Does oil price uncertainty matter in firm innovation? Evidence from China

Inspired by the prevalence of firm innovation and substantial influence of international oil price uncertainty (OPU) on firm operation and decision-making, we investigate the influence of OPU on firm innovation. Using a sample of Chinese listed firms over the 2007–2019 period, our study reveals that OPU decreases firm innovation. This finding is consistent with the real options theory and the prospect theory. Mediation analysis shows that OPU could decrease firm innovation by increasing firms' financing constraints degree. Moreover, high-tech firms and those in highly competitive industries have fewer options to delay their innovation investments, we find that the adverse effects of OPU on their innovation are weaker. Finally, further analysis shows that government subsidies can help mitigate adverse effects of OPU on firm innovation. This paper reveals that OPU goes beyond the commonly known and understood regular indicator that shapes a firm's innovation activity and enriches firm-level evidence for the effects of OPU by highlighting the effects on long-term investment in intangible assets.     

Do investors want politically connected independent directors? Evidence from their forced resignations in China

Prior studies document that politically connected independent directors (“political IDs”) bring both benefits (e.g., easier access to long-term debt financing) and costs to firms (e.g., greater minority shareholder expropriations), but the observed relationship may be spurious because board composition is endogenously determined. Moreover, no direct evidence shows how minority shareholders value these political IDs. Using an exogenous shock that forces firms to lose their political IDs, we investigate the value of political IDs for Chinese listed companies. Specifically, using a difference-in-difference methodology, we find that the mandated departures of political IDs lead to reduced long-term debt financing and decreased government subsidies for nonstate-owned listed companies. Nonstate-owned listed companies that experience the sudden loss of political IDs adapt to the shock and improve their minority shareholder protections by engaging in fewer self-dealing activities and by enhancing investment efficiency. Although minority shareholders experience greater levels of expropriation in the presence of political IDs, they react negatively to the forced departure of political IDs. This evidence suggests that minority shareholders weigh the loss of political ties over the potential gain of corporate governance improvement. Our study provides direct evidence on how political IDs affect firms' strategic decisions. The study also sheds light on political IDs' roles in facilitating rent-seeking by controlling shareholders.     

Does social trust restrain firm financing violations? Evidence from China

We use a sample of Chinese firms to examine the impact of social trust, as an informal institution, on firm financing violations. Our findings suggest that when a firm is located in a region with high social trust, it commits fewer financing violations than those committed by firms in a region of low social trust. The results are robust for alternative measures of financing violations (fraudulent activities when issuing new shares, changing the use of new funds to uses other than the stipulated purposes, or illegally using third‐party loan guarantees), social trust, and after using instrumental variables estimation to account for endogeneity. Additional analysis suggests that the impact of social trust on restraining financing violations is more pronounced for firms having lower interest costs, facing low industry competition, located in high marketisation regions, and having good internal control. The findings show that the impact of social trust on financing violations is moderated by the economic reality of the firm (interest costs and competition), the formal institutional environment (level of marketisation), and the internal governance of a firm (internal control).     

How Do Institutional Investors Affect Corporate Performance? Evidence from Private Placements in China

Using data on private placements in China from 2007 to 2014, we show that abnormal returns of issuing companies’ stocks are significantly positive on the announcement day, but they become significantly negative during the event window [?20, +20]. Participation by institutional investors has a significant and negative impact on the short-term stock returns. This negative effect is also present in issuing companies’ long-term stock returns and profitability. Furthermore, we find that participation by institutional investors reduces dividend payments after private placements. Overall, our findings do not support the monitoring hypothesis of institutional investors’ role in corporate finance but are consistent with the management entrenchment hypothesis and shareholder pessimism hypothesis.     

