Lack of Trust, Adverse Selection and Trust Reconstruction: A Study Based on the Dairy Crisis

Lei Yu

Journal of Finance and Economics Vol. 42, Issue 04, pp. 81 - 91 (2016)  DOI:10.16538/j.cnki.jfe.2016.04.008

Abstract

Based on the dairy crisis in China recently and the data of listed companies, this paper studies the problem of adverse selection under lack of trust and the effect of trust reconstruction conducted by governments and industry associations from the perspectives of value relevance of accounting earnings and event reaction of stock prices. It arrives at the following findings:firstly, in the dairy crisis, because of lack of public trust in dairy firms, their business performance could not obtain evaluation equivalent to other firms, showing that value relevance of accounting earnings in dairy listed companies is lower than companies from other food industries and thereby probably inducing adverse selection and hurting the development of dairy industry; secondly, government institution construction and product promotion of industry associations can play a role in trust reconstruction. Through powerful institution construction, the adverse selection phenomenon in dairy firms constantly disappears and product launches organized by industry associations lead to positive market responses of relevant firm stocks. It helps firms, governments and the public to understand the effects of lack of trust and the effectiveness of trust reconstruction, and cross study ideas and methods, namely the test of economic issues from an accounting perspective, have sound innovation.

Keywords

trust; adverse selection; dairy crisis; value relevance