Do different forms of government ownership matter for bank capital behavior? Evidence from China

This study attempts to reconcile the conflicting theoretical predictions regarding how government ownership affects bank capital behaviour. Using a unique Chinese bank dataset over 2006–2015 we find that government-owned banks have higher target capital ratios and adjust these ratios faster compared to private banks, supporting the ‘development/political’ view of the government’s role in banking. This effect is stronger for local government-owned and state enterprise-owned banks than for central government-owned banks. We also find that undercapitalized government-owned banks increase equity while undercapitalized foreign banks contract assets and liabilities as their respective main strategy to adjust their capital ratios.     

Do dividends signal safety? Evidence from China

Our paper examines whether dividends convey information about future cash-flow volatility in the Chinese stock markets. We observe that dividend changes are followed by cash-flow-volatility changes in the opposite direction. Taking advantage of the unique context of China, we show, in both the two-way sorting analysis and the regression analysis, that the strong relation between changes in dividend and cash-flow volatility is robust after controlling for potential confounders, including firm-level financial market frictions, macroeconomic and market conditions, and government intervention in firms' decision-making, and holds after we control for endogeneity concerns. Furthermore, we perform the theoretic mechanism tests of the relation and present supporting evidence on the signaling theory under the setting of asymmetric information, instead of the free cash flow theory based on the assumption of agency conflict. This study enriches our understanding of the source and nature of cash-flow information contained in dividends.     

Risk-sharing,market imperfections,asset prices: Evidence from China’s stock market liberalization

We examine the roles of risk-sharing and other factors in stock price revaluation during a recent liberalization episode in China. Consistent with the theoretical prediction that liberalizations reduce systematic risk, we find that risk-sharing explains approximately one-fourth of the price revaluation of investible stocks during the eight-month window between reform announcement and implementation. The firm-specific information generated by the reform is more efficiently priced into stocks that have a higher degree of market liquidity, information transparency, and informed trading.     

Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States

Review of Quantitative Finance and Accounting - We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999–2015. We use accruals-based...     

Why Do Firms Switch Banks? Evidence from China

This article uses a sample of matched firms-banks data in China over the period 1999–2012 to determine the drivers of firms switching behavior from one bank relationship to another. The results show that the principal driver of a switching action is the credit needs of the firm. The binding force of the Communist Party in state-owned banks and enterprises would suggest that switching should be a rare phenomenon in Chinese commercial relations. But switching occurs. The findings support the extant literature that transparent firms are able to switch more readily than opaque firms. The results also suggest that banks that develop their fee income services are more effective in locking-in their borrowers and that firms tend to switch from state-owned banks to smaller non-state owned banks. However, in other areas switching does not conform with the mainstream explanations.     

Do auditors’ early-life socioeconomic opportunities improve audit quality? Evidence from China

Prior research documents significant variation in audit outcomes based on individual auditors' demographic features, working experience, educational background, and social connections. This study examines whether individual auditors' early-life socioeconomic opportunities also affect audit practices. We expect that auditors from big cities have more access to socioeconomic opportunities and accumulate more human capital in early life, thus are more capable of providing high-quality audits after they start careers. Consistent with this hypothesis, we find that auditors from big cities make more audit adjustments to earnings compared with auditors from small towns. Additional tests suggest that this early-life effect on audit quality is moderated when auditors receive higher education or gain more auditing experience and is more pronounced in downward adjustments than in upward adjustments. We also find a fee premium for auditors from big cities. Overall, this paper provides evidence that auditors’ early-life socioeconomic opportunities have a far-reaching influence on audit quality.     

Does carbon emission of firms matter for Bank loans decision? Evidence from China

In the context of global climate governance, greater carbon emissions of enterprises often result in a higher potential risk of environmental violations. Taking the non-financial companies listed in China from 2008 to 2018 as research samples, this paper empirically examined the impact of firm carbon emission on their acquisition of new bank loans and its mechanism of action. This paper empirically finds that if the carbon emission of an enterprise is higher, it will be granted with less new bank loans. The results remain robust after pairing analysis and instrumental variable analysis. The mechanism analysis shows that corporate credit rating plays a significant moderating role in the relationship between corporate carbon emission and new bank loans. Carbon emission leads to the improvement of earnings management of enterprises and the significant decline in the conservatism and comparability of accounting information, which is likely to be an important channel for the reduction of corporate bank loans. Upon further analysis, we find that the carbon emission of enterprises will not significantly affect the cost of acquiring bank loans, but it will significantly reduce the loan term structure. The cross-sectional analysis shows that the effect of carbon emission on new bank loans is more obvious in state-owned listed enterprises, enterprises with high internal control quality and enterprises with strong environmental law enforcement. The research results of this paper enrich the research on the economic consequences of carbon emission, reveal the implementation effect of green credit policies, provide empirical evidence for bank credit to play a role in green governance, and promote enterprises to actively reduce carbon emission.     

