Economic policy uncertainty and firm’s cash holding in China: The key role of asset reversibility

This paper investigates how asset reversibility affects the sensitivity of firm’s cash holding to economic policy uncertainty in China. Using the 2012 national input-output table for 139 industries, we measure the industry-level asset reversibility and match them with nonfinancial publicly listed firms over 2007−2017. The results show that asset reversibility has a significant and negative effect on the positive uncertainty-cash holding sensitivity, especially for firms with more severe financial constraints. Furthermore, we find that firms with higher asset reversibility invest more in fixed assets, suggesting that real investment is an important mechanism. In addition, baseline results are robust to potential endogeneity and alternative measures of asset reversibility and economic policy uncertainty. Our findings reveal that asset market friction is a critical determinant of firm’s cash holding.     

China's monetary policy surprises and corporate real investment

We evaluate the effect of China's monetary policy shocks on corporate real investment. We propose a new approach to identify China's monetary policy shocks using high-frequency surprises based on treasury futures around monetary policy announcements as external instruments. We then estimate the dynamic effect of monetary policy shocks on corporate real investment using a rich firm-level data of all listed non-financial firms in China. We find that an unexpected monetary policy easing boosts firms' investment expenditures with heterogeneous dynamic responses across firms: small-sized firms have quicker responses than large-sized firms, especially for non-state-owned enterprises (non-SOEs). We show that sales revenue response could be the channel through which monetary policy shock transmits to non-SOEs' investment expenditures in China.     

For goodwill or resources? The rationale behind firms' corporate philanthropy in an environment with high economic policy uncertainty

This paper investigates the impact of economic policy uncertainty (EPU) on the corporate philanthropy (CP) behaviors of firms using a dataset from Chinese A-share listed firms. We find that, on average, firms decrease their CP significantly when economic policy uncertainty increases, but the response is heterogeneous for firms with different ownership types. Compared with their counterparts, private firms are willing to contribute more donations in an environment with high economic policy uncertainty. Further analysis shows that private firms take on more other types of corporate social responsibility at the same time, and private firms' additional CP in a high EPU environment is rewarded with more subsidies, indicating that altruistic and political motives may play important roles in driving the CP behaviors of private firms. There is no evidence that private firms selling products directly to consumers are more likely to engage in additional CP. Our findings indicate that the main motivation behind Chinese private firms' additional CP under high economic policy uncertainty is seeking more government resources, instead of keeping consumers loyal by maintaining good reputations during hard periods.     

The Determinants and Motivations of China's Outward Foreign Direct Investment: A Spatial Gravity Model Approach

Abstract

The study attempts to investigate the features and determinants of China's outward foreign direct investment (OFDI) into 138 countries and Chinese firms' investment strategies over the 2003–2009 period using an augmented gravity model with spatial linkages. The respective evaluations of China's OFDI are indicative of the important role played by non-financial OFDI. At the same time, Chinese firms prefer to invest in high-tech industries in developed countries while also focusing on the extraction of natural resources around the world. The empirical findings show that the host country's economic size has a significantly positive effect in terms of promoting Chinese OFDI. Chinese firms favour a complex-vertical platform in the developed countries while they prefer a market potential foreign direct investment (FDI) surrounding the host developing countries and an export-platform FDI in the petroleum exporting countries based on the surrounding market potential effect and spatial effect. The fuel extraction motive plays a key role in China's OFDI in line with the realities of Chinese FDI strategies in recent years.     

Does tax deduction relax financing constraints? Evidence from China's value-added tax reform

Financial constraint is a significant obstacle for firm growth, especially in developing countries where credit is scarce. This paper explores the role of tax policy in relaxing firms' financial constraints by exploiting China's value-added tax (VAT) reform that was initiated in 2004 and completed in 2009. We use a quasi-experimental method and Annual Survey of Industrial Firms (ASIF) data from 2000 to 2009 to estimate the VAT reform's policy effects on financial constraints. We show that the VAT reform significantly improves firms' external financing capacity by decreasing borrowing costs and promoting commercial credit. The findings are robust to alternative specifications but show heterogeneity across ownerships, firm sizes, regions, and between export and non-export firms. Our analysis suggests tax deduction is useful to relax firms' financial constraints.     

