Does access to external finance improve productivity? Evidence from a natural experiment

We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison with a control group. This result is statistically significant and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.     

Does good luck make people overconfident? Evidence from a natural experiment in the stock market

This paper examines the changes in investors' trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these investors subsequently become overconfident: They trade more frequently and lose more money relative to other investors. This effect is stronger when investors are inexperienced and when investors' pre-existing level of overconfidence is low. We also show that investors exhibit a stronger gambling propensity and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.     

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 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.     

Does lending relationship help or alleviate the transmission of liquidity shocks? Evidence from a liquidity crunch in China

We examine China’s June 2013 liquidity crunch as a negative shock to banks and analyze the wealth effects on exchange-listed firms. Our findings suggest that liquidity shocks to financial institutions negatively impact borrower performance, particularly borrowers reporting outstanding loans at the end of 2012. Stock valuations of firms with long-term bank relationships, however, outperform the market and experience smaller subsequent declines in investment than peers lacking solid banking relationships. This effect is the strongest for firms that enjoy good relations with China’s large state-owned banks or foreign banks, and weakest for firms whose connections are solely with local banks. We document a positive correlation between the stock performances of firms and the stock performances of lender banks and the likelihood of lender banks operating as net lenders in the interbank market. These results suggest that banks transmit liquidity shocks to their borrowing firms and that a long-term bank-firm relationship may mitigate the negative effects of a liquidity shock.     

Does alternative data reduce stock price crash risk? Evidence from third-party online sales disclosure in China

This study empirically investigates the effect of releasing alternative data on firm-specific price crash risk. Using the public launch of a firm's third-party online sales data in a well-known Chinese financial database as an exogenous shock, we find that stock price crash risk significantly decreases with the disclosure of third-party online sales data. The results are robust to a series of endogeneity corrections and robustness checks. We also find that the reduction of stock price crash risk is due to the decrease in managers' bad news withholdings and the increase in the accuracy of market expectations. In addition, the negative association between third-party online sales disclosure and crash risk is more pronounced for firms with weaker external governance, higher earnings volatility, greater likelihood of sales manipulation, and lower book-to-market ratio. Our findings yield important implications for a comprehensive understanding of the information disclosure effect of online sales data in the capital market and the mechanisms to reduce stock price crash risk.     

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 foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam

Most of previous studies on stock price informativeness tend to focus on the context of mature stock markets while this issue is more acute in emerging equity markets where regulatory and institutional structure are weak. This paper examines the relationship between foreign ownership and stock price informativeness in Vietnam stock market. We utilize a data set covering firm attributes of non-financial firms listed on the Ho Chi Minh City stock exchange over the period 2007–2015. Employing different estimation techniques for panel data, the empirical results indicate that foreign investors improve stock price informativeness in Vietnam stock market. The finding from this paper confirms the important role of foreign investors in emerging equity markets.     

Fiduciary or loyalty? Evidence from top management counsel and stock liquidity

We examine whether and how corporate top management counsel (TMC) influences stock liquidity and document a significant positive association. Our results remained robust to a series of sensitivity tests and continue to hold after accounting for potential endogeneity concerns. We identify a reduction in information asymmetry and business risk as the channel through which TMC affects stock liquidity. Further tests reveal that the positive relationship is stronger when the CEO has no legal expertise and in the post-SOX period, where firms are mandated to have in-house counsel. Our paper contributes to the ongoing debate on the dual paradox of TMC's role (gatekeeper v. facilitator) and has policy implications.     

Does stock exchange consolidation improve market liquidity? A study of stock exchange acquisition in Russia

The last couple of decades have witnessed significant institutional and structural changes in financial sector within a worldwide trend toward consolidation. In the segment of organized trading stock exchanges merge and develop into large and diversified publicly traded companies. These processes are rather complicated in case of a transition economy like Russia. In December 2011 MICEX, the first largest and state-controlled stock exchange acquired RTS, the second largest and privately owned stock exchange primarily designed for foreign investors. We empirically investigate whether the acquisition resulted in improved liquidity of the Russian stock market which was one of the declared acquisition objectives. We use the Kolmogorov–Smirnov and the Wilcoxon tests to compare market-wide liquidity in several discrete periods pre and post acquisition. A deep and thorough insight into liquidity performance is ensured by assessing liquidity from limit order book data of tick frequency along three dimensions (tightness, immediacy, and elasticity).     

