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Brief

Journal of Finance and Economics is supervised by Ministry of Education of PRC, and sponsored by Shanghai University of Finance and Economics. It aims to include research results on the major theories and practical problems in China’s reform and opening up and modernization of economic construction. Its scope covers all the major fields of Economics, including Public Economy, Finance, Accounting, Economic history, Regional Economics, Industrial Economics, International Economics. The Journal is included in CSSCI.
Editorial Board

Editor-in-Chief
Fan Liming

Deputy Editor-in-Chief
Lu Rong

Market conditions and the fund behavior of flight to quality: a study based on earnings quality

PENG Wenping;XIAO Jihui;ZHOU Yujuan

Journal of Finance and Economics,2018,Vol 44,No. 11

Prior research shows that when making investment decisions, mutual funds are concerned about accounting information and accordingly adopt different investment strategies. However, existing literature mainly focuses on accounting earnings itself while paying less attention to earning quality and ignoring that the usage of earning quality can be influenced by market conditions. Hence, most papers find that mutual funds do not extensively use earning quality. When market conditions are becoming worse, the overall risks faced by mutual funds increase with the rising systematic risks. In order to decrease the risks, mutual funds have strong incentives to allocate more assets to stocks with high earnings quality. As the stock with high earnings quality is less sensitive to systematic risks with its price more stable and performance better than others, it becomes an ideal choice for mutual funds to avoid potential risks. Considering the potential effect of market conditions on mutual funds’ use of accounting information, this paper investigates mutual funds’ asset allocation strategy based on earnings quality under different market conditions. Our sample consists of open-ended mutual funds from 2005 to 2015 in China. We find new evidence different from existing literature that when market conditions are poor, mutual funds will invest more high earnings quality stocks. This finding is conducive to explaining the mixed conclusions drawn from existing literature concerning whether mutual funds use information of accounting earnings quality when making investment decisions. This paper further explores the channel through which mutual funds shift their portfolios toward stocks with higher earnings quality. We find that mutual funds also hold more non-cyclical industry stocks which have high earnings quality. Mutual funds’ transferring portfolio assets between stocks of cyclical and non-cyclical industries are still based on their earnings quality. Uncovering the flight to quality (FTQ) channel from the perspective of relationships between the industry cycle and earnings quality is one of our contributions. Does FTQ have a positive effect on the mutual fund performance? The answer to this question is of great significance to systematically evaluate the investment ability of mutual funds and the value relevance of accounting information in investment decisions. We find that the flight to quality behavior of mutual funds has a positive impact on performance, especially when market conditions are poor. It indicates that some funds have good stock selection abilities, and are able to avoid risks by making full use of earnings information and timely adjusting portfolios. Our findings shed light on understanding the role of accounting information quality in investment decisions. We show new evidence contributing to relevant literature that when market conditions are poor, mutual funds will invest in more high earnings quality stocks. We also find that the flight to quality behavior of mutual funds has a positive impact on mutual funds’ performance. This finding will help investors make a better understanding of how mutual funds use accounting information to make investment decisions professionally and more comprehensively evaluate the investment abilities of mutual funds.

Intergenerational transition of family businesses and the thought of pan-familizational equity financing in modern China

CHENG Lin;ZHOU Yan

Journal of Finance and Economics,2018,Vol 44,No. 11

It has been forty years since China’ reform and opening-up. The founders of family business at that time have stepped into their twilight, anxiously inspecting and evaluating their qualified successors. Of late, the transition of family business has become one of the big hurdles on the way of sustainable development of Chinese private economy. The existing literature considers equity financing as an institutional arrangement, which is conducive to alleviating the conflicts between stakeholders and optimizing the structure of corporate governance during the family business transitional process. However, many problems remain mystery to us. What are the features of the equity financing of Chinese family business? How does its mechanism function in ensuring the transition of family business? This paper had a systematic investigation on the origin, the mechanism, and the system design of the thought of modern pan-familizational equity financing, especially the role it played in the intergenerational transition of family business from the perspective of history of economic thought. Our research drew the following conclusions. First of all, although the thought of equity financing orginated from Western countries, the thought of pan-familizational equity financing is the product of the fusion of Western economic thoughts with Chinese traditional culture. Second, facing so many impediments in the intergenerational transition of family business under the context of Chinese culture, the thought of pan-familizational equity financing, typically the family integration, differentiated governance hierarchy, family networking, undoubtedly clear the way to certain extent. Third, since the “rotten meat in the pot” dividend distribution system, the “differentiation pattern” equity ownership structure and the “quasi consanguine network” equity governance system built to accommodate traditional Chinese family business, the pan-familizational equity financing, as a combination and development of equity financing and microeconomic theories, could significantly lower transaction cost in intergenerational transition. In a word, the main contribution of our paper is as following. First, it sketched a panorama of the thought of modern Chinese pan-familizational equity financing, including its origin, mechanism and system design. Second, it provided a new path of constructing the institutions of the intergenerational transition of Chinese family business. Third, it shed insights into how recent family business reduce potential risks, boost the efficiency of intergenerational transition and enrich Chinese traditional governance culture. It had a great influence on introducing brilliant achievements of traditional governance culture to the world and winning the international discourse power on Chinese culture.