Picking ‘winners' in China: Do subsidies matter for indigenous innovation and firm productivity?

This paper examines the effects of public subsidies across several dimensions of the innovation process and the implications for productivity. As an identification strategy, panel data is used to estimate a structural innovation model that controls for unobserved heterogeneity combined with matching techniques that help ensure comparability between subsidized and non-subsidized firms. The findings reveal that public subsidies reduce firms' economic performance in lower and higher technology industries despite promoting indigenous innovation in the higher technology industries. Policymakers may tolerate lower average efficiency if they expect that some of the state-backed firms will eventually become successful innovators that go on to generate significantly large social welfare payoffs. Although the findings do not support such an expectation, thus bringing into question whether the social payoff from China's so-called picking ‘winners' strategy justifies the cost.     

Product differentiation,export participation and productivity growth: Evidence from Chinese manufacturing firms

In this paper, we investigate how the degree of export participation and product differentiation affect firms' productivity growth through learning-by-exporting. We extend the model of Melitz and Ottaviano (2008) to endogenize the effort firms allocate to learning. This effort choice depends on both the degree to which firms enter export markets and the extent to which products are differentiated across producers. Using a firm-level dataset from China's manufacturing industries, we implement propensity score matching methods to test the model's predictions. Our results indicate that the degree of export participation is positively correlated with TFP improvements. Simultaneously, we empirically verify that firms exporting less differentiated products experience faster TFP growth than those exporting more differentiated products.     

Experimental Evidence of the Impact of Increasing Auditors' Legal Liability on Firms' New Investments*

This laboratory market study examines the potential effect of increasing auditors' liability on firms' new investments. The experimental hypotheses are derived from Shibano's 2000 model, which predicts that an increase in auditors' liability will decrease the frequency of audit failures and may decrease firms' new investments if the liability level is “excessive”. Results from three experimental market settings (with low, medium, and high liability levels) suggest two major conclusions. First, firms' new investments increase significantly when auditors' liability level increases from low to medium, and decrease significantly as the liability level increases from medium to high. This result provides support for the argument that adequate auditor liability is necessary to motivate firms to invest in new projects. Excessive liability, however, may discourage firms from making new investments. Second, the frequency of audit failure decreases insignificantly when auditors' liability increases. These two results have an important policy implication: the benefit of imposing high liability on the auditor (i.e., an insignificant decrease in audit failure) may be more than offset by its cost (i.e., a significant decrease in new investments).     

Going out to innovate more at home: Impacts of outward direct investments on Chinese firms' domestic innovation performance

This study explores the effects of cross-border mergers & acquisitions (CBMA) on domestic innovation of Chinese firms. We build a new panel dataset that matches information on CBMA and innovation activities for China's publicly listed firms. We rely on matching techniques combined with a difference-in-differences estimator to study the causal effects of CBMA respectively on firms' investments in innovation, innovation outputs, and financial performance. The main findings reveal that CBMA has both a positive impact on firms' R&D spending and number of patent applications, no statistically significant effect on the number of granted patents or on the quality of those patents, and a negative effect on firms' financial performance. These results depend, however, on the type of CBMA (horizontal or vertical), destination country (OECD or non-OECD), and the technological intensity (high-tech or not) of the acquirer and target firm. Overall, the findings bring into question whether CBMAs, and China's going-out strategy, will significantly boost its indigenous innovation capabilities.     

The minimum wage and the financialization of firms: Evidence from China

This paper utilizes China's A-listed firm data to investigate whether increasing the minimum wage promotes the financialization of firms. We apply instrumental variable estimation and various robustness tests to address measurement errors and potential endogeneity. We find robust and consistent evidence that exposure to higher minimum wages increases a firm's investment in financial assets. Furthermore, we explore the effects of moderators, such as increased employment stickiness, intensification of financial constraints, and reduced innovation activities as potential explanations for the positive effect of increasing minimum wages. Moreover, firms located in non-coastal cities with relatively higher equity concentration and lower market competition are substantially more incentivized to increase investment in financial assets. Overall, this paper provides new insights into understanding the effects of increasing labor costs on firms' asset allocation in emerging market economies.     

