Economic history Assignment Example | Topics and Well Written Essays - 500 words

Economic history - Assignment Example The insatiable quest for many profits necessitated the involvement of many workers and extensive labor division. Meaning that employees could work in different locations, anonymous to each other, with the aim of producing various parts for the same commodity. This led to each producer developing a sense of isolation and loneliness, which in the end translated to producers emerging as egoistic. This state of egoism led to a natural state of war with each fighting solely against a myriad others. However, this state of war could only be controlled if there were a central party which every producer would submit to and in turn gain protection from the rest producers. This was explained by Hobbes in his writing where he stressed that it was only after submission to an absolute monarch that individuals would escape the conflict existing among them. Economic specialization, on the other hand, explained the co-existence of different producers in the market system to help each other survive. There was complete dependence on each other for successful functioning of the market. Economic specialization was important as it provided for a relatively free functioning market where producers assisted each other produce and in turn benefit (Hunt 128). Labor and economic specialization contradict each other in that for the former, producers worked in isolation that prompted a feeling of competition among each other. For the latter, however, producers work to benefit each other. There is no single producer that can exist without the other. In conclusion, human beings have a desire to achieve pleasure but avoid pain with his nature being competitive and egoistic. Specialization of labor is meant to maximize profits and speed up production in any market system. When producers are left to work independent, there is the development of an

Are Black Afro Caribbean boys underachieving within the Education Dissertation - 1

Are Black Afro Caribbean boys underachieving within the Education system that are born in the UK - Dissertation Example However, it is also important to understand that success is about opportunity. In the case of Black Afro Caribbean boys, the opportunity for them may also rely on the level of encouragement given to them for success. These children are mostly encouraged to participate in sports, dance or music, but not on professions such as in line with politics and law. The sole purpose is to make them role models in arts and entertainment (BBC News, 2011). Thus, these children are given less substantial background on politics and law but they are rather given much exposure in areas such as sports, dance or music. Certainly, there are different perceptions or ideas about achieving and under achieving. In short, the perception about success may vary. This means that Black Afro Caribbean boys can become successful when it comes to the opportunity given to them but not on areas where they are not given much exposure or encouragement. Prior to the understanding of underachieving among Black Afro Caribb ean boys within the UK’s education system, it is important to understand the derivation of acknowledgement of achievement. Achievement in the academe is given greater weight in the measurement of one’s level of attainment in life. Education particularly in the UK is given with great importance. That is why performing better in the academe has become a good measure of one’s success. There is only secondary evaluation given to areas which pertain to talents and skills. In line with this, Black Afro Caribbean boys are usually secluded from academic evaluation due to the fact that they are much exposed to sports, dance, music and other skill and talent related areas. However, the issue of racial discrimination especially among teachers on black Caribbean pupils exists in the education system (Thomas et al., 2009). In this way, the entire evaluation system may not be having enough solid foundation for concise evaluative process. Thus, more relevant bases are necessar y in order to find out how exactly black Caribbean pupils are performing in school. Objectives It is in line with this that the proponent of this paper tries to evaluate and find out if Black Afro Caribbean boys are really underachieving in the academe provided that they are much exposed to sports, dance, and music and even susceptible to racial discrimination. On the other hand, it is also part of this paper to define what exactly are the bases or standards used in evaluating under achievement among Black Afro Caribbean boys. The proponent will particularly answer the following questions at the end of the study. 1. What are the reasons why children underachieve in education? 2. Are black Afro Caribbean boys especially under achieving within the education system in the UK? 3. What are the reasons and effects of different education system in the UK on black afro Caribbean’s boys lerning? 4. What are the prevailing perception and acknowledgement of achieving and under achieving ? 5. How and where does the acknowledgement of achievement derive? 6. Do black afro Caribbean boys have the same opportunities or expectations to achieve? 7. Are black afro Caribbean boys affected by the lack of male role models? 8. Do teachers have low expectations of social groups such as looked after children, asylum seekers, single parented families and the disabled etc? Methodology The proponent in general would therefore investigate the reasons why

Human Resource Management Essay Example | Topics and Well Written Essays - 1000 words - 18

Human Resource Management - Essay Example This makes me set my direction in the field of information systems only where after completing my Masters in Information Systems, I will enter the corporate world, equipped with my learning, knowledge, skills gained and abilities polished. Talking of my skills, choosing computers at the very beginning of my academic career has imparted a lot of technical skills in me. Further more, computer science involves frequent group projects and team works which has helped me improve upon my communication and interpersonal skills. Now when I am into my Majors, regular presentations, case studies and other assignments are further helping me develop and nurture my managerial skills in the way I manage my time, interact with others and plan my activities to attain short term objectives. This combination of all kinds of skills and knowledge in the fastest growing domain in business presents a plethora of opportunities ahead. Companies are in continuous search for competent computer professionals where I feel I can contribute a lot through my skills and abilities. I am also aware of the growing impetus on employee performance and provision of incentive plans and promotional opportunities based on performance and contribution made. As such, I plan to constantly build up my current inventory of knowledge, skills and abilities through regular training and courses (Rouda & Mitchell 1996). This is important because computer science and information systems is one area where every day new technology comes in, turning the previous one obsolete. Thus to remain competitive in my career, I need to constantly strive to enhance my capabilities and existing skill set. The company will also provide for my training and development but I will also look for regular certification on my own. This will make me more dynamic in my work and in a position to demand more for my services and work. In this light, company and

Active Perception Essay Example for Free

Active Perception Essay The Wikipedia article on perception defined passive perception theory which states that perception is a phenomenon that results from a sequence of events. First, the sensory information is taken in which the senses process and interpret. After processing the information, a response to the information is generated. The best way to illustrate this theory is by observing how an old computer works. Data are fed on to the computer which it processes and interprets after which, a response to the data is produced. However, recent studies show that perception does not occur in such a simple, linear manner. Rather, the information, the input or senses, and the description or interpretation of the information interact with one another and form a dynamic relationship. The Wikepedia article on perception refers to this occurrence as active perception. In addition, Freeman (78) claimed in his article that perception is a physiological phenomenon which is more complex than it appears. Previous studies reported that the cerebral cortex is responsible for the analysis of the sensory information. However, recent studies revealed that the brain does more than merely analyzing sensory information by extracting its features. The process of perception involves the past experience of an individual which he or she relates to the sensory message. This stimulus (sensory information) and its particular meaning to an individual are expected to be identified based on his or her previous experiences. Millions of neurons are simultaneously at work during perception which Freeman referred to as the brain of chaos. The brain of chaos is complex behavior of neurons that appears to be random but possesses some hidden order in actuality. Various neurons abruptly and simultaneously shift â€Å"from one complex activity pattern to another in response to the smallest of inputs† (Freeman 78). Freeman (78) speculated that the brain of chaos makes perception possible. This could explain why some people instantly recognize the distinct smell dental clinics and dislike it due to their terrible experience in a dental clinic in the past. In the same way, the underlying theory on active perception could explain why people can recognize a famous actor, the aroma of their favorite food, and a close friend’s voice at once (Freeman 78). All activities in one’s life require perception. It is one of the bases of behavior, beliefs, values, attitudes, and preferences. Perception is also important in decision-making and responding to external events. When shopping, for instance, the items that the buyer purchased (and those that he or she rejected) are a reflection of his or her perception on the items’ price, quality, function, and overall attractiveness. Hence, understanding perception works is very important. By understanding the underlying processes involved in perception, how the behavior, beliefs, values, attitudes, and preferences of an individual are formed would be determined. The cognitive and affective processes involved in decision-making and responding to external events would also be understood by conducting research on perception. Knowing the reason why people behave or think in a certain way would greatly contribute to understanding others. Certainly, when people understand one another, personal relationships would improve, while the activities that directly involve people such as a psychological therapy or a marketing approach would be more effectively implemented. In conclusion, perception is a complex process which is not limited to a passive process of obtaining sensory information. Rather, it is a process that involves past experience and a dynamic relationship between the information, the input or senses, and the description of the information. It was also discovered that perception is a complex brain activity in contrast to previous findings which state that perception occurs at the cerebral cortex. By understanding the process and concept of perception, people would be able to learn how behavior, beliefs, attitudes, preferences, decision-making, and response to external events are formed. Works Cited Freeman, Walter. â€Å"The Physiology of Perception. † Scientific American, 264 (1991): 78-85. â€Å"Perception. † 20 November 2007. Wikepedia. 20 November 2007 http://en. wikipedia. org/wiki/Perception.