Does mutual fund ownership reduce stock price clustering? Evidence from active and index funds

Review of Quantitative Finance and Accounting - The literature is rich with examples of price clustering in financial markets. This study focuses on the relation between mutual fund ownership (both...     

Does stock market development always improve firm-level financing? Evidence from Tunisia

The question of whether or not increased stock market size allows for improved financing conditions for firms in emerging markets is an important one for policy-making. This paper seeks to investigate this issue by analyzing whether increases in market-level liquidity have indeed trickled down to individual firms over the last decade of stock market development in Tunisia, a fast-growing Mediterranean emerging market. We develop time varying liquidity scores for all firms listed in the Tunisian market over the 1997–2009 period and analyze the extent to which market development, firm-level characteristics and risk exposure affect the magnitude and the distribution of liquidity using a set of fixed effect panel regressions. Our results suggest that massive increases in value traded have created market congestion, thereby increasing the costs of trading, in a context of persistently low efficiency and increased international integration. The main implications of this process are (i) market-level development and international integration are not sufficient conditions to ease access to finance for local firms, (ii) further reforms in the Tunisian market should focus on diversifying corporate ownership and improving the disclosure of information, and (iii) international investors seeking diversification in Tunisia should be aware of a significant illiquidity risk.     

Does deposit insurance improve financial intermediation? Evidence from the Russian experiment

This study examines how the introduction of deposit insurance affects depositors and banks, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system. These results hold up in a multivariate panel-data analysis that controls for bank- and time-random effects. The longer a bank has been entered into the deposit insurance system, the greater is its level of deposits and its ratio of deposits to assets. Moreover, this effect is stronger for regional banks and for smaller banks. We also find that implementation of the new deposit-insurance system has the effect of “leveling the playing field” between State-owned banks and privately owned banks. Finally, we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk-taking. Financial risk and, to a lesser degree, operating risk increase following implementation.     

Does short selling affect a firm's financial constraints?

Using a sample of Chinese A-share listed firms from 2007‐2017, we examine the impact of short sales on a firm's financial constraints. We develop three conceptual frameworks, the negative information effect, the undervaluation effect, and the deterrent effect, based on the prevailing theories and conduct an in-depth empirical analysis using the difference-in-differences, propensity score matching, and instrumental variable methods. Our findings suggest that: (1) Short sales generally worsen a firm's financial constraints by reducing its ability of raising cheap and overvalued external capital. (2) A shortable firm's financial constraints deteriorate more seriously in the case of higher credit risk or information asymmetry. (3) When a firm becomes shortable, its negative media coverage increases, external financing cost rises, and the amount of new external financing decreases. (4) The adverse impact of short sales on financial constraints is more pronounced for inefficient state-owned firms and mainly concentrates in the short term. Collectively, these results support the underlying logic of the negative information effect. However, further analysis shows that: (1) The deterrent effect also exists but is much weaker than the negative information effect. (2) The strength of the two effects will “wan and wax” with time or circumstances. Thus, the deterrent effect may outweigh the negative information effect by easing a firm's financial constraints in some cases, such as in the long term after short sales deregulation and when short sales magnitude is low or the managers are more sensitive to the decline of stock price. Our paper provides new insights into the impact of shorts sales on financial constraints, revealing some unique Chinese features compared to the US market and offering valuable lessons to other emerging markets.     