Does the Prohibition of Long-lived Asset Impairment Reversals Affect Corporate Innovation? Evidence from a Quasi-experiment in China

China modified the asset impairment standard in 2007, prohibiting long-lived asset impairment reversal, which it had previously allowed. Using this setting as a quasi-experiment, we investigate how the prohibition of long-lived asset impairment reversal affects corporate technological innovation. Our empirical results demonstrate that the prohibition of impairment reversal has negative impacts on corporate innovation outputs. Further analyses reveal that the negative effect of this prohibition on corporate innovation is more prominent in companies with high discretionary accruals, high shareholding ratios for the largest shareholders, and companies in highly competitive markets.     

Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance

We investigate whether the levels of social capital in U.S. counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book‐tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarters relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.     

Does firm visibility matter to debtholders? Evidence from credit ratings

This paper investigates the role of a firm's information visibility in the assessment of its default risk. We use press coverage to proxy for firm visibility and find that highly visible firms generally have better credit ratings. The positive association between firm visibility and credit ratings arises because (1) press coverage facilitates the generation and dissemination of firm-specific information to market participants and (2) it disciplines the activities of managers and large shareholders. This positive association becomes stronger for firms with more severe information asymmetry or weaker alternative monitoring systems. Our findings contribute to the accounting literature by providing new evidence on the influence of firm visibility in the debt market.     

How do agency problems affect firm value? – Evidence from China

Using newly available data, we examine the effects of the agency conflicts between ultimate controlling shareholders and minority shareholders in China's publicly listed firms between 2004 and 2009. We measure the severity of these agency problems by the excess control rights of the ultimate controlling shareholders. We show that higher excess control rights are associated with significantly lower firm value. We identify two channels through which the excess control rights affect firm value: (1) related-party loan guarantees, and (2) legal violations. We find that higher excess control rights are associated with significantly larger amounts of related-party loan guarantees (scaled by assets) for non-state and private firms, but not for state-owned firms. We find that, for non-state and private firms, the excess controls rights are associated with (1) significantly higher probability that the firm will issue value-destroying related-party loan guarantees and (2) significantly worse stock market reactions to the announcements of related-party loan guarantees. However, these results do not hold for state-owned firms. We also find that higher excess control rights are associated with significantly higher probability, frequency and severity of legal violations for non-state and private firms, but not for state-owned firms.     

Who benefits in a crisis? Evidence from hedge fund stock and option holdings

We use a unique data set of hedge fund long equity and equity option positions to investigate a significant lockup-related premium earned during the tech bubble (1999–2001) and financial crisis (2007–2009). Net fund flows are significantly greater among lockup funds during crisis and noncrisis periods. Managers of hedge funds with locked-up capital trade opportunistically against flow-motivated trades of non-lockup managers, consistent with a hypothesis of rent extraction in providing crisis era liquidity. The success of this opportunistic trading is concentrated during periods of high borrowing costs, in less liquid stock markets, and is enhanced by hedging in the equity option market.     

Do strategic alliances in a developing country create firm value? Evidence from Korean firms

This paper examines the impact of strategic alliances on the increment of firm value in the case of Korean firms. For this, we apply an event study using OLS and GARCH market models. The results of our study show that, strategic alliances in Korea produce significant positive abnormal returns before and at the announcement date, indicating an increase in firm value. This firm value augmented by alliance announcements does not have any relationship with firms' growth but has an inverse relationship with firms' sizes. Interestingly, non-technological marketing alliances contribute to increasing firm value more than technological alliances do, regardless of partner firms' nationality. This evidence is contrasted to the cases of firms in advanced countries. Particularly, Korean firms' marketing alliances with firms in advanced G7 countries contribute to largely increasing the firm value of the former.     