Economical And Political Situation In Russia Politics Essay

Economical And Political Situation In Russia Politics Essay The purpose of this paper is to investigate and to shed light on the nature of the relationship between big business and the state in contemporary Russia. It is commonly assumed that a relatively small number of Russian industrial tycoons, or oligarchs, control a substantial share of Russias economy and have the capacity to determine policy in the areas that are fundamental to the running of the country. I propose to challenge these assumptions and to argue that between 1996 and 2003 economic power blocks in Russia could never aspire to become the ruling class, as well as to enjoy access to the development of state policy. In contemporary Russia the leading entrepreneurs are no longer in the position to make significant claims on the political power using their economic resources. Fortescue argues that the use of the term oligarch is questionable because as an economic power block they never managed to actually run the country and that their policy role even in the economic sphere wa s minor. This paper argues that the oligarchs took advantage of, rather than created, the big business strategy of mass privatization and shares-for-credit scheme. I therefore prefer, when dealing with the subject, to speak of industrial tycoons, economic power blocks or big businesses. The relationship between Russian business and the state swung between two extremes. Under the conditions of a weak state in the early to late 1990s there was a high degree of state capture by Russian business. State capture or privatization of the state is best understood in terms of economic resources being used to influence the policy making process of federal and regional authorities to the benefit of the economic and political agents involved in these collusive agreements. State capture denotes a situation where a narrow set of interests, such as a firm, uses corruption or relies on informal agreements to shape the political and legal environment to its own advantage. This paper explores how the strategy of close integration with the state paved the way for the regional and federal authorities to gradually shift, relationship wise, from state capture to informal submission of private business to the state. In raising critical questions and relying on empirical evidence I attempt to draw a clear picture of the policies pursued by the Kremlin administration to establish an effective political mechanism to control and benefit from the economic performance of the industrial tycoons. I assess the risks taken by Putin in launching a frontal attack on the selected oligarchs and determine whether Putin has been successful in creating a new political order that aims at using economic power blocks as a tool of effective state politics. The first chapter analyzes the state-business relations in the mid-late 1990s. I look at the privatization of the state and the nature of collusive agreements between leading economic and political power blocks. The second chapter looks at the consolidation of the state and its changing relationship with the big business community. I look at the way the nature of individual relations with political power was re-assessed and how the consolidation of power contributed to big businesses falling under the command of state bureaucratic interests. This chapter demonstrates how the changing relationship, attributed to the consolidation of the state, created favorable conditions for the development of large-scale financial industrial groups, with the capacity to stimulate the growth of Russian economy and to serve as a strategically important factor in the pursuit of broader political interests. 1: STATE CAPTURE state-business relations in the mid-late 1990s In the early stages of democratic transition and state consolidation between 1993 and 1996 the concept of rent seeking was widely used to describe business behavior in Russia. Characteristically, those who were able to accumulate large capital and property relied on a strategy of close integration with the state and maximized their profits through privileges, such as subsidies and benefits obtainable from the state. The relationship between business and government was determined by differences in access to rent and its distribution. Those who were closely connected to the state were able to use the changing political and economic system to their advantage. When political and economic systems go through a rapid and challenging change they create a range of opportunities to take over business, using formerly state-owned property, and to make money on the structural disorders of a state in transition. Andrei Yakovlev in assessing the situation in Russia as compared to other Eastern Euro pean countries notes that weakened and half-destroyed public institutions in Russia were unable to build an effective resistance to the attempts of various private interest groups to capture and privatize rent. In the first half of the 1990s Russian political authorities made a strategic choice on the issue of foreign ownership and gave preference to the younger generation of Russian entrepreneurs. The Russian political authorities were faced with a choice-to put their money on either their business or on foreign investors. The active lobbying of big capital led to the adaptation of the first scenario. Such a situation created the ideal circumstances for the growth not only of the economic, but also the political influence of big capital. Most of these entrepreneurs got control of their most valuable assets by shares-for-credit scheme through which Boris Yeltsin funded his successful 1996 election campaign. Yeltsin offered assets of existing state-owned enterprises at a bargain basement price in exchange for loans to the Russian government that could be redeemed for further shares: The assets were to be put up for auction, the winner of each auction being the bidder who offered the highest amount of credit to the state. The winner would hold the states shares as security on the loan and have the right of operational control. The main beneficiaries of the auction were the ONESKIMbank, Menatep, Lukoil and Surgutneftegaz Pension Fund. It is important to understand that the shares-for-credit scheme involved a strong element of long term strategic thinking among a powerful group of reform oriented policy makers headed by Chubais. Fortescue notes that it was designed to achieve a strategic goal, laying the foundation for a privately owned big business able to operate competitively in global markets. This period is best characterized by the creation of government assisted financial-industrial groups with the capacity to improve their economic efficiency and global competitiveness. The inevitable result was high concentration of property ownership and economic power. The president and parliament that Russian businesses helped elect created the legal environment that their businesses needed to prosper. Yeltsins daughter, Tatiana Diachenko served as a political channel through which the oligarchs could influence the decisions made by the presidents political entourage in their favour. Shevtsova writes that informal political channels helped to hasten the merging of business with the state authorities at the top, and this blending of power and business spread further to other levels of the system. Oligarchy became a political reality in its true definition of the term when Vladimir Potanin was appointed first deputy prime minister and Boris Berezovskii was made deputy secretary of the Security Council. These appointments legitimized interference by big business in the affairs of the state and in many cases restricted the playing field for everyone else. The leading tycoons not only restricted the market to other firms but also successfully lobbied f or exclusion of foreigners from their fields of activity. In 1996-97 they fell out with one another and began fighting among themselves for economic resources. It is argued by leading economists and political theorists that lack of collective spirit and organized action among the oligarchs sharply reduced their influence on political authorities. They were unable or unwilling to defend each other when the common enemy arose. For example for Bunin and Pete Duncan their inability to influence the Kirienko government and his attempt to rein them in by taxing their companies and to proceed with the devaluation which brought them enormous losses in August 1998, demonstrates their lack of power. Minister of Finance Fedorov in mid 1998 stated the following: You guys are not paying taxes. Well arrest you, well take your property, well make your companies bankrupt. After the August 1998 crash Berezovskii attempted to have Kirienko replaced by Chernomyrdin. Through informal agreements he persuaded Yeltsin to nominate him for the post twice but the St ate Duma rejected his nomination. Even Chubais who was instrumental in the privatization process and managed to intervene on their behalf with Yeltsin on a number of crucial occasions was not going to grant them control of the political process: So in 1996, using the newly created Russian business, we resolved the problem of communism in Russia. But then that very big business decided that at last everything was in place and now decided to run the country. The government is working hard to get the message across to business that it is not its job to run the country. Anatolii Chubais, the architect of Russian privatization, in 2004 admitted to having underestimated the deep feeling of injustice that shares-for-credit would create, although he still maintained that given the choice between bandit communism and bandit capitalism, then the choice he made in favour of the latter was the right one. The oligarchs were able, on the whole, to withstand the attacks on them from the reformers but it signaled an end to the era of political domination. Pete Duncan notes that the organs of the state, the security services, the police, the armed forces and the courts remained loyal to the president, and already in the Yeltsin period looked with suspicion and jealousy on them. In the true sense of the term, the Russian oligarchs never really exercised any high degree of political power and have shown no capacity to determine policy in the areas that are fundamental to the running of the country. First, they took advantage rather than created the major economic transformation policies. Second, their policy role in the state system creating sense was minor. Third, having regained the instruments for the resolution of conflict and determining the rules of the game, the authorities grew stronger than the businesses that had assisted them by strengthening their power and providing financial s upport to specific officials. The use of the term oligarch in its traditional sense is therefore questionable. As according to Pete Duncan, they were lobbyists rather than decision-makers, on the whole. The shift of balance began to be evident after the August 1998 crisis. 