Respond Differently to the Same Piece of Information?
Lu Zheng (Merage), Shu Lin (Nanjing University), Shu Tian (Fudan)
Do US and Chinese investors behave differently in the financial markets? If so, how do their behaviors differ?
Given dramatic discrepancies in the economic environment, regulatory policy, and corporate dynamics, it is
difficult for researchers to control for a variety of factors and document conclusive empirical evidence on the
above issue. In this project, we try to address the question in a unique setting, where we study a group of
Chinese stocks that are cross-listed and traded in NYSE, China A-share markets, Hong Kong stock exchange
and Frankfurt stock exchange. These stocks provide us with a rare opportunity to compare the responses of the
shareholders of a same company in different markets to the same piece of information.
We plan to study price reactions to both firm specific and macroeconomic events. At the firm level, we will
collect event news on mergers and acquisitions and earnings announcements. For macroeconomic shocks, we
plan to study adjustments of oil price and bank reserve rate. These two types of macro events are affected by
government policies and capture macroeconomic shocks from both the monetary and real sectors.
The speed and manner at which the newly arrived information is incorporated into the shock price reflect the
degree of efficiency of the financial markets. In an efficient market, stock prices reflect newly arrived
information quickly and accurately. If mature markets are more efficient than emerging markets as we usually
expect, we should observe that price reactions to the same event are more timely and accurate in NYSE than
China A-share markets. In the event study setting, we expect to see less post-event return drift or reversal in the
US markets than Chinese markets.
On the other hand, local investors may have an informational advantage over remote investors. Researchers
document a strong geographic link between usual fund and hedge fund investment and performance. Such an
information advantage can be a result of improved monitoring capabilities or access to private information of
geographically proximate firms. In this case, price reactions in the local Chinese markets should be more
accurate than those in the remote US markets.
#9
“E-Commerce Platform Innovation and the Impact on Retailers: A Comparative Study of the US and
China”
Kevin Zhu (UCSD)
This project is collaborative research by University of California (UC San Diego) and Fudan University
(Shanghai, China). It will investigate the innovation of e-commerce platforms in the US and in China, and
examine their impacts on retailers in these two countries.
E-commerce has been growing globally for the last decade. Total e-commerce spending in the US and China
reached $227.6 billion and $70.9 billion respectively in 2010. In both countries, the growth of e-commerce
platforms has attracted a large number of companies around them, including merchandise and service providers,
which form ecosystems around several key platforms. For example, Amazon.com has moved from a book seller
to a full-service retailer of all products. And third party sellers help Amazon broaden its offerings. In China,
Taobao.com has become the biggest online shopping platform that is positioned to revolutionize retail.
E-commerce platforms have been evolving rapidly to satisfy the needs of merchants and consumers. Significant
innovations have been brought into e-commerce to enhance the functionality of the platforms. However, the
platforms in the two countries differ significantly in their paths toward innovation, and this leads to different
outcomes and status of the platforms. First, they differ in technology path. That is, they created different tools to
enhance the transactions and communications between buyers and sellers. Second, US and China differ in their
legal environment. While legal protection is still weak, e-commerce companies create tools to ensure the
security of online transactions. For example, Taobao created Alipay, a third party payment platform, to protect
buyers and sellers from transaction fraud. Third, in both countries, the companies present on e-commerce
website differ in their sizes, industries and other aspects. This may in turn affect their adoption of technologies
and strategies in competition. Moreover, e-commerce companies do not always succeed when they expand
globally and reproduce the business model from their home market to the local market. For example, eBay lost
in the competition with Taobao in China.
Motivated by the differences identified above, we seek to study the following research questions: (1) How
would the different legal and business environments in the US and China shape e-commerce innovation
differently? (2) How would these differences affect the strategic behaviors of buyers and sellers on the
platforms? We plan to identify the differences in system innovation in the two countries and provide important
policy and managerial implications for governments and companies in the two countries, especially for those
international companies conducting business in both countries.
#10
“Comparison of the Securitization Transactions in the US and China from a Legal Perspective”
[tentative]
Olufunmilayo Arewa (UCI School of Law) and Lingyun Goa (Fudan School of Law)
The securitization transactions have been developed quite well in the United States and have made great
achievements in the recent decades. Many businesses have been utilizing securitization as a cost-effective
financing tool and have been quite successful until recently when the financial crisis occurred. Many
securitization transactions have been criticized and blamed for at least partly causing the crisis. Therefore, the
development of the structured finance has been slowed down a bit. However, securitization is still a new
concept in China, and many business people and lawyers would like to introduce this financing device into this
country. The Chinese government is also interested in developing this system, and has already made a
regulation on securitization of bank loans.
This proposed project is aimed to researching the securitization transactions in the US from the legal
perspective, exploring whether it is the direct cause of the financial crisis: if yes, why so and how to avoid the
adverse consequence; if no, why it is blamed. Then the focus will be on the feasibility of developing
securitization in China. The social background, the business environment, the legal tradition, and the current
legal system of China will be examined and compared with those of the US. The forms of the SPV in a
securitization transaction frequently used in the US will be especially scrutinized. Since the two main forms are
trusts and corporations, the trust law, corporation law, securities law, as well as the fiduciary law of both
countries will be researched and compared because they will provide the legal support for the securitization
transactions.
Among other things, the lack of common law concept of trust in China is a very big problem. Although China
has enacted a Trust Law, it does not have the same concept of trust as the US trust mainly because of its civil
law tradition under which the title of one property cannot be concurrently owned by two more owners. This has
been one of the main obstacles for China to develop a true trust system. Therefore, the benefits of trust under
the US trust law may not be received by the businesses from a trust established in China. How to reconcile the
different concepts and practices? Is it possible to change the Chinese trust law which has been enacted for 10
years so as to support the development of a trust system in China and facilitate the development of the
securitization? What will be the future prospective in this regard?
After examining the above laws, the project is expected to draw a conclusion regarding whether China should
promote securitization as a financing tool, and how will the transactions to be structured under the current legal
system, and under the proposed new law.