Do policies and institutions matter for pre-tax income inequality? Cross-country evidence

International Tax and Public Finance - Do policies and institutions matter for pre-tax income inequality? I build an annual panel of 43 countries for the period 1980–2016 to document...     

Does regulatory forbearance matter for bank stability? Evidence from creditors’ perspective

Regulatory forbearance in times of corporate distress has been a common practice in many countries to achieve bank stability, particularly so in the absence of a unified bankruptcy code, yet very little is known in the context of emerging market economies. Exploiting variation of membership across banks in a corporate debt restructuring programme (CDR) sponsored by the central bank in India, this paper finds that the banks that made use of regulatory forbearance (RF) on the restructured corporate loans could increase their stability significantly due to the extension of low provisioning on restructured loans. However, the positive effect of RF diminishes at higher levels of market power, highlighting that member banks with higher market power tend to originate riskier assets (as reflected in their risk-weighted assets) under the auspices of this programme. Our results remain robust to different estimators (including propensity score matching), ownership structure, and alternative measures of bank stability.     

Do investors prefer borrowers from high level of trust cities? Evidence from China’s P2P market

This study explores the effects of trust on individuals’ access to the peer-to-peer (P2P) lending market. We use data collected from the P2P lending market and the China General Social Survey and find that borrowers from cities with high trust have high borrowing success rates, thereby indicating that lenders prefer high social trust. Results in the successful sample indicate that borrowers with high regional trust also receive low loan costs and large loan amounts. Regression of trust and default proves that borrowers from cities with high social trust have minimal default rates, which may be the channel of our conclusion. Results remain unchanged when using slope and river length as instrumental variables. This research further shows that personal heterogeneity, including income level, whether borrowers work in state-owned enterprises or state agencies, and whether the fund is used for development purposes, affects the impact of social trust. In addition, the conclusions continue to be robust after replacing the explanatory variable, control variable, and sample. Finally, this study determines that fairness plays a consistent role with trust, but happiness plays an opposite role.     

Do Attention-Grabbing Stocks Attract All Investors? Evidence from China

Abstract:

Using a unique and comprehensive data set of China’s Shenzhen Stock Exchange, we test whether all investors adopt attention-grabbing stocks. Only the less-wealthy individuals, the Small Group, are found to have the tendency to pursue attention-grabbing stocks, such as abnormal-volume stocks, extreme-return stocks, and initial public offering stocks. By contrast, wealthy individuals, such as the Middle and Large Groups, are the sellers of attention-grabbing stocks and prefer non-attention-grabbing stocks, thereby exhibiting a behavior resembling that of institutional investors. The wealth levels of individual investors may account for such heterogeneous trading behavior. Heterogeneous trading behavior may address one reason why only the less-wealthy individuals do poorly in China’s stock market. Accordingly, we suggest that the Small Group manage the stock selection problem through consultancy with investment institutions.     

Do ETF flows increase market efficiency? Evidence from China

Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward-looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter-market information spread: the efficiency effect of the forward-looking ETF flows strengthens when ETFs share more new information; and the forward-looking ETF flows increase the information flow to the ETF index on the next day.     

Do CFOs matter? Evidence from the M&A process

This study examines the effect of Chief Financial Officers (CFOs) on mergers and acquisitions using a newly constructed CFO Influence Index. Because the perceived influence of CFOs is high in U.K. firms, we use that market for our analysis. We find that influential CFOs as measured by experience, stature, and pay are associated with more deal completions and the pursuit of smaller, domestic targets. High influence CFOs require less time to complete a deal and are able to identify higher quality targets for which they pay less. We also discover that firms with high influence CFOs enjoy greater long-term operating and financial performance post-merger. We conclude that influential CFOs are effective in creating shareholder value during M&A.     

Do facilitation payments affect earnings management? Evidence from China

This study examines whether facilitation payments drive managers to manipulate earnings, thus weakening financial disclosure transparency. I find economically and statistically significant evidence that facilitation payments relate positively to earnings management levels in China. The impact of facilitation payments on earnings management is more pronounced when firms have relatively weak political power, less effective external monitoring, fewer growth options, and when firms are located in regions that have less efficient juridical systems. Finally, the findings are strengthened by a set of additional tests to mitigate the endogeneity problem: a difference-in-differences estimation that exploits China’s anti-corruption campaign as the exogenous shock, a dynamic analysis, an instrumental variable approach, and a Heckman analysis to adjust for selection bias. This study contributes to debates regarding corruption and transparency from a micro-economic perspective.     