2: Consolidation of the State re-assessment of individual relations with political power Local and regional authorities began to undermine the power of the federals (who were largely dependent on oligarchs) by supervising the territories within their jurisdiction for tax evasion. In exchange for ensuring electoral support local and regional authorities bargained for more power and resource regulation in strategically important regions. As we have already noted, the conflicts between the leading industrial tycoons (along with their respective sponsors in the federal administration) over sources of rent extraction eventually produced the financial crisis which ended with the breakdown of the largest banks and a radical replacement of the federal government. Contrary to the situation before the 1996 presidential election (when powers of the oligarchs, regional and federal authorities were united to preserve the nature of the political regime), the 1998 crisis, stimulated by the political tensions between leading industrial groups and authorities produced a deep split in the ruling elite. The split in the ruling elite is well documented. Yakovlev writes that influential regional governors, together with their business associates, attempted to use the crisis to make the federal government even weaker. Narrow circle of politicians and top bureaucrats, financed by the economic power of the JSFC Sistema created by the Moscow government and Yuri Luzhkov attempted to undermine the position of the federal elite and Boris Yeltsins associate business group. In order to ensure succession of power in a deeply discredited federal government the federal elite had to resolve their conflicts with the powerful governors gathered around fatherland-Russia and to win the support of the federal bureaucracy. It was important for the super elite not to ignore the strategic interests of the nation; otherwise they would run the risk of the complete loss of their personal authority and influence. Measures were taken to (1) provide financial support to the army, the FSB and to other law enforcement agencies (2) to strengthen the status of federal bureaucrats (3) to win the support of non oligarchic business by revising tax legislation and alleviating the tax burden. Actors involved in the process of power consolidation used the new image of a strong and responsible leader personified in Vladimir Putin to increase the public support of society that has grown tired of chronic state weakness, corruption and looked with suspicion on the close contacts of the presidential administration to the business tycoons. The first steps that Putin took as the prime minister, particularly his initiative to work out a long term policy for the strategic development of Russian economy, boosted the Social Sentiment Index from 85 points to almost 140 points. The index shows that trends in public opinion, based on how people assess the political, social and economic situation in the country, were in favor of the newly established political order. With social support and federa l bureaucracy under the control, the newly emerging federal elite strengthened their position by limiting the powers of the governors through the creation of a system of federal districts and through a delimitation of statutory powers between the federal government and the regions. Yakovlev notes that these steps sufficiently diminished the rights and fiscal resources of regional authorities and paved way for a consolidation of a new political system with rules of the game changed in favor of the state rather than private interests of individual political and economic agents. Federal authorities and economic power blocks of the Yeltsin regime failed to introduce effective means of state regulation and economic and social development. These failures should be attributed to the politics of favoritism and informal collusive agreements between political agents and industrial tycoons. The political and legal environment was shaped by a set of narrow interests that undermined the development of the strategic interests of the nation. The new super elite of the Putin era took into account an important factor: in order to consolidate personal authority and influence it is essential to take into account not only the interests of the groups they arose from, but also strategic interests of the nation. This is an objective condition which places this narrow group above the other groups of the elite. What the oligarchs of the 1990s could not do and that is to serve the common purpose and enjoy a common set of principles and rules, the new emerging elite consolidated th eir power and influence by promoting the strategic interests of the nation. This strategy did not only win them popular support but also guaranteed loyalty from federal agencies that have already in late 1990s have been critical of public officials operating for the benefit of individual market players connected to the highest echelons of political power. Curbing the oligarchs political influence was an essential part of Vladimir Putins state politics. He promised to treat the oligarchs in the same way as other entrepreneurs and announced that all interest groups would be kept at an equal distance from his government. The much quoted term equidistance refers to a situation when the state no longer plays favorites and refuses to promote special interests. In the first meeting with the leading oligarchs Putin made it clear that it is not their business to get involved in politics and that they should concentrate purely on running their businesses. It is documented in some literature that there was a pact between Putin and the leading industrial tycoons: As long as the oligarchs paid taxes and did not use their political power to undermine the development of a new political order, the state would respect their property rights and refrain from revisiting shady privatization schemes. The nature of the meeting cannot be disputed; leading bu sinessmen and Putin met to discuss possible patterns of interaction between business and the state. However, I am inclined to argue that because big business in Russia never developed a corporate interest that it could defend collectively, backed both by the population and the state apparatus which outweighed any special interests that oligarchs could have attempted to lobby for. Tompson, for example, describes the agreement as something akin to a foundational political myth and Pete Duncan argues that there is little evidence that Putin promised them anything. Putins priority was not to arrange a certain hypothetical agreement between the oligarchs. (If Russian politics of the Putin era would be interpreted in these terms it would imply that the state was not in the position to use its bureaucratic means to restrict the political influence of the leading business tycoons.) The opposite was true: big businesses were increasingly subjected to searches, summonses and charges from vari ous government agencies, usually related to tax and privatization issues. The owners of big business who found themselves under federal investigation were no longer in the position to use direct informal contacts with the authorities (that they relied on in the Yeltsin era) to resolve their problems through some form of payment or favor. The change in the situation should be understood in the following terms: individual public officials who operated for the benefit of individual market players in the 1990s were integrated into a larger system of a consolidated state. Consolidated state and its administrative apparatus is interested in the pursuit of long term strategic objectives rather than short term private gains and in order to secure and strengthen its position it will suppress any opportunistic behavior of its members whose private interests are in conflict with the interests of the state. Hence, the term equidistance is characteristic of policies pursued by the consolidated regime: oligarchs could no longer rely on the support of state institutions or individuals working within these institutions if their interests were in conflict with the strategic interest of the state. Putins priority was to rebuild the central state and to establish the presidential administration as the dominant political institution. State consolidation was a priority for two reasons: (A) consolidated government institutions recognize their collective interests (state policy) and abilities much better (B) consolidated governmental organizations can influence the rules of the game and are much stronger than any individual player in the political and economic system. With consolidation of the state there is a consequent informal submission of business to the command of state bureaucratic interests. If under the Yeltsin regime chronic weakness of the state meant that individual public officials operated for the benefit of individual market players, under the consolidated government it is either the organization as a whole that operates in favor of certain actors or the organization plays in favor of itself. The relative weakness of the industrial tycoons in the new institutional or der was confirmed by the exile of Berezovskii and Gusinskii and the Yukos case. During the Yukos case selective justice was used in means to consolidate power. The case is well documented and it shows that financial-industrial groups that pursue strategic economic and political interests independent of the collective bureaucratic interest of the state would be persecuted and would fall under the control of the state. Yukos dared to take direct action against the authorities by openly funding Putins opponents ( Khodorkovskii was giving financial support to the Communist Party and other deputies to influence their votes on legislation related to taxes in the oil industry) and the announcement of a merger of Yukos and Sibneft, with a possible further sale of a large block of shares to ExxonMobil or Chevron corporations, carried the implication that the state could actually lose control over strategic assets in the oil industry. In 2003 Yukos became the victim of a crippling tax demand which led to its bankruptcy and sale of its assets to government assisted financi al-industrial group Rosneft. The Yukos affair has clarified the rules of the game between oligarchs and Kremlin: (A) they should pay their taxes (B) they should not interfere in national politics (C) they should not attempt to undermine the strategic interests of the state in the pursuit of its energy policy. It can be argued that the Yukos affair had limited but generally positive implications for the development of Russia into eventually a normal market economy. Paul Khlebnikov wrote in 2003: The arrest of the oligarch is indeed an example of selective justice. But that is better than no justice at all. Put yourself in the place of the oligarchs. What conclusions will you draw from the Khodorkovskii case? What will you do as not to find yourself behind bars. Obviously, you will prefer always to be on the side of the president, and even better to keep your distance from politics. But you will also direct all your energies to remaining within the boundaries of the law. What befell the oligarchs under Putin shows that as a class they cannot aspire to become the dominant force in Russian politics. The regime may exploit big business and at times share power with them, but the dependency of the state on the capital of economic power blocks is purely temporary Even though the oligarchs remain economically powerful, they have no longer any weight in politics. Shevtsova notes that once the state has re-established itself and gained the support of other forces, the master of the Kremlin can shake off oligarchic influence. Where does this leave the other oligarchs in relation to the state? Consolidated state bureaucracy brings advantages to the development of big business and the economy. For the oligarchs who accepted the new political structure, rebuilding the state meant more security and guarantees for business. Businesses interact with monopolistic departments instead of individual bureaucrats and their relationship to the state is, therefore, more stable, predictable and effective. Putin and the countrys most prominent business leaders are working to convince Western investors that the Russian government and business can create law-abiding and transparent market economy. Leading Russian firms are moving towards corporate transparency and are trying to observe international accounting standards, pay regular dividends and protect minority stockholders rights. Russias industrial tycoons are becoming global players with the support and encouragement from their government: Lukoil CEO Alekperov stated in a 2001 interview that for the past two years we sense support of the Russian leadership, which now understands the importance of creating a transparent business environment that can serve to facilitate not only political ties but also strategic interests. The relationship between the state and business in Russia is one of mutual strategic interest that largely depends on the powers inherent in the presidency. It is in the interest of Russian big business to have behind it the support of the state and its guarantee of property rights, but at the same time it has to accept that the state operates on the basis of informal rules and agreements and places national strategic interests above market mechanisms.