Working capital as a firm performance savior? Evidence from Scandinavian countries

This study examined the relationship between working capital management (WCM) and firm performance in Scandinavian markets from 2007 to 2020. The initial data set comprised 8821 observations; only 5331 yearly observations remained after data filtration. The data are extracted from a reliable Bloomberg database. This empirical study adopts a multiple regression analysis for unbalanced panel data on Scandinavian markets, reporting an inverse relationship between WCM and firm performance measured through return on assets, gross operating income, and market-to-book value ratio. The control variables also showed a significant relationship order. To assess the robustness of our baseline regression results, we considered various indicators, (i) including alternative measures of firm performance, (ii) excluding the 2008 global financial crisis period, and (ii) running all countries in one equation as a group analysis. This study adds to the existing literature and outlines how efficient WCM can help managers to improve firm performance.     

Does international experience of managers bring financing benefits? Evidence from the cost of equity capital

Using a sample of Chinese firms, this study examines whether and how managers’ overseas experience affects a firm’s cost of equity capital. We document a negative association between managers’ overseas experience and the cost of equity capital. Mechanism analyses indicate that companies with returnee managers have better information quality and lower systematic risk; more institutional investors, media reports, and analysts following; and higher stock liquidity, all of which lead to a lower cost of equity capital. Further analyses show that chief executive officers (CEOs) with foreign experience have a more significant impact on the cost of capital than non-CEO managers with foreign experience and that managers’ overseas work experience has a more significant impact on the cost of capital than their overseas education. We also find that the impact of managers’ overseas experience is more pronounced when that experience is gained in common law countries compared to code law countries but weaker for state-owned enterprises and firms that are cross-listed or have foreign institutional investors. Overall, the results suggest that managers’ knowledge, skills, and ethical values imprinted from overseas experience, plus eyeball effects from media and analyst attention, can reduce the cost of equity capital.     

Corporate lobbying: Resource-seeking or rent-seeking? Evidence from audit fees

Theory and prior research suggest that corporate lobbying is a primary means that corporations use to influence government policies either for improving firm performance (i.e., strategic decisions) or for rent-seeking activities (i.e., agency costs) but the evidence between lobbying activities and auditor assessments of audit risk remains unclear. Our results show that lobbying firms are associated with higher audit risks and fees, consistent with the idea that lobbying is related to rent-seeking and higher agency costs. In cross-sectional analyses, we find that the positive association between lobbying and audit fees is weaker for firms with strong corporate governance. Further analysis shows that firm financial returns or low earnings quality mediate the relationship between lobbying and audit fees. The results suggest that practitioners, users of financial statements and regulators could benefit by recognizing that lobbying activities could signal managerial opportunistic behavior.     

Why is it difficult for Chinese companies to operate across regions in China?—Evidence from zombie companies

This paper aims to investigate whether zombie companies create entry barriers for non-local companies and hinder their cross-regional development. Based on Chinese listed companies' subsidiaries' distribution in each province, we find that there will be fewer off-site subsidiaries in the provinces with more zombies, indicating that they create entry barriers for non-local companies. Heterogeneity analysis shows that the entry barriers are more obvious in non-state-owned companies, innovative companies, and companies with strong financing constraints. We also find that the development of the institutional environment and informal institutions can alleviate the entry barriers. Furthermore, off-site subsidiaries operating in the province with more zombies have relatively poor operating performance and low competitive advantage compared with local companies, which may discourage parent companies from reinvesting. Our research enriches the research on zombie companies' negative impacts, provides explanations for Chinese companies' cross-regional development barriers, and also illustrates the importance of strengthening the institutional environment in attracting foreign investment.     

Does Corporate Social Responsibility Affect the Cost of Bank Loans? Evidence from China

This article examines the link between corporate social responsibility (CSR) and cost of bank loans (CBL) in China. We find that there exists an inverse U-shape relationship between CSR and CBL. In addition, CSR threshold for state-owned enterprises (SOEs) is higher than for non-SOEs. In particular, CSR threshold for SOEs is lower in regions with high degree of marketization than in regions with low degree of marketization. The findings indicate that value-destroying effect occurs during CSR underinvestment phase, which is different from the overinvestment view. Moreover, the effect of CSR on CBL also depends on contextual factors such as firm ownership and marketization level.     

