The significance of research—Comments on the Five-Year Plan paper

Feng Liu

Xiamen University,China

The significance of research—Comments on the Five-Year Plan paper

Feng Liu

Xiamen University,China

All accounting and financial behaviors are rooted in specific institutional environments.These behaviors pertain to specific firms,and firms operate in different economic systems.Therefore,institutions such as the political,legal,economic,cultural,and religious institutions that shape an economic entity will surely be reflected in firms’accounting and financial behaviors.Accounting and finance research that does not consider institutions lacks relevancy and vitality.

Modigliani and Miller(1958)are the starting point of modern corporate finance research.However,a series of assumptions in Modigliani and Miller(1958)is designed to limit or weaken the role played by the institutional environment on investors’behaviors.Subsequent research relaxes Modigliani and Miller’s(1958)assumptions and introduces social institutions,such as taxes and bankruptcy costs.During the last three decades,accounting and finance studies published in influential academic journals have been based on capital markets and institutions in the United States.The discussion on institutions is not salient,as all authors,readers,editors,reviewers,and even critics are from or assumed to be from the United States,and they exchange stories under the same social scenarios.

Accounting and finance research based on Jensen and Mecklin’s(1976)agency theory during the last three decades was undoubtedly mainstream.Such research has made the Journal of Accounting and Economics and the Journal of Financial Economics successful.Agency theory leads researchers’attention to firms’internal organization and market participants’characteristics.It has also made some assumptions on external environments related to the free market,protection intellectual properties,and a mature legal system.Research on capital structure,earnings management,and tax shields requires certain assumptions to be made of institutions,such as profit-seeking capital and discretionary decision making based on firm and shareholder value.Solving the so-called capital structure puzzle calls for attention to institutions.

At the end of the last century,China introduced a framework originating from US markets and institutions to conduct its accounting and finance research.The Shanghai and Shenzhen Exchanges are constantly supplying data for this kind of research.We have been making steady improvement in our research.Earlier replications have been modified by adding institutions(such as shareholder identities and state ownership)and using different Chinese settings or data.However,most of the research is literature-driven and not issue-driven,with the goal of answering questions,using Chinese settings and data that Western scholars are interested in but cannot answer.This kind of research already respects institutions and their effects on accounting and finance behaviors.However,it is not guided by institutions,nor is it issue-driven.Therefore,although we sometimes see statistical significance,we are often unable to explain reality and sometimes even see contradictory explanations.Unguided by real issues,accounting and finance research is often a tempest in a teacup and does not deal with important questions.Researchers should always aim to answer real theoretical and practical questions.

Real institution-guided and issue-driven research should stem from China’s institutional environment or its business reality and discuss persistent and important questions in this market or economic system using current theories.If these theories cannot provide an explanation,they can become researchers’treasure troves.This is also the logic of Justin Lin’s New Structural Economics.

The current accounting and finance theories were mainly formed during the 1990s.Although the US economy is still a free market economy,it has been experiencing big,if not fundamental,changes during the last 20 years due to the Internet,securitization,and big data.Businesses like Google,Uber,and Airbnb are occupying important places in the economy.This has reduced the ability of our current accounting and finance theories to explain these firms.Furthermore,our market is characterized by the coexistence of centralization,intense regulation,central-local government relationships,Confucian culture,the coexistence of SOEs and non-SOEs,and so on.Research exploring these common phenomena under such institutions and real business scenarios can thus be considered as institution-guided and issue-driven.

In short,accounting and financial behaviors pertain to specific firms,and firms operate in a given economic environment.Factors shaping and constraining economic environments are broadly defined as institutions,which include politics,law,economy,and culture.Professor TJ Wong once called for the paradigm of a‘‘top-down” research approach,which requires accounting and finance research to start from its fundamental source.This begs the question of where the source is.

Now let’s turn to the Five-Year Plan paper.

Although prior studies address microeconomic accounting and finance research in light of China’s institutional characteristics,this paper starts from a point that appears to be somewhat disconnected:China’s Five-Year Plans.By dissecting Five-Year Plans,the authors explore a more general idea:how macroeconomic policies influence microeconomic firm behaviors or the macroeconomic policy transmission mechanism.The focus of the paper is still firms’finance behaviors.The authors find that SOEs supported by the Five-Year Plans have access to more and cheaper capital and have more overinvestments and nonperforming loans,and that non-SOEs are crowded out.

The China Journal of Accounting Research(CJAR)seeks papers of this style.These papers start from China’s institutional background and contribute distinct findings with a solid theoretical foundation to the accounting and finance literature.We expect that the authors and CJAR can work together to mainstream this type of research.

However,as a critical reader,I still have several issues to clarify.

First,what is the positioning of the research?Is this paper a Five-Year Plan study or a study on how Five-Year Plans affect firms’financial behaviors?If it is a Five-Year Plan study,the authors need to focus on which of the 13 Five-Year Plans is most effective,what kinds of Five-Year Plans are effective,and other such questions.To discuss the effectiveness of Five-Year Plans,they would need to use Justin Lin’s comparative advantages and the roles of the government as theoretical foundations.The authors describe their results in such a way as to prevent readers from negative interpretations.They imply that Five-Year Plans cannot be considered simply as government interference in the market and that cheap finance obtained by state-owned firms cannot be considered as a negative effect of government action.If we leave the macroeconomy,then we cannot understand the microeconomy.