Relationship Between Earnings and the Chinese Stock Market

Relationship Between Earnings and the Chinese Stock Market Abstract In this paper, some factors are examined which are associated with equity value in an immature and emerging market, China. In the developed countries, research has indicated that both earnings and book value are playing an important role in forecasting equity value. While in China, earnings seems to have information content but earnings, by itself, seems to be weakening in importance over time. Book value has a more significant association with equity values. In the risky and unstable environment of China, where future expected earnings is quite uncertain, investors may not be pay much attention to earnings, but be more concerned for the book value. Regarding the role of book value, there are competing explanations. While some researchers conclude that book value was only important because of its contribution as a control for scale differences (Barth and Kallapur, 1996), others conclude that the important role book value played because it was a useful proxy for expected future normal earnings (Ohlson, 1995). Still others conclude that it is only relevant in the valuation of loss making and unsuccessful companies generally (Berger, Ofek and Swary 1996; Burgstahler and Dichev, 1997). The result of this paper indicates that, overall, earnings and book values are two important determents for pricing stock in China. Furthermore, this study indicates that book value is also important in an unstable economic environment and immature stock market, like China, which is still in early stage of capital market. 1 Introduction 1.1 Brief history In the mature market, empirical research finds that earnings and book value can be used to predict firm value. In particular, researchers have examined the association between earnings, book value, and a combination of both with stock prices and have found it to be significant (Ball and Brown 1968; Ball 1972; Kaplan and Roll, 1972; Collins and Kothari 1989; Burgstahler and Dichev, 1997). In an important paper referred as a landmark work, Ohlson (1995), in a famous paper, modeled this association and provided a widely used framework for empirical exploration. Burgstahler and Dichev (1997), a significant study in this area, indicated that equity value is an option style combination of recursion value and adaptation value. Recursion value (see Burgstahler and Dichev, 1997) is capitalized expected earnings when the firm recursively applies its current business technology to its resources. Adaptation value means the value of the firm’s resources adapted to alternative use. Current earnings are used as a proxy for recursion value and book value of equity is used as a proxy for adaptation value. While earnings provide a measure of how the firm’s resources are used currently, book value provides a measure of the value of the firm’s resources independent of how the resources are used currently. They note that, in particular, when the ratio of earnings to book value is high, earnings is the more important factor than book value of equity value. This is because under such a condition the firm is more likely to continue using resources in its current way. In contrary, when the ratio of earnings to book value is low, book value becomes the more important factor than earnings in equity valuation. Under this alternative condition, the firm is more likely to exercise the option to adapt its resources to a better alternative use. 1.2 Objectives In this dissertation, I will focus on the association between earnings and book value with stock prices in the Chinese stock market. Analysis of the Chinese market presents the potential for obtaining insights into stock pricing in an emerging or immature market. While some arguments could be made that certain aspects, for example, political and economic consequences of joining the World Trade Organization (WTO), make the Chinese market unique. In general, however, it should be noted that the Chinese market is still very reflective of developing (emerging) markets. Los and Yu (2008) classify China as an emerging market because of its low per capita income, chronic inflation, thin and immature capital markets, and concentrated financial and industrial sectors; criteria that they use to characterize emerging markets generally. Although the two Chinese Stock Exchange, the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE), were founded in December, 1990. The Chinese stock market is considered one of the highest growing emerging markets. But it is still small relative to the stock markets in developed countries. As Han et al. (2006) note, potential inefficiency and volatility also characterize the Chinese market. In the market, the buying and selling activity of a few large investors can make great effect to the stock prices. China is experiencing a highly economic transition and on the path to become an important and irreplaceable part of economic integration all over the world at present. Therefore, it is interesting to examine if the association of earnings, book value with stock prices which is applied to the larger and more efficient market will still hold in an immature (developing) stock market, like China. The objective of this dissertation is to examine the relationships between recursion value (earnings), adaptation value (book value) and equity value in an emerging stock market. The results of this dissertation will show that earnings is associated with stock price significantly for successful and middle-of-the-road companies; while, book value is associated with stock price significantly for unsuccessful companies. This may indicate that the â€Å"recursion value† portion of a company’s equity value is relatively of greater importance in equity valuation than â€Å"adaptation value† for successful (high earnings) companies, whereas the â€Å"adaptation value† portion of a company’s equity value is relatively of greater importance in equity valuation than â€Å"recursion value† for unsuccessful (low earnings) companies. 1.3 Economic and stock market characteristics of China This dissertation will examine the potential factors that cause the variation of stock prices in different conditions. Therefore, it is imperative to understand the economic and institutional influence behind such differences and the characteristics of Chinese stock market. In this section, I summarize the history of the Chinese stock market. China’s economy has changed from a centrally-planned economy (CPE), which was introduced in 1949, to a more market orientated economy  since 1978. China’s economic transition has been accompanied by a great social achievement since the late 1970s. However, there were some inherent deficiencies of the CPE, like the defective functioning of the planning mechanism, the monopolistic, non-contestable position of the State-Owned Enterprises (SOEs), the lack of adequate incentives, the lack of financial sanctions, the macro-economic, suboptimal allocation of resources (Gao, 2006 ). During the last three decades, China’s great successful economic transition has been accompanied by huge and complex social change, with an officially reported GDP growth rate of 9.5 percent per year since 1980 (Lindbeck, 2008). The growth rate of China’s economic has been among the highest in the world, especially since 1990. And China is a significant participant in the global economy currently. One of the most important developments was the reactivation of the stock market. To strengthen the operating performance and release the capital shortage experienced by SOEs, China has been promoting a market economy through corporatizing (i.e. privatizing) SOEs and developing securities markets. The origin of stock market in post-1949 mainland China can be traced to July 1984, when Beijing Tianqiao Department store was converted into a shareholding company. In August 1984, the Shanghai municipal government approved the first principle-level regulation on securities. The first stock was subsequently issued by a household electronics company in November 1984 and traded in August 1986 on the OTC market. In the next few years, more SOEs were â€Å"incorporated† by the selling of shares to their employees, other stock companies and other SOEs. The stock market, however, didn’t become a significant vehicle for SOE reform until the establishment of the two stock exchanges. In the early 1990s, the SHSE and the SZSE established, in December 1990 and in July 1991 respectively. In the following year, the Chinese Security Regulatory Commission (CSRC) was set up, as the Chinese equivalent of Securities and the Exchange Commission in the United States, to monitor and regulat e the stock market. Since then, the stock market has grown in a high speed, expanded rapidly and facilitated the reform of SOEs (Haw et al, 1999). In 1991, there were only 13 stocks listed and traded on these two exchanges (eight on SHSE and five on SZSE). By the first quarter of 2009, the number of firms listed had increased to 1625 (864 on SHSE and 761 on SZSE). (Gao, 2009) The total market capitalization of listed firms increased about 1522-fold over the 18-year period, from 11billion reminbi in 1991 (equivalent to about US$1.3 billion) to 12056.6 billion renminbi (equivalent to about US$1773 billion) in 2008 (Table 1). As of 24 April 2009, the total market capitalization was valued as 16742.768 billion renminbi (equivalent to about US$ 2462 billion) (Haw et al., 1999). 2 Literature review In this section, I initially discuss studies that examine the relationship between equity value and earnings and the relationship between equity values and book values respectively; then I examine the association of earnings and book values with equity values; finally I will focus on studies that have examined data from the Chinese stock market. 2.1 Studies examining association of earnings with equity value Generally speaking, much of the research in this area for the last 30 years was focused on inspecting the relationship between certain variables and equity values or stock price. In a seminal study, Ball and Brown (1968) found a positive and statistically significant association between earnings and equity value. An empirical evaluation of accounting income figures required for agreement as to what real-world results constituted a useful appropriate test. Because net income was a figure of particular interest to investors, the result they used as the standard forecast was the investment decision making as it was reflected in security prices. Since usefulness could be reduced by deficiencies in either of the content or the timing of existing annual net income numbers, both of them would be evaluated. The developments of capital theory at that time provided more choices to the price of security as an operational test of the usefulness of business. Impressive Institutions to support the idea of the theory that the capital market are both effective and fair, if the information is useful in forming capital asset prices, then the market in asset prices will be quickly adjusted to the information without leaving any opportunity for further abnormal gain. As the evidence indicates, if stock price do in fact really quickly adapt to the new information and then changes in stock prices will reflect the information market. As observed revision of stock prices and income report published would provide the evidence that the information reflected in the income figures are useful. Ball and Brown’s method of accounting on income to stock price was based on the theory and evidence by focusing on the unique information which is to a specific company. Specifically, Ball and Brown built two alternative models of what was the market expected income to be, and then investigated the error when the expected market response. 2.1.1  Expected and unexpected income changes According to Ball and Brown (1968), the income of enterprises in America tends to move together over the time. It has been demonstrated that about half of change in the level of average earnings per share (EPS) of a firm could be influenced by the whole economic environment. At least part of the change in the company’s income from one year to the next could be expected. In the past years, if a company’s revenue had been associated with other companies in a particular way, then understanding that relationship of the past, together with the understanding of the income of those other companies, had a particular expected rate of return at present. Therefore, in addition to confirm the impact of new information can have a similar equivalent to the differences between real change in income and expectations of income. But not all of these differences must be new information.  