Administrative division adjustments and stock price comovement: Evidence from the city–county mergers in China

Under the background of Chinese market segmentation, whether government-led administrative division adjustments can promote regional economic integration is a practical issue. Taking interregional firms’ stock price comovement as a micro measurement of regional integration, this paper investigates the regional integration effect of administrative division adjustments, i.e., city–county mergers. We find that stock price comovement between county-level and municipal district-level firms in the merged counties and municipal districts significantly improve after city–county mergers, particularly in regions with a higher degree of market segmentation and lower degree of marketization. We further find that the increase in stock price comovement caused by city–county mergers emerges from the increase in comovement of real activities between firms in the merged counties and municipal districts. Taken together, our results suggest that government-led administrative division adjustments effectively promote regional integration.     

Does media coverage deter firms from withholding bad news? Evidence from stock price crash risk

Spurred by the informational and disciplinary roles that the media fulfils, this study provides initial evidence on how higher media coverage is associated with a lower tendency of firms withholding bad news, proxied by stock price crash risk. Our main findings are robust to a battery of tests that account for endogeneity concerns including a difference-in-differences analysis based on newspaper closures that exogenously reduce media coverage and a regression-discontinuity design analysis based on the top band of Russell 2000 and lower band of Russell 1000 index stocks. Additional tests reveal that the negative relation between media coverage and stock price crash risk is concentrated within firms with more negative and novel news coverage and firms with higher litigation or reputation risks. We also find that media plays an important role in reducing future stock price crash risk when there is reduced monitoring by other external monitoring mechanisms such as external auditors, financial analysts, and institutional shareholders.     

Does country risks predict stock returns and volatility? Evidence from a nonparametric approach

We use the k-th order nonparametric causality test at monthly frequency over the period of 1984:1–2015:12 to analyze whether aggregate country risk, and its components (economic, financial and political) can predict movements in stock returns and volatility of eighty-three developed and developing economies. The nonparametric approach controls for the existing misspecification of a linear framework of causality, and hence, the weak evidence of causality obtained under the standard Granger tests cannot be relied upon. When we apply the nonparametric test, we find that, while there is no evidence of predictability of squared stock returns barring one case, at times, there are nearly 50 percent of the countries where the aggregate risks and its components tend to predict stock returns and realized volatility.     

Does the weather have impacts on returns and trading activities in order-driven stock markets? Evidence from China

We study the association between weather-related mood factors and stock index returns in an order-driven market, the Shanghai Stock Exchange (SSE) of China. Our results indicate that asset returns are unaffected by changes in mood introduced by factors including the weather and the onset and recovery from SAD. In contrast, many of these variables are strongly correlated with a reduction in market turnover and liquidity, consistent with investor mood driving variations in market activity. Overall, we show that in an order-driven market, environmental impacts on sentiment are likely to affect trading activities, but not returns.     

Does aggressiveness help? Evidence from IPO corruption and pricing in China

Using a unique database of Chinese firms bribing initial public offering (IPO) regulators, we examine the impact of bribing on IPO pricing. Our findings suggest that bribing firms are younger, smaller, more volatile in their operating activities, and more generous in compensating underwriters and management. Most important, bribing firms price their IPO shares more aggressively than non-bribing firms and exhibit a higher price-to-earnings ratio, lower first-day return, and poorer post-IPO stock performance. Additional analyses suggest that both bribing and non-bribing firms exhibit negative announcement returns after the arrest of corrupt officials. However, the effect is stronger for bribing firms. Overall, bribing firms are systematically more aggressive than their non-bribing counterparts. They concede less to IPO investors and reward underwriters and management for helping them access the capital market.     

Why do firm fundamentals predict returns? Evidence from short selling activity

This study uses short selling activity to test whether the relation between fundamentals and future returns is due to rational pricing or mispricing. We find that short sellers target firms with fundamental performance below market expectations. We also show that short selling activity reduces the return predictability of fundamentals by speeding up the price adjustments to negative fundamental signals. To further investigate whether the returns earned by short sellers reflect rational risk premia or mispricing, we exploit a natural experiment, namely Regulation of SHO, which creates exogenous shocks to short selling by temporarily relaxing short-sale constraints. Evidence from the experiment confirms that the superior returns to short sellers result from exploiting overpricing. Overall, our study suggests that the return predictability of fundamentals reflects mispricing rather than rational risk premia.