Do media connections help? Evidence from IPO pricing in China

This study examines how social connections between media executives and firms affect initial public offering (IPO) pricing using manually collected Chinese data. We find media-connected firms receive more frequent and more positive coverage than their unconnected peers, resulting in reduced IPO underpricing. However, media-connected firms have worse post-IPO market performance. Although media-connected firms have better pre-IPO accounting performance, they conduct more earnings management under the cover provided by their connected media. Additional results show that the negative effect of media connections on IPO underpricing is more pronounced for media that are not controlled by the central government and are based in the same city as the firm. It is also more pronounced for firms with less institutional ownership and non-state-owned enterprises. Our results remain valid after various robustness tests, such as alternative proxies for IPO underpricing, eliminating alternative hypotheses, matching analysis, instrumental variable analysis, as well as placebo tests. Collectively, our findings suggest that media connections compromise IPO pricing efficiency.     

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 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.     

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.     

What firm risk factors drive bank loan pricing and other terms? Evidence from China

This study investigates how firm risk factors affect bank loan pricing. Although firm-specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non-price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.     

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 insiders share pledging stifle innovation? Evidence from China

We examine the relation between insiders share pledging activities for personal loans and firm innovation. Firstly, we find a negative effect of both the existence of pledging and the intensity of pledging activities on firm innovation, measured by R&D and patent application. Pledging by insiders with decision rights is associated with a 4.6% decline in R&D activities and 0.5% decline in patent applications, respectively, which accounts for 4.0% and 10.6% of the mean of each variable. This result holds using a propensity-score matched sample. In addition, we instrument pledging activities by financing constraints faced by other firms controlled by the same controlling insiders who pledge shares. IV estimation yield similar results. Secondly, we find share pledge activities have more pronounced effect on firm innovations when firms are located in areas with strong property rights protection, when firms are non-SOEs, or when pledging insiders serve on corporate boards. Lastly, we also find a negative effect of share pledging of other firms with common shareholders on firm innovations of interest. Overall, our findings suggest that pledging shares by insiders stifle firm innovation because share pledging reduce insiders' preference for risk taking.     

Does FinTech development facilitate firms' innovation? Evidence from China

This study examines the impact of financial technology (FinTech) development on firms' innovation