A number of changes in income were due to financing and other policy decisions made by the firm. Ball and Brown assumed that, to a first approximation, these changes were reflected in average change in income through time. Since the influence of the two components of change were felt at the same time, that is, economy wide and policy effects, the relationship must be estimated jointly. 2.1.2  The market reaction It had also been demonstrated that stock prices move together with the rate of return from holding stocks. The whole market return was influenced by the information released by all enterprises. (Ball and Brown, 1968) Since they were assessing report of income as it related to each company, its content and timing should be evaluated relative to the changes in the rate of return on the firms stocks net of whole market effects. 2.1.3  Some economic issues An assumption for Ordinary Least Squares (OLS) income regression model was that the average income of firm j in the market (Mj) and the unexpected income change were uncorrelated. Correlation between them could take at least two forms, which contained the firm in the market index of income (Mj) and the industry effects at that time. The first had been eliminated by construction (denoted by the y-subscript on M), but it had not been adjusted due to the impact of the industry at that time. It had been estimated that the impact of industry might account for only 10 percent of the variability of the income in a company. For this reason the model had been adopted as appropriate specifications, to believe that any bias in the estimates would not be very significant. However, as the statistical efficiency inspection on the model, Ball and Brown also presented results for another naà ¯ve model, which predicted that the income would be the same as last year. The forecast error (i.e. unexpected income change) was only changes in income since the previous year. As was the case with the income regression model, stock returns model contained a number of apparent violations of OLS assumptions. The return of market index was relevant to the residual because the market index contained the return for firm j, and because the industry impacts. Neither violation was serious, because the â€Å"Combination Investment Performance Index† of Fisher (Fisher, 1966) was calculated over all stocks listed on the New York Stock Exchange (hence stock returns was only a small portion of the index), and also because the industry impacts accounted for up to 10 percent (Brealey, 1968) of the changes in the rate of return on the average stock. Again, any bias had little effect on the results, because there is in no case was the stock return regression that was fitted over 100 observations (Fama, et al., 1967). Therefore, Ball and Brown (1968) assumed that it was impossible that no useful information about a particular firm reflected the rate of return during a period, but only the market-wide information that fitted for all firms. By abstracting market impacts, they identified the impact of information fitted to individual firms. Then, in order to determine whether part of the effect could be associated with information contained in the numbers of accounting income of a firm, they separated the expected and unexpected changes in income. If the income forecast error was negative, that was, if the actual change in income was less than its conditional expectation, they defined it as a bad news and predicted that if there was some relationship between accounting income numbers and stock prices, and then releases of the income figures would lead to the return on that firm’s stock, which was less than what would have been originally expected. The results from the empirical test of Ball and Brown showed that the information contained in the annual income figures were useful, as it related to stock prices. Beaver, Clark, and Wright (1979) found similar results and confirmed the initial findings of Ball and Brown (1968). Subsequent studies (Barth, Beaver, Landsman, 1992; Collins Kothari, 1989) found similar results again. The research of Lipe (1990) found that the relationship between earnings and equity value changes with the persistence of earnings. This study found that the equity value during a period is a function of (1) the time-series persistence of the earnings series, (2) the interest rate used in discounting expected future earnings, and (3) the relative ability of earnings versus alternative information to predict future earnings. The comparative statistics of Lipe (1990) showed that the response coefficient played an increasingly important role for past earnings to predict future earnings and an increasing function of persistence. In addition, the movements of stock price changed conditionally on earnings being announced was a decreasing effect of the predictability of the earnings series and an increasing effect of earnings persistence. If the predictability or response-coefficient effect was positive, that was because the value attached to a one-dollar current-period earnings shock was an increasing effect of predictability; if the predictability or variance-of-price-changes effect was negative, that was because the average quantity of unexpected information released during the period was a decreasing effect of predictability. Other studies refined the earlier studies by disintegrating earnings into components and then empirically testing the association between these components and equity values (Lipe, 1986; Wilson, 1986). 2.2 Studies examining association of book values with equity values A great number of studies focus on the balance sheet measures of assets and liabilities. These studies find a statistically significant relationship between book values and equity values of the firm (Penman, 1992; Barth Kallapur, 1996; Ohison, 1995; Berger, Ofek, Swary, 1996; Burgstahler Dichev, 1997). Book values of the firm’s assets and liabilities are used in these studies, which reinforce the assumption that measures of assets and liabilities reflect the expected results of future activities. However, some different conclusions are arrived at by the studies regarding the importance of book value. Barth and Kallapur (1996) stated that book value was important only because it acted as a control for size differences. Penman (1992) and Ohlson (1995) concluded that book value is important because it also acted as a proxy for earnings. Still others offer a competing explanation. Berger et al. (1996) reported that there is a positive and highly significant relation between market value and estimated liquidation value after controlling for present value of expected cash flow. Further assurance that correlated omitted variables do not affect the results is provided by the fact that the positive relation between market values and liquidation value changes in holding as well as levels. Berger et al. (1996) stated that the abandonment option was equal to an American put option on a paying dividend stock. Their analysis of this option results in the forecasting about how liquidation value influences firm value. All the other equality, the abandonment option leads to firms with a much bigger number of liquidation values being worth more investors. Therefore, they predict that market value is positively associated with liquidation value, after controlling for the relationship between market value and the present value of expected cash flow. Generally speaking, liquidation value for going concerns is not observable. Moreover, they concern more about the association between balance sheet information and the abandonment option’s value. They, therefore, estimate the relation between book value and liquidation value for major asset classes by choosing and analyzing the discontinued options footnotes of 157 sufficiently-detailed information firms. They find that one-dollar book value produces, 72 cents of liquidation value for receivables on average. Applying these estimates to the balance sheet disclosures of all the firms used as samples provides them with estimated liquidation values. In the empirical results, they report that after controlling for the option’s exercise price, the market value of a firm’s equity increases in a close approximation one for one with increases in the present value of after-interest cash flows. The significant positive estimate on the excess liquidation value movements continues to support the inference that the abandonment option makes a more important and significant contribution to the market value of a firm’s equity than that made by the present value of cash flow. To investigate the change over time in the association between abandonment option value and liquidation value, and to solve that problem that the pooled observations may not be independent, because it includes the same firm for many years. The results of their further research continue to show a positive, strong relation between the estimated liquidation value and the market value of the firm’s equity. Moreover, to further reduction of the concern that the inferences may be influenced by the liquidation value measure capturing a portion of true present value of cash flow that is omitted from their proxy, they perform an analysis in changes. At the same time, the sample contains all first differences of the firms from the levels analysis that meet sample selection restrictions. Berger et al. (1996) require that the first earnings prediction occur no later than the fourth month after the date liquidation value is calculated, which make sure that the changes in liquidation value and present value of cash flow are aligned properly in time for each firm in the sample. The change of percentage in equity value is for the purpose that captures the impact of operational decisions, not the impact of insurances and redemptions. So they delete the firms with insurances and retirements. The results for the changes is as expected, the fact that the latter estimate is significantly positive supports strong evidence, however, that the association they documented earlier between equity value and liquidation value was not affected by liquidation value and the present value of cash flow that both measure different part of true present value of cash flow. The constant component of any association between liquidation value and the omitted part of true present value of cash flow is removed by examining changes rather than levels. Therefore, Berger et al. continue to find the strong, positive association liquidation value and equity value of a firm. Berger et al. (1996) and Burgstahler and Dichev (1997) concluded that book value has relatively more significant association with stock prices when a firm is unsuccessful and making losses. They argued that this was because book value acted as a proxy for the â€Å"abandonment option†. 2.3 Studies examining association of earnings and book values with equity values Some studies observe the association between earnings and book values with equity values. Bernard (1995) tested several valuation models empirically. He found that book value per share accounted for 55% of the cross sectional variability in price per share; that book value and rank of return on equity accounted for 64% of the variation in equity price; and that estimated earnings and book values accounted for 68% of the variation in equity prices. Ohlson (1995) did not focus on earnings alone; theoretically, he modeled the role of earnings, book value and dividends in the valuation of a firm’s equity. An important combined function to the statement of changes in owner’s equity is allocated by accounting method. The statement includes the bottom-line items in the balance sheet and income statement, book value and earnings, and its format needs the change in book value to equal earnings minus dividends. This relation is referred as the clean surplus relationship because all changes in assets and liabilities which are unrelated to dividends must pass though the income statement. Generally, this scheme is accepted by accounting theory without connecting it to a user’s perspective on accounting data. While the underlying idea that net stocks of value settle with the creation and distribution of value produces a basic question in an equity valuation context: whether one can create a cohesive theory of a firm’s value that depends on the clean surplus relation to identify a distinct role for each of the three variables: earnings, book value and dividends. Ohlson (1995) resolves the question in a neoclassical framework. In this case, the analysis starts from the assumption that value is equal to the present value of expected dividends (Rubinstein, 1976). Then one can assume the clean surplus relation to replace dividends with earnings and book