Granting decision rights to minority shareholders protects them from expropriation by controlling shareholders, but it simultaneously fosters a mismatch between decision rights and decision‐relevant information. Using the setting of China's classified voting system (CVS), which requires minority shareholder approval for managerial proposals, this study investigates the effect of such a regulation on investment responsiveness to profitability and equity value attributable to growth options. Following the real‐options‐based valuation model, we document that the adoption of CVS diminishes both investment responsiveness and equity value. This reduction is attributed to heightened financial constraints following the CVS implementation. Further analyses show the negative impacts are more pronounced for firms experiencing greater information asymmetry, lower mutual fund holdings, and severe agency conflicts. Our evidence indicates that the efficacy of the regulation is contingent on the alignment between decision rights of minority shareholders and decision‐relevant information available to them. Our findings thus provide insights to the regulators regarding the advantages and disadvantages of allowing minority shareholders direct influence over corporate decision‐making.

ABSTRACT Interpreting accruals as working capital investment, we hypothesize based on "q"-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable investments and higher accruals. Our evidence supports this optimal investment hypothesis: (1) adding an investment factor into standard factor regressions substantially reduces the magnitude of the accrual anomaly, often to insignificant levels; (2) accruals covary negatively with discount rate estimates from the dividend discounting model, and for the most part, with estimates from the residual income model; (3) accruals with low accounting reliability covary more with capital investment than accruals with high accounting reliability; and (iv) expected returns to accruals-based trading strategies are time-varying, suggesting that the deterioration of the accrual effect in recent years might be temporary and likely to mean-revert in the near future. Copyright (c), University of Chicago on behalf of the Accounting Research Center, 2009.

The anomalies literature in capital markets research in finance and accounting is based (almost) exclusively on average realized returns. In contrast, we construct accounting-based expected returns for dollar-neutral long-short trading strategies formed on a wide array of anomaly variables, including book to market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment to assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value and the size premiums, the cost of equity estimates differ drastically from the average realized returns.

A Framework for Exploring the Macroeconomic Determinants of Systematic Risk by Torben G. Andersen, Tim Bollerslev, Francis X. Diebold and Jin Wu. Published in volume 95, issue 2, pages 398-404 of American Economic Review, May 2005