The impact of exchange rate movements on multi-product firms' export performance: Evidence from China

This paper investigates the effects of RMB exchange rate movements on Chinese multi-product firms' export behavior using China's firm-level micro data and highly disaggregated customs data over 2000–2007. We find that real appreciation of RMB exerts negative effects on Chinese multi-product firms' export prices and export quantities, and the effects are significantly different across firms with different productivity as well as the product ladder within multi-product firms. In addition, we document that real appreciation of RMB narrows multi-product firms' export scope and induces firms to skew their export sales towards the best performing products. Finally, the paper explores the effects of RMB exchange rate movements on firms' export duration, and shows that real appreciation of RMB lengthens the export duration of core products but shortens the export duration of non-core products.     

Green policy and corporate social responsibility: Empirical analysis of the Green Credit Guidelines in China

In the past four decades, several countries have imposed environmental regulations to enforce green policy and corporate reduction of industrial emissions and waste. Unlike other environmental regulations, China's Green Credit Guidelines internalize firms' environmental risks into a loan channel; firms with high environmental credit risks encounter high barriers to obtaining loans. To investigate whether, and to what extent, this approach promotes corporate social responsibility, we introduce a Modified Environmental, Social, Governance (MESG) index that uses disaggregated firm-level data to measure the level of engagement in corporate social responsibility. We find that, after the promulgation of the Green Credit Guidelines, there was a significant increase in social responsibility in firms restricted by the Guidelines relative to firms not restricted by the Guidelines.     

Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms

This article examines the impact of monetary policy on net sales of publicly traded firms in various sectors of the U.S. economy. We find that monetary policy has a heterogeneous effect on firms in different industries, with the strongest effect on firms in Retail and Wholesaling. Balance sheet characteristics, especially size, influence the impact of policy. Larger firms in several industries are able to mitigate the effect of policy. We find mixed results for firms' working capital, short‐term debt ratio, and leverage ratio with respect to the operation of the credit channel of monetary transmission mechanism.     

The misalignments in Chinese real effective exchange rate from 1994 to 2020: A counterfactual analysis

Using a novel panel data method proposed by Hisao, Ching and Wan (2012), we empirically evaluate the misalignments between the actual and counterfactual values of Chinese real effective exchange rate (REER, CPI-based) from 1994 to 2020, where “counterfactual” refers to the counterfactual scenarios that some major economic events had not happened. These events include China's accession to WTO from December 2001, the reforms of exchange rate regime in July 2005, June 2010 and August 2015, China's economic stimulus package in November 2008, and the US-China trade dispute started from March 2018. We calculate the counterfactual values for both real and nominal effective exchange rates (REER and NEER) in order to examine the channels of the misalignments. We find that the reform of China's exchange rate policy in July 2005 and August 2015 increased Renminbi's trade competitiveness in real term compare to foreign currencies, while other events decreased it or had no effects. The misalignments in REER are caused by the changes in both NEER and China's CPI.     

How revolving-door recruitment makes firms stand out in land market: Evidence from China

The fact that firms seek political connections through revolving-door recruitment is widely acknowledged around the world. Using an original database including the information of listed firms' board members and parcel-level land transaction records, this paper documents how revolving-door recruitment makes firms stand out in China's land market. We show that firms with revolving-door recruitment receive special deals in land transactions, which are simultaneously reflected in the quantity and price of land. Specifically, connected firms buy more parcels and larger areas of land in the primary land market. Due to the particularity of industrial land, price discounts are only identified for commercial and residential land, while not for industrial land. Measuring economic activity by night light intensity, we find no evidence that land transaction under the influence of political connections has a negative impact on economic activity on land. Our research advances the understanding that the state-business relationship is an essential factor in resource allocation in an emerging market with government intervention.     

Free trade or protection? belgian textile and clothing firms’ trade preferences

Free Trade or Protection? Belgian Textile and Clothing Firms' Trade Preferences. -This paper examines the positions of Belgian textile and clothing firms on trade policies. Observations on positions are generated by a survey. Along the lines of the political economy of protection and anti-protection we test whether firm-specific characteristics influence textile and clothing firms' trade policy preferences. The results show that international competition and having foreign establishments significantly determine firms' positions, but that product differentiation does not. A Chow test indicates no significant difference between firms' sensitivities in the textile and clothing industries. This suggests that the two professional organizations should co-operate on trade issues.     

Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice

Auditors and regulators have invested heavily in improving audits of estimates in recent years, but problems in this area persist. We examine the causes of these problems and why they persist. To do so, we interview 24 very experienced auditors about how they audit complex accounting estimates such as fair values and impairments and what problems they experience in the process. We find that auditors overwhelmingly choose to audit the details of management's estimate rather than use other allowable approaches. The steps auditors describe and the language they use to describe those steps indicate that they follow a process of verifying individual elements of management's assertions on a piecemeal basis, resulting in overreliance on management's process, rather than engaging in a critical analysis of the overall estimate. The problems that auditors identify are consistent with this view, and include failures to notice inconsistencies among the estimate and other internal data or external conditions and overreliance on specialists to identify, evaluate, and challenge critical assumptions. We interpret these processes and problems using institutional theory and identify two root causes: standards' and firm policies' emphasis on verifying management's model, and audit firms' division of knowledge between auditors and specialists. Institutional theory proposes these conventions arise from firms extending use of procedures that are legitimate in one area (i.e., auditing accounts without significant uncertainty) to a new area (i.e., auditing complex estimates), even though they are likely less effective in the new area. These conventions are reinforced by regulators' method of inspection and by firms' reluctance to change methods without a prompt to change to a clearly better method. We argue that these institutionalized conventions thwart auditors' good‐faith attempts to engage in skeptical analysis of estimates. Thus, audit quality problems are likely to persist.     

Investment incentives and the relative demand for skilled labor: Evidence from accelerated depreciation policies in China

This study evaluates the effects of China's 2014 and 2015 accelerated depreciation policies on the relative demand of firms for skilled labor. We develop a simple model to explore how the policies affect the relative demand of firms for skilled labor and illustrate the roles of financing constraints and tax compliance in mediating the policy effects. We then employ a firm-level dataset from China's A-share listed companies and use a quasi-experimental design to examine the model predictions. We find that the policies significantly increase the relative demand of firms for skilled labor. The channels underlying the policy effects are that the policies generate additional cash flow for firms, stimulate investment and, thus, raise the demand of firms for skilled labor with the presence of capital–skill complementarity. We also find that the positive effects of the policies on the relative demand for skilled labor are primarily significant for firms with strong financing constraints and high tax compliance. Moreover, we document the positive effects of the policies on R&D investment, firm value added, productivity, workers' benefits, and corporate social responsibility performance, which further corroborate our main results.     

The Investment Opportunity Set and Acquired Goodwill*

This paper examines how managers in New Zealand allocate the cost of firms' investments in subsidiaries between net tangible assets and acquired goodwill. We find a negative relation between acquired goodwill and leverage. This could be interpreted as the result of managers of highly leveraged acquiring firms opportunistically allocating a lower portion of the acquisition price to acquired goodwill. However, this analysis, like much of the research on accounting choice, suffers from an omitted variables problem. We present evidence that the observed negative relation between acquired goodwill and leverage may stem from each variable's relation to the investment opportunity set. Further, we find no evidence that acquired goodwill is related to the existence of debt covenants. Together, these results suggest an endogenous relation between the firm's asset structure, its financing policy, and the allocation of acquisition price to acquired goodwill.     

Industry specific effects on innovation performance in China

This research aims to understand how industrial characteristics in Chinese industrial sectors are related to and affect innovation activities. Using Heckman's two-step procedure, this study contributes to examine firms' innovation determinants with a framework that clearly distinguishes between the two steps of innovation model: innovation propensity (probability of being innovative) and innovation performance (patents and innovation sales). In particular, the moderating effects of industrial characteristics on the relationships between R&D intensity, financial incentives and innovation performance are discussed. The findings show that different industrial characteristics generate different impacts on innovation propensity and innovation performance. Firms in capital intensive industries and relative monopoly industries are more likely to innovate. The findings also show that Direct Government Subsidy does not contribute significantly to improve economical innovation performance of firms and Indirect Government Subsidy on innovative economic performance is easier to be influenced by industry characteristics, which have important potential policy implications to guide innovation activities for Chinese policy makers as well as for Chinese firms.