values in the formula of present value. At the same time, a multiple-date, uncertain model such that earnings and book value act as complementary value indicators is led to by assumption on the stochastic behavior of the accounting data, In a specific way, the main point of the valuation function expresses value as a weighted average of (i) capitalized earnings at present (adjusted for dividends) and (ii) book value at present. Extreme parameterizations of the model produce either capitalized earnings or book value at presents the only value indicators. Ohlson (1991) have examined both of the settings. At its most primary level, he accordingly generalizes prior analysis to derive a convex combination of a pure flow model of value and a pure stock model of value. The combination is an interesting conception because both the bottom-line items are brought into valuation through the clean additional relation. The development of model, in which Ohlson (1995) produces the value of a firm as linear additive functions of both earnings and book value, shows the relevance of abnormal or residual earnings as a variable that drives a company’s value. Earnings minus a charge for the use of capital define this accounting-based performance measure as measured by book value that is in the beginning of period multiplied by the cost of capital. Abnormal or residual earnings hold on the difference market and book values, that is to say, they bear the goodwill of a company. As a matter of fact, a particular parsimonious expression for goodwill is derived from a straight forward two step procedure as it relates to abnormal or residual earnings. Firstly, following Peasnell (1981) and others, the clean surplus relation indicates that goodwill is equal to the present value of future expected abnormal or residual earnings. Secondly, if one further assumes that abnormal or residual earnings comply with an autoregressive process, then it follows that goodwill is equal to abnormal or residual earnings at present scaled by a positive constant. The results emphasize that value can be driven by assuming abnormal or residual earnings processes that make no reference to past or future expected dividends. Not only does owners’ equity accounting subsume the clean surplus relation, it also indicates that dividends reduce book value but leave earnings at present unaffected. This additional feature is exploited to examine the margin effects of dividends on value and on the evolution of accounting data (Modigliani, 1958; Miller, 1961). Market value is displaced by dividends on a dollar for dollar basis, so that dividend payment irrelevancy applies. In addition to that, dividends that paid today impact expected future earnings negatively. The creation of wealth is separated by the model accordingly from the distribution of wealth. On the important condition that one generally attaches to Modigliani and Miller (1958, 1961) properties in valuation analysis, the economic significance of owners’ equity accounting is enhanced by the requirement that dividends reduce book value but not current earnings. The model allows information beyond earnings, book value and dividends. The additional information is motivated by the idea that expected future earnings are affected by some relevant value events as opposed to current earnings, that is to say, accounting measurements incorporate some relevant value events only after a time delay. The feature is interesting because the analysis implies that the weighted average of capitalized earnings and book value still support the main point of the valuation function, though the accounting data will be incomplete indicators of value. Ohlson (1995) made a conclusion that, earnings at present might have a strong relation with market value of equity while current dividends are more important than future earnings in predictive ability. He made the theoretical framework for further empirical explorations. In a further refinement of Ohlson (1995), Burgstahler and Dichev (1997) showed that earnings and book values are positively and significant associated with equity values. However, they found that the relationship was nonlinear (i.e., moderated by factors such as success of a firm) and not additive as suggested by Ohlson (1995). In 1997, the research of theirs developed an option- style model of equity value that incorporated the capitalized value of the firm’s expected earnings (under the assumption that the firm continues its current way of employing resources) but also explicitly recognized the value of firms adaption option (i.e. the value of the option converted the firm’s resources to alternative, more productive uses). The main forecasting of the model is that the value of equity is a convex function of both expected earnings and book value. Their empirical evidence strongly supported the prediction of convexity – the coefficient on earnings increased with the ratio of earnings to book value and the coefficient on book value decreased with the ratio of earnings to book value. They developed two propositions for the relationship of recursion (a proxy of earnings) and adaptation value (a proxy of book value of equity) components with market value. In the model below, an option-style combination of recursion value and adaptation value are reflected in the equity value. Recursion value is capitalized expected earnings when the company recursively applies its business technology at present to its resources. Adaptation value is the value of the company’s resources which adapted to an alternative use. The possibility that the company will exercise the option to conform the resources to another way to use is reflected in the relative weights on the two factors of market value of equity. In a specific way, when the recursion value is not high relative to the adaptation value, the company will opt out of recursion value in favor of adaptation value. Two propositions are led to by the shape of valuation function in each argument. The model is as follows: MV (E, AV)EAV There are four basic terms in the model. MV represents market value of equity; E represents expected future earnings which use the company’s business technology at present; c represents capitalization factor for earnings; AV represents adaptation value. E and AV are random variables. The joint distribution of the two variables is described by the multivariate no Relationship Between Earnings and the Chinese Stock Market Relationship Between Earnings and the Chinese Stock Market Abstract In this paper, some factors are examined which are associated with equity value in an immature and emerging market, China. In the developed countries, research has indicated that both earnings and book value are playing an important role in forecasting equity value. While in China, earnings seems to have information content but earnings, by itself, seems to be weakening in importance over time. Book value has a more significant association with equity values. In the risky and unstable environment of China, where future expected earnings is quite uncertain, investors may not be pay much attention to earnings, but be more concerned for the book value. Regarding the role of book value, there are competing explanations. While some researchers conclude that book value was only important because of its contribution as a control for scale differences (Barth and Kallapur, 1996), others conclude that the important role book value played because it was a useful proxy for expected future normal earnings (Ohlson, 1995). Still others conclude that it is only relevant in the valuation of loss making and unsuccessful companies generally (Berger, Ofek and Swary 1996; Burgstahler and Dichev, 1997). The result of this paper indicates that, overall, earnings and book values are two important determents for pricing stock in China. Furthermore, this study indicates that book value is also important in an unstable economic environment and immature stock market, like China, which is still in early stage of capital market. 1 Introduction 1.1 Brief history In the mature market, empirical research finds that earnings and book value can be used to predict firm value. In particular, researchers have examined the association between earnings, book value, and a combination of both with stock prices and have found it to be significant (Ball and Brown 1968; Ball 1972; Kaplan and Roll, 1972; Collins and Kothari 1989; Burgstahler and Dichev, 1997). In an important paper referred as a landmark work, Ohlson (1995), in a famous paper, modeled this association and provided a widely used framework for empirical exploration. Burgstahler and Dichev (1997), a significant study in this area, indicated that equity value is an option style combination of recursion value and adaptation value. Recursion value (see Burgstahler and Dichev, 1997) is capitalized expected earnings when the firm recursively applies its current business technology to its resources. Adaptation value means the value of the firm’s resources adapted to alternative use. Current earnings are used as a proxy for recursion value and book value of equity is used as a proxy for adaptation value. While earnings provide a measure of how the firm’s resources are used currently, book value provides a measure of the value of the firm’s resources independent of how the resources are used currently. They note that, in particular, when the ratio of earnings to book value is high, earnings is the more important factor than book value of equity value. This is because under such a condition the firm is more likely to continue using resources in its current way. In contrary, when the ratio of earnings to book value is low, book value becomes the more important factor than earnings in equity valuation. Under this alternative condition, the firm is more likely to exercise the option to adapt its resources to a better alternative use. 1.2 Objectives In this dissertation, I will focus on the association between earnings and book value with stock prices in the Chinese stock market. Analysis of the Chinese market presents the potential for obtaining insights into stock pricing in an emerging or immature market. While some arguments could be made that certain aspects, for example, political and economic consequences of joining the World Trade Organization (WTO), make the Chinese market unique. In general, however, it should be noted that the Chinese market is still very reflective of developing (emerging) markets. Los and Yu (2008) classify China as an emerging market because of its low per capita income, chronic inflation, thin and immature capital markets, and concentrated financial and industrial sectors; criteria that they use to characterize emerging markets generally. Although the two Chinese Stock Exchange, the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE), were founded in December, 1990. The Chinese stock market is considered one of the highest growing emerging markets. But it is still small relative to the stock markets in developed countries. As Han et al. (2006) note, potential inefficiency and volatility also characterize the Chinese market. In the market, the buying and selling activity of a few large investors can make great effect to the stock prices. China is experiencing a highly economic transition and on the path to become an important and irreplaceable part of economic integration all over the world at present. Therefore, it is interesting to examine if the association of earnings, book value with stock prices which is applied to the larger and more efficient market will still hold in an immature (developing) stock market, like China. The objective of this dissertation is to examine the relationships between recursion value (earnings), adaptation value (book value) and equity value in an emerging stock market. The results of this dissertation will show that earnings is associated with stock price significantly for successful and middle-of-the-road companies; while, book value is associated with stock price significantly for unsuccessful companies. This may indicate that the â€Å"recursion value† portion of a company’s equity value is relatively of greater importance in equity valuation than â€Å"adaptation value† for successful (high earnings) companies, whereas the â€Å"adaptation value† portion of a company’s equity value is relatively of greater importance in equity valuation than â€Å"recursion value† for unsuccessful (low earnings) companies. 