Do site visits mitigate corporate fraudulence? Evidence from China

Corporate site visits emerge as an increasingly important means of information acquisition process for analysts and institutional investors. In this study, we test whether and how site visits mitigate corporate fraud risk using a unique dataset of site visits to Chinese listed firms. We find that corporate site visits can substantially reduce the incidence of corporate fraud, which is robust to adding a series of control variables, alternative model specifications and alternative measures of corporate fraud, as well as accounting for endogeneity issue and controlling for firm and time fixed effects. This negative effect is more pronounced for firms with poorer information environment and for firms with weaker corporate governance. Furthermore, we examine the mechanisms underlying the negative association between site visits and corporate fraud. Overall, this paper contributes to the literature by providing complementary evidence that site visits are important venues for analysts and institutional investors to collect firm-specific information and monitor the management of firms in China. Our findings also provide significant practical and policy implications for investors and regulators who seek to promote corporate information disclosure and mitigate the risk of corporate fraud.     

Do goodwill impairments affect audit opinions? Evidence from China

There has been a steady growth of goodwill impairments in the Chinese stock market since the adoption of the impairment approach in accounting. The influence of goodwill impairments on a firm’s financial position and profitability give reason to doubt its current and future performance. We examine whether auditors, as a crucial external monitor, identify the information risks of goodwill impairments and express their concerns about financial reporting quality in their audit opinions. Using a sample of firms listed on China’s A-share market from 2007 to 2017, we test the association between goodwill impairments and the type of audit opinion received in the same financial period. Our findings are as follows. First, the probability of receiving a modified opinion increases with the amount of goodwill impairments. Second, the positive association between goodwill impairments and modified audit opinions is driven primarily by earnings management risks. Third, this positive association is more salient when auditors are industry experts and there is no auditor–client mismatch. Fourth, auditors are more sensitive to the amount of goodwill impairments than to their mere existence. Overall, we document that auditors perceive goodwill impairments as a signal of information risks and communicate their concerns to investors to avoid litigation.     

Does political pressure matter in bank lending? Evidence from China

Using provincial data from China between 2002 and 2011, we find substantial evidence indicating a positive association between the growth of bank loans issued by commercial banks and the political pressures faced by provincial leaders. This association is particularly true for state‐owned banks, which are much more politically pressurized than others, but is relatively attenuated in provinces with a more developed banking sector. We also find that bank loans issued under greater political pressures are less commercially oriented and have lower quality. Our findings are robust to a variety of sensitivity analyses and alternative measures of political pressure. Overall, our study contribute to a growing literature emphasizing the role of the political incentives of government officials in fuelling economic growth through credit allocation.     

Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China

Using a sample of Chinese listed firms that are required to audit and disclose any internal control deficiency (ICD), this paper examines the effect of mandatory ICD disclosure on accrual quality (AQ) in China. We find that relative to voluntary ICD disclosure, mandatory ICD disclosure is associated with poorer AQ, as proxied by abnormal accruals, suggesting that the mandated disclosure of ICD effectively identifies financial reporting quality in Chinese firms. This relationship is enhanced by government control of firms (especially the central government) and by the intensity of government inspections and is stronger in undeveloped regional markets. The results are robust to the application of the PSM-DID method and use of different measures and samples. Our findings demonstrate the critical role of the mandated disclosure of ICD and improve our understanding of internal control mechanisms in emerging markets.     

Does location matter for disclosure? Evidence from geographic segments

The segment disclosures of multinational companies provide strategic information. We use the location characteristics of geographic segments to identify the reasons for withholding or disclosing segments. We examine segment data from around the adoption of IFRS 8, a reporting standard that requires firms to reveal more disaggregated information. Consistent with a proprietary cost motive for nondisclosure, we find that segments in regions that are deemed better for business tend to be hidden, while higher entry barriers for a segment are positively related to disclosure. These effects appear to be stronger for firms for which proprietary cost motives are more important. Among the previously unrevealed segments, proprietary costs explain the nondisclosure of segment earnings and other relevant financial information for investors.     

Does investment banker human capital matter in acquisitions? Evidence from China

Investment banker human capital is valuable in mergers and acquisitions. Exploiting a unique hand-built dataset, this paper studies whether and how investment banker's education and experience impact the merger performance in China. We find that investment bankers' education credentials are positively related to the post-merger performance; however, greater investment banker experience does not. We further explore the channels and show that the education effect is stronger in deals with higher information asymmetry and acquirers with worse corporate governance. On the other hand, experience increases merger performance in deals with high information asymmetry but reduces deal performance in poorly governed firms. Our findings suggest that higher education attainment facilitates both the advisory and monitoring role of investment bankers, while more experience makes investment bankers better advisors yet worse monitors. Our findings also suggest that investment bankers' roles in value creation are highly dependent on different institutional backgrounds, and one cannot generalize the findings in the U.S. across borders.