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Abstract
We examine whether Enterprise Resource Planning system (ERP) usage affects the stock price crash risk of Chinese firms, and whether the effect differs between state-owned enterprises (SOEs) and non-SOEs. We find that ERP usage is associated with lower stock price crash risk, but this pattern is largely concentrated in non-SOEs, consistent with our arguments that more acute shareholder-manager agency problem and more organizational rigidity can inhibit the successful assimilation of ERP. The results are further confirmed by a difference-in-differences analysis exploiting the privatization of SOEs as a negative shock to their shareholder-manager agency problem and organizational rigidity. Three channels help explain why ERP usage helps lower stock price crash risk: it improves the quality of internal control, reduces the chance of financial restatements, and mitigates information asymmetry, and all effects are concentrated in non-SOEs. Our study is among the first to examine how ERP usage affects stock price crash risk – an overall outcome measure of a firm's information environment. Using SOEs vs. non-SOEs as a powerful measure of the shareholder-manager agency problem and organizational rigidity, it also represents the first test of the moderating effect of agency problem and organizational rigidity on the effectiveness of ERP usage.
Acknowledgement
We are grateful for the insightful comments from Matthias D. Mahlendorf (Associate Editor) and two anonymous reviewers. We also thank the participants of the seminar in Central University of Finance and Economics and the 2017 Young Researcher Conference for their helpful feedback.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 O’Leary (Citation2000) reports that ERP costs about USD 15 million and may take two years to implement. In the paper, ERP usage refers to the point in time when a firm has implemented an ERP and put it into use.
2 As of the end of 2020, the total market capitalization of the Shanghai and Shenzhen stock exchanges is US$12.2 trillion, ranked the 2nd globally behind US equity. Since 2002, China has allowed global investors to invest in its A-share markets via the Qualified Foreign Institutional Investors (QFII) scheme and the subsequent Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect Schemes. Leading international stock index compilers also started to include China A-shares into their stock indexes. For example, China A-shares account for 31.3% in the MSCI Emerging Markets Index as of August 2018 and MSCI projects that the weighting would increase to 42% upon full inclusion (https://www.msci.com/msci-china-a-inclusion). FTSE has also included 1051 China A-shares in the FTSE Emerging All Cap index as of the end of 2020 (https://www.ftserussell.com/press/ftse-russell-completes-landmark-inclusion-china-shares). Global investors can also gain exposures to Chinese firms by participating in the trading of H-shares in Hong Kong.
3 According to Rogers (Citation2010), adoption is more about management authorizing the purchase of ERP and overseeing its basic implementation; in contrast, assimilation is to routinize the ERP technology for everyday use so that a firm can fully capture the strategic value and benefits of ERP.
4 In 2008, the State-owned Assets Supervision and Administration Commission (SASAC) issued a rule on promoting SOEs’ adoption of information and communication technology (ICT) and decided to review SOEs’ progress in ICT adoption annually. In 2009, the SASAC further required that each SOE appoint a chief information officer (CIO) and establish a department to oversee ICT.
5 CCIDNET, 2002. 2001 China's ERP Market Share. CCIDNET, Beijing.
6 The data is provided by Prospective Industry Research Institute, available at https://bg.qianzhan.com/trends/detail/506/210303-5c76f2ad.html.
7 For example, the national SASAC directly oversees about one hundred large central SOE groups.
8 On August 16, 2009, China issued the ‘Guiding Opinions on Further Standardizing the Remuneration Management of Heads of State-owned Enterprises’, which stipulates that senior executives of a SOE should not receive a pay that exceeds certain times of the average pay of rank-and-file employees in the firm. Source: http://finance.sina.com.cn/g/20090917/09183058799.shtml.
9 One may argue that in SOEs even if managers use ERP to collect more information, they still have incentives to withhold the information. This is part of the managerial agency problem. However, auditors’ use of ERP information provides a constraint for such possibility. Both U.S. Auditing Standard No. 5 issued by the Public Company Accounting Oversight Board (PCAOB) and Auditing Standard No. 1211 issued by the Chinese Institute of Certified Public Accountants (CICPA) in 2010 provide guidance that auditors can consider a client's usage of ERP in employing a simplified audit procedure.
10 We thank an anonymous reviewer for suggesting this point.
11 Specifically, foreign ERP vendors include SAP, Oracle, JDE, Peoplesoft, Hyperion, Infor, SSA, Baan, Fourth Shift, Lawson, QAD, CA, Sage, Accpac, Microsoft, IFS, Mocala, Atpact, Fujistu, NEC, Epicor, Movex, Tpic, RSS, Abas, Aca, Mapex, ISS, AK Infopark, Cdc, Visma, Global solutions, and Agresso. Domestic ERP vendors include Yongyou, Kingdee, Inspur, Digital China, Boke, Newgrand, eAbax, Ygsoft, Join cheer, Neusoft, Oin cheer, Digiwinsoft, Guanjiapo, Baison, Licheng, Wanneng, Infor, Rephensoft, Riamb Qiwang, Pushsoft, Palmyou, Feilo newcon, Horainsoft, Superdata, Hejia, Golden Thinking, Kesi, Tianxin, Tiansi, Tongshuai, Multitable, Chang hang, Ione, Lingyue, Hongyi, Puyang, and Hankang.
12 We only count a firm as an ERP user if the firm has used a complete set of an ERP system at the whole organization level. If a firm just used some parts of an ERP system (e.g., customer relation management system, accounting information system) or doing so in certain subsidiaries, we do not treat the firm as an ERP user.
13 The industry classification in China treats all manufacturing firms as one broad category with many different subcategories of manufacturing and there are a larger number of firms in manufacturing (than in other industries). It is customary for studies using Chinese data to use two-digit industry code to identify different sub-industries under manufacturing. However, our results are similar if we just define industries at the one-digit industry code.
14 Consistent with this argument, in our sample there are 58 ERP manufacturers involved, including 35 headquartered in the four first-tier cities (i.e., Beijing, Shanghai, Guangzhou, and Shenzhen) (accounting for 60.3%) and 23 in other cities (accounting for 39.7%).
15 The distance we calculate is the length of the shortest curve between two points on the surface of the earth, which is assumed to be based on the World Geodetic System 1984 datum. This method is also adopted by Baidu Map and GPS device.
16 Admittedly, the DID is not based on an exogenous event and so the analysis mitigates but does not rule out the endogeneity concern.
17 We thank the anonymous reviewers for this insightful suggestion to add this test.