1.3 Economic and stock market characteristics of China This dissertation will examine the potential factors that cause the variation of stock prices in different conditions. Therefore, it is imperative to understand the economic and institutional influence behind such differences and the characteristics of Chinese stock market. In this section, I summarize the history of the Chinese stock market. China’s economy has changed from a centrally-planned economy (CPE), which was introduced in 1949, to a more market orientated economy  since 1978. China’s economic transition has been accompanied by a great social achievement since the late 1970s. However, there were some inherent deficiencies of the CPE, like the defective functioning of the planning mechanism, the monopolistic, non-contestable position of the State-Owned Enterprises (SOEs), the lack of adequate incentives, the lack of financial sanctions, the macro-economic, suboptimal allocation of resources (Gao, 2006 ). During the last three decades, China’s great successful economic transition has been accompanied by huge and complex social change, with an officially reported GDP growth rate of 9.5 percent per year since 1980 (Lindbeck, 2008). The growth rate of China’s economic has been among the highest in the world, especially since 1990. And China is a significant participant in the global economy currently. One of the most important developments was the reactivation of the stock market. To strengthen the operating performance and release the capital shortage experienced by SOEs, China has been promoting a market economy through corporatizing (i.e. privatizing) SOEs and developing securities markets. The origin of stock market in post-1949 mainland China can be traced to July 1984, when Beijing Tianqiao Department store was converted into a shareholding company. In August 1984, the Shanghai municipal government approved the first principle-level regulation on securities. The first stock was subsequently issued by a household electronics company in November 1984 and traded in August 1986 on the OTC market. In the next few years, more SOEs were â€Å"incorporated† by the selling of shares to their employees, other stock companies and other SOEs. The stock market, however, didn’t become a significant vehicle for SOE reform until the establishment of the two stock exchanges. In the early 1990s, the SHSE and the SZSE established, in December 1990 and in July 1991 respectively. In the following year, the Chinese Security Regulatory Commission (CSRC) was set up, as the Chinese equivalent of Securities and the Exchange Commission in the United States, to monitor and regulat e the stock market. Since then, the stock market has grown in a high speed, expanded rapidly and facilitated the reform of SOEs (Haw et al, 1999). In 1991, there were only 13 stocks listed and traded on these two exchanges (eight on SHSE and five on SZSE). By the first quarter of 2009, the number of firms listed had increased to 1625 (864 on SHSE and 761 on SZSE). (Gao, 2009) The total market capitalization of listed firms increased about 1522-fold over the 18-year period, from 11billion reminbi in 1991 (equivalent to about US$1.3 billion) to 12056.6 billion renminbi (equivalent to about US$1773 billion) in 2008 (Table 1). As of 24 April 2009, the total market capitalization was valued as 16742.768 billion renminbi (equivalent to about US$ 2462 billion) (Haw et al., 1999). 2 Literature review In this section, I initially discuss studies that examine the relationship between equity value and earnings and the relationship between equity values and book values respectively; then I examine the association of earnings and book values with equity values; finally I will focus on studies that have examined data from the Chinese stock market. 2.1 Studies examining association of earnings with equity value Generally speaking, much of the research in this area for the last 30 years was focused on inspecting the relationship between certain variables and equity values or stock price. In a seminal study, Ball and Brown (1968) found a positive and statistically significant association between earnings and equity value. An empirical evaluation of accounting income figures required for agreement as to what real-world results constituted a useful appropriate test. Because net income was a figure of particular interest to investors, the result they used as the standard forecast was the investment decision making as it was reflected in security prices. Since usefulness could be reduced by deficiencies in either of the content or the timing of existing annual net income numbers, both of them would be evaluated. The developments of capital theory at that time provided more choices to the price of security as an operational test of the usefulness of business. Impressive Institutions to support the idea of the theory that the capital market are both effective and fair, if the information is useful in forming capital asset prices, then the market in asset prices will be quickly adjusted to the information without leaving any opportunity for further abnormal gain. As the evidence indicates, if stock price do in fact really quickly adapt to the new information and then changes in stock prices will reflect the information market. As observed revision of stock prices and income report published would provide the evidence that the information reflected in the income figures are useful. Ball and Brown’s method of accounting on income to stock price was based on the theory and evidence by focusing on the unique information which is to a specific company. Specifically, Ball and Brown built two alternative models of what was the market expected income to be, and then investigated the error when the expected market response. 2.1.1  Expected and unexpected income changes According to Ball and Brown (1968), the income of enterprises in America tends to move together over the time. It has been demonstrated that about half of change in the level of average earnings per share (EPS) of a firm could be influenced by the whole economic environment. At least part of the change in the company’s income from one year to the next could be expected. In the past years, if a company’s revenue had been associated with other companies in a particular way, then understanding that relationship of the past, together with the understanding of the income of those other companies, had a particular expected rate of return at present. Therefore, in addition to confirm the impact of new information can have a similar equivalent to the differences between real change in income and expectations of income. But not all of these differences must be new information.  A number of changes in income were due to financing and other policy decisions made by the firm. Ball and Brown assumed that, to a first approximation, these changes were reflected in average change in income through time. Since the influence of the two components of change were felt at the same time, that is, economy wide and policy effects, the relationship must be estimated jointly. 2.1.2  The market reaction It had also been demonstrated that stock prices move together with the rate of return from holding stocks. The whole market return was influenced by the information released by all enterprises. (Ball and Brown, 1968) Since they were assessing report of income as it related to each company, its content and timing should be evaluated relative to the changes in the rate of return on the firms stocks net of whole market effects. 2.1.3  Some economic issues An assumption for Ordinary Least Squares (OLS) income regression model was that the average income of firm j in the market (Mj) and the unexpected income change were uncorrelated. Correlation between them could take at least two forms, which contained the firm in the market index of income (Mj) and the industry effects at that time. The first had been eliminated by construction (denoted by the y-subscript on M), but it had not been adjusted due to the impact of the industry at that time. It had been estimated that the impact of industry might account for only 10 percent of the variability of the income in a company. For this reason the model had been adopted as appropriate specifications, to believe that any bias in the estimates would not be very significant. However, as the statistical efficiency inspection on the model, Ball and Brown also presented results for another naà ¯ve model, which predicted that the income would be the same as last year. The forecast error (i.e. unexpected income change) was only changes in income since the previous year. As was the case with the income regression model, stock returns model contained a number of apparent violations of OLS assumptions. The return of market index was relevant to the residual because the market index contained the return for firm j, and because the industry impacts. Neither violation was serious, because the â€Å"Combination Investment Performance Index† of Fisher (Fisher, 1966) was calculated over all stocks listed on the New York Stock Exchange (hence stock returns was only a small portion of the index), and also because the industry impacts accounted for up to 10 percent (Brealey, 1968) of the changes in the rate of return on the average stock. Again, any bias had little effect on the results, because there is in no case was the stock return regression that was fitted over 100 observations (Fama, et al., 1967). Therefore, Ball and Brown (1968) assumed that it was impossible that no useful information about a particular firm reflected the rate of return during a period, but only the market-wide information that fitted for all firms. By abstracting market impacts, they identified the impact of information fitted to individual firms. Then, in order to determine whether part of the effect could be associated with information contained in the numbers of accounting income of a firm, they separated the expected and unexpected changes in income. If the income forecast error was negative, that was, if the actual change in income was less than its conditional expectation, they defined it as a bad news and predicted that if there was some relationship between accounting income numbers and stock prices, and then releases of the income figures would lead to the return on that firm’s stock, which was less than what would have been originally expected. The results from the empirical test of Ball and Brown showed that the information contained in the annual income figures were useful, as it related to stock prices. Beaver, Clark, and Wright (1979) found similar results and confirmed the initial findings of Ball and Brown (1968). Subsequent studies (Barth, Beaver, Landsman, 1992; Collins Kothari, 1989) found similar results again. The research of Lipe (1990) found that the relationship between earnings and equity value changes with the persistence of earnings. This study found that the equity value during a period is a function of (1) the time-series persistence of the earnings series, (2) the interest rate used in discounting expected future earnings, and (3) the relative ability of earnings versus alternative information to predict future earnings. The comparative statistics of Lipe (1990) showed that the response coefficient played an increasingly important role for past earnings to predict future earnings and an increasing function of persistence. In addition, the movements of stock price changed conditionally on earnings being announced was a decreasing effect of the predictability of the earnings series and an increasing effect of earnings persistence. If the predictability or response-coefficient effect was positive, that was because the value attached to a one-dollar current-period earnings shock was an increasing effect of predictability; if the predictability or variance-of-price-changes effect was negative, that was because the average quantity of unexpected information released during the period was a decreasing effect of predictability. Other studies refined the earlier studies by disintegrating earnings into components and then empirically testing the association between these components and equity values (Lipe, 1986; Wilson, 1986). 