Of course,the CJAR does not reject macro research,although it is not a major theme of the journal.To make the paper more influential,we suggest that its position be revised:the influence of macro policies and institutions on firms’financial and accounting behaviors– evidence from Five-Year Plans.Such a position change would require some revision of the article.An important question should be discussed:why are Five-Year Plans an important factor?Of course,one can use Justin Lin’s theories here,too.We suggest,if possible,that the authors build a framework of the determinants of Chinese firms’accounting and finance behaviors;this would make Five-Year Plans a key factor.

Second,if the focus is on how macro policies influence firms’behaviors,how does this link to La Porta,Lopez-deSilanes,Shleifer,and Vishny(LLSV)or other related studies?Answering this question would enhance readability.Alternatively,is it possible to infer a more general conclusion based on Five-Year Plans and firms’financial performance,like LLSV’s conclusion that legal protection of investors’rights determines the prosperity of capital markets?Currently,the paper provides research findings but still lacks–or we have overlooked–such generalizability.Prior works,such as implicit contracts and perk consumption,have such qualities.The authors appear to combine macro and micro rationality and try to convey the idea that under different institutions,macro and micro rationality have different criteria.For example,state-owned firms supported by industrial policies have a low cost of capital.This would be considered discriminatory in the US free market.However,if one considers the rationale behind macro policies,then the criteria for micro rationality can change.Alternatively,this could be a creative idea the authors are trying to convey.However,it appears that the authors have not expressed it clearly and readers can only sense it vaguely.

Third,what are the links from Five-Year Plans to corporate finance,accounting behaviors,and accountingbased performances?We suggest the authors explore a few cases where firms grow quickly because of support from Five-Year Plans.

Two key indicators in the paper,IPO and investment amount,are a result of government actions.When the China Securities Regulatory Commission screens IPO applications,it pays attention to whether they are consistent with industrial policies.If the applications are inconsistent,they are declined.Therefore,we can observe an almost mechanical relationship between financial resource allocation and Five-Year Plans.Similarly,in China,large capital investments are not solely determined by firms,as firms need to obtain permissions from the National Development and Reform Commission(NDRC)and Environmental Protection Agency.For example,Jianlin Wang has to obtain approvals to invest in amusement parks to compete with Disneyland.The Shanghai Disneyland needs to do that,too.Hence,it is reasonable to conjecture that industries supported by Five-Year Plans have priority in obtaining investment permissions.

These two measures would make sense when used to distinguish di ff erent mechanisms.Are there other mechanisms and other measures?

Fourth,why are non-state-owned firms crowded out in Five-Year Plans?Many studies show that the driving force of China’s economic growth is the non-state sector.If Five-Year Plans crowd out non-state-owned firms,does this mean that Five-Year Plans are detrimental to China’s economic development?Additionally,nonperforming loans are related to Five-Year Plans and state-owned firms in policy-supported industries perform even worse.This finding also needs further explanation.

A more general research question addresses the relationship between Five-Year Plans and formal and informal financing.What is the underlying logic here?Does it account for why Five-Year Plans can crowd out nonstate-owned firms?

Informal financing must exist because formal financing channels are blocked or because of a high level of regulations.A study by Lu and Yao(2004)suggests that non-state-owned firms can obtain more capital and achieve better performance when financing channels are less regulated,consistent with findings in this paper.That said,why do Five-Year Plans crowd out non-state-owned firms?Is it because of official disapproval or cost disadvantages?Is the crowding out of non-state-owned firms inconsistent with privatization?Does the paper consider the effect of these institutional factors?

Fifth,are human behaviors discussed thoroughly enough?Under the framework of Justin Lin’s New Institutional Economics,the government is rational.To obtain a good reputation,government officials are willing to implement ‘‘nationwide welfare maximization” policies.The authors’judgment of the competitive advantages of a nation or a region is correct in general.

From our perspective,the authors could focus more on human behaviors.Are policymakers purely rational without any self-interest or concerns?Perhaps the authors could more thoroughly consider the topic from the cultural perspective.

Irrational behaviors exist naturally.How does this idea affect Five-Year Plans?For example,do NDRC members’past experiences and geographic origins affect the formation and implementation of Five-Year Plans,and if so,to what degree?In implementing Five-Year Plans,is there any agency cost,and what would it be?How would it affect the mechanisms(e.g.,nonlinear,multidirectional forms)?The authors subsequently examine the associations between industrial policies and insider trading,analyst behaviors,information environment,and so on.As this paper is the first study of a series,perhaps the authors should consider thinking outside the box.

I hope that papers published in the CJAR can explore the secrets of ‘‘the China miracle” in an ideologyneutral sense,without the priori assumption that government is the engine of the miracle.Maybe it is really the masses that create the miracle.Is it possible that we adopt an attitude of truth-seeking and objectively examine the transmission from macro policies to firm behaviors or discuss the formation of the development of China’s accounting and financial system?Without such an attitude,we are not taking research seriously.

Acknowledgements

I am grateful for the helpful comments raised by Prof.Zhen Zheng from Xiamen University.

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