Do Financial Markets Care about Corporate Social Responsibility Disclosure? Further Evidence from China

Corporations increasingly define their corporate social responsibility (CSR) activities as a part of their business. However, is this trend beneficial to investors? Based on an event study methodology and a sample of Chinese listed companies, we extend the literature on voluntary disclosure by exploring the role of CSR disclosure in reducing stock market information asymmetry, as proxied by share price volatility and liquidity. Our results show that the share price volatility after CSR disclosure is lower than before CSR disclosure; however, the trend is that it decreases first and then increases for three months following disclosure. Stock liquidity also significantly improves after CSR disclosure; however, it increases first and then decreases. Additionally, by dividing CSR disclosure into economic (hard) disclosure and generic (soft) disclosure, we find that the reduction in information asymmetry is higher for hard disclosure than soft disclosure, suggesting that although CSR disclosure does indeed have an impact on investors’ behaviour in China, an economic‐based disclosure contributes more substantially. Finally, to better understand the characteristics of the Chinese financial market, we also explore the role of marketisation with results that show that the effect in reducing information asymmetry is greater for companies located in a region with a higher degree of marketisation.     

Do checks on bureaucrats improve firm value? Evidence from a natural experiment

This paper studies the impact on firm value of tighter checks on bureaucrats’ behaviour. We use as a natural experiment the revision in 2015 by the Communist Party of China (CPC) of its regulations on disciplinary actions. We document a positive and substantial market reaction following this unexpected policy change that tightened and formalised constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state ownership, firms having CEOs or directors with CPC membership, and firms that operate in provinces with better institutional quality. The subsequent revision in 2018 that enforced political obedience is not associated with a positive market reaction.     

Too big to fail in banking: What does it mean?

Interest in too big to fail (TBTF) resolutions of insolvent large complex financial firms has intensified in recent years. TBTF resolutions protect some in-the-money counterparties of a targeted insolvent firm from losses that they would suffer if the usual bankruptcy resolution regimes used in resolving other firms in the industry were applied. Although special TBTF resolution regimes may reduce the collateral spill-over costs of the failure, the combined direct and indirect costs from such “bailouts” may be large and often financed in part or in total by taxpayers. Thus, TBTF has become a major public policy issue that has not been resolved in part because of disagreements about definitions and thereby the estimates of the benefits and costs. This paper explores these differences and develops a framework for standardizing the definitions and evaluating the desirability of TBTF resolutions more accurately.     

Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China

This paper assesses the risk arising from transition toward a low-emission economy and examines its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulation impairs firms' balance sheets in the short term, as it enforces firms to internalize the pollution costs, which consequentially escalates the risks facing the financial system. For the empirical analysis, we employ the Clean Air Action that the Chinese government launched in 2013 as a quasi-natural experiment. The analysis on a unique dataset containing more than one million loans indicates that the default rates of high-polluting firms rose by around 80% along their environmental policy exposure. Further analysis shows those joint equity commercial banks with lower degree of government intervention and better corporate governance structure were able to appropriately manage their exposure to transition risks, while the state-owned banks failed to factor in such risks when extending credit to the borrowers targeted by the environmental regulation.     

Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey

We investigate the contribution of Sukuk in diversification of bond portfolios. We do so by comparing Turkish bond funds that invest exclusively in conventional bonds (pure conventional bond funds), in Sukuk (pure Islamic bond funds), and in both (mixed bond funds) among each other for the period of 2014–2019. We employ tests of differences in means and variances of various risk-return measures as well as mean-variance spanning and intersection tests in order to uncover the diversification potentials of Sukuk in the portfolio management industry. Our results suggest that bond funds, of which the portfolios are composed of a combination of Sukuk and conventional bonds (i.e. mixed bond funds), have a relatively “lower risk-higher return” profile. Moreover, including Sukuk to conventional bond portfolios theoretically offers significant diversification opportunities for investors, particularly when the economy worsens.