2.2 Studies examining association of book values with equity values A great number of studies focus on the balance sheet measures of assets and liabilities. These studies find a statistically significant relationship between book values and equity values of the firm (Penman, 1992; Barth Kallapur, 1996; Ohison, 1995; Berger, Ofek, Swary, 1996; Burgstahler Dichev, 1997). Book values of the firm’s assets and liabilities are used in these studies, which reinforce the assumption that measures of assets and liabilities reflect the expected results of future activities. However, some different conclusions are arrived at by the studies regarding the importance of book value. Barth and Kallapur (1996) stated that book value was important only because it acted as a control for size differences. Penman (1992) and Ohlson (1995) concluded that book value is important because it also acted as a proxy for earnings. Still others offer a competing explanation. Berger et al. (1996) reported that there is a positive and highly significant relation between market value and estimated liquidation value after controlling for present value of expected cash flow. Further assurance that correlated omitted variables do not affect the results is provided by the fact that the positive relation between market values and liquidation value changes in holding as well as levels. Berger et al. (1996) stated that the abandonment option was equal to an American put option on a paying dividend stock. Their analysis of this option results in the forecasting about how liquidation value influences firm value. All the other equality, the abandonment option leads to firms with a much bigger number of liquidation values being worth more investors. Therefore, they predict that market value is positively associated with liquidation value, after controlling for the relationship between market value and the present value of expected cash flow. Generally speaking, liquidation value for going concerns is not observable. Moreover, they concern more about the association between balance sheet information and the abandonment option’s value. They, therefore, estimate the relation between book value and liquidation value for major asset classes by choosing and analyzing the discontinued options footnotes of 157 sufficiently-detailed information firms. They find that one-dollar book value produces, 72 cents of liquidation value for receivables on average. Applying these estimates to the balance sheet disclosures of all the firms used as samples provides them with estimated liquidation values. In the empirical results, they report that after controlling for the option’s exercise price, the market value of a firm’s equity increases in a close approximation one for one with increases in the present value of after-interest cash flows. The significant positive estimate on the excess liquidation value movements continues to support the inference that the abandonment option makes a more important and significant contribution to the market value of a firm’s equity than that made by the present value of cash flow. To investigate the change over time in the association between abandonment option value and liquidation value, and to solve that problem that the pooled observations may not be independent, because it includes the same firm for many years. The results of their further research continue to show a positive, strong relation between the estimated liquidation value and the market value of the firm’s equity. Moreover, to further reduction of the concern that the inferences may be influenced by the liquidation value measure capturing a portion of true present value of cash flow that is omitted from their proxy, they perform an analysis in changes. At the same time, the sample contains all first differences of the firms from the levels analysis that meet sample selection restrictions. Berger et al. (1996) require that the first earnings prediction occur no later than the fourth month after the date liquidation value is calculated, which make sure that the changes in liquidation value and present value of cash flow are aligned properly in time for each firm in the sample. The change of percentage in equity value is for the purpose that captures the impact of operational decisions, not the impact of insurances and redemptions. So they delete the firms with insurances and retirements. The results for the changes is as expected, the fact that the latter estimate is significantly positive supports strong evidence, however, that the association they documented earlier between equity value and liquidation value was not affected by liquidation value and the present value of cash flow that both measure different part of true present value of cash flow. The constant component of any association between liquidation value and the omitted part of true present value of cash flow is removed by examining changes rather than levels. Therefore, Berger et al. continue to find the strong, positive association liquidation value and equity value of a firm. Berger et al. (1996) and Burgstahler and Dichev (1997) concluded that book value has relatively more significant association with stock prices when a firm is unsuccessful and making losses. They argued that this was because book value acted as a proxy for the â€Å"abandonment option†. 2.3 Studies examining association of earnings and book values with equity values Some studies observe the association between earnings and book values with equity values. Bernard (1995) tested several valuation models empirically. He found that book value per share accounted for 55% of the cross sectional variability in price per share; that book value and rank of return on equity accounted for 64% of the variation in equity price; and that estimated earnings and book values accounted for 68% of the variation in equity prices. Ohlson (1995) did not focus on earnings alone; theoretically, he modeled the role of earnings, book value and dividends in the valuation of a firm’s equity. An important combined function to the statement of changes in owner’s equity is allocated by accounting method. The statement includes the bottom-line items in the balance sheet and income statement, book value and earnings, and its format needs the change in book value to equal earnings minus dividends. This relation is referred as the clean surplus relationship because all changes in assets and liabilities which are unrelated to dividends must pass though the income statement. Generally, this scheme is accepted by accounting theory without connecting it to a user’s perspective on accounting data. While the underlying idea that net stocks of value settle with the creation and distribution of value produces a basic question in an equity valuation context: whether one can create a cohesive theory of a firm’s value that depends on the clean surplus relation to identify a distinct role for each of the three variables: earnings, book value and dividends. Ohlson (1995) resolves the question in a neoclassical framework. In this case, the analysis starts from the assumption that value is equal to the present value of expected dividends (Rubinstein, 1976). Then one can assume the clean surplus relation to replace dividends with earnings and book values in the formula of present value. At the same time, a multiple-date, uncertain model such that earnings and book value act as complementary value indicators is led to by assumption on the stochastic behavior of the accounting data, In a specific way, the main point of the valuation function expresses value as a weighted average of (i) capitalized earnings at present (adjusted for dividends) and (ii) book value at present. Extreme parameterizations of the model produce either capitalized earnings or book value at presents the only value indicators. Ohlson (1991) have examined both of the settings. At its most primary level, he accordingly generalizes prior analysis to derive a convex combination of a pure flow model of value and a pure stock model of value. The combination is an interesting conception because both the bottom-line items are brought into valuation through the clean additional relation. The development of model, in which Ohlson (1995) produces the value of a firm as linear additive functions of both earnings and book value, shows the relevance of abnormal or residual earnings as a variable that drives a company’s value. Earnings minus a charge for the use of capital define this accounting-based performance measure as measured by book value that is in the beginning of period multiplied by the cost of capital. Abnormal or residual earnings hold on the difference market and book values, that is to say, they bear the goodwill of a company. As a matter of fact, a particular parsimonious expression for goodwill is derived from a straight forward two step procedure as it relates to abnormal or residual earnings. Firstly, following Peasnell (1981) and others, the clean surplus relation indicates that goodwill is equal to the present value of future expected abnormal or residual earnings. Secondly, if one further assumes that abnormal or residual earnings comply with an autoregressive process, then it follows that goodwill is equal to abnormal or residual earnings at present scaled by a positive constant. The results emphasize that value can be driven by assuming abnormal or residual earnings processes that make no reference to past or future expected dividends. Not only does owners’ equity accounting subsume the clean surplus relation, it also indicates that dividends reduce book value but leave earnings at present unaffected. This additional feature is exploited to examine the margin effects of dividends on value and on the evolution of accounting data (Modigliani, 1958; Miller, 1961). Market value is displaced by dividends on a dollar for dollar basis, so that dividend payment irrelevancy applies. In addition to that, dividends that paid today impact expected future earnings negatively. The creation of wealth is separated by the model accordingly from the distribution of wealth. On the important condition that one generally attaches to Modigliani and Miller (1958, 1961) properties in valuation analysis, the economic significance of owners’ equity accounting is enhanced by the requirement that dividends reduce book value but not current earnings. The model allows information beyond earnings, book value and dividends. The additional information is motivated by the idea that expected future earnings are affected by some relevant value events as opposed to current earnings, that is to say, accounting measurements incorporate some relevant value events only after a time delay. The feature is interesting because the analysis implies that the weighted average of capitalized earnings and book value still support the main point of the valuation function, though the accounting data will be incomplete indicators of value. Ohlson (1995) made a conclusion that, earnings at present might have a strong relation with market value of equity while current dividends are more important than future earnings in predictive ability. He made the theoretical framework for further empirical explorations. In a further refinement of Ohlson (1995), Burgstahler and Dichev (1997) showed that earnings and book values are positively and significant associated with equity values. However, they found that the relationship was nonlinear (i.e., moderated by factors such as success of a firm) and not additive as suggested by Ohlson (1995). In 1997, the research of theirs developed an option- style model of equity value that incorporated the capitalized value of the firm’s expected earnings (under the assumption that the firm continues its current way of employing resources) but also explicitly recognized the value of firms adaption option (i.e. the value of the option converted the firm’s resources to alternative, more productive uses). The main forecasting of the model is that the value of equity is a convex function of both expected earnings and book value. Their empirical evidence strongly supported the prediction of convexity – the coefficient on earnings increased with the ratio of earnings to book value and the coefficient on book value decreased with the ratio of earnings to book value. They developed two propositions for the relationship of recursion (a proxy of earnings) and adaptation value (a proxy of book value of equity) components with market value. In the model below, an option-style combination of recursion value and adaptation value are reflected in the equity value. Recursion value is capitalized expected earnings when the company recursively applies its business technology at present to its resources. Adaptation value is the value of the company’s resources which adapted to an alternative use. The possibility that the company will exercise the option to conform the resources to another way to use is reflected in the relative weights on the two factors of market value of equity. In a specific way, when the recursion value is not high relative to the adaptation value, the company will opt out of recursion value in favor of adaptation value. Two propositions are led to by the shape of valuation function in each argument. The model is as follows: MV (E, AV)EAV There are four basic terms in the model. MV represents market value of equity; E represents expected future earnings which use the company’s business technology at present; c represents capitalization factor for earnings; AV represents adaptation value. E and AV are random variables. The joint distribution of the two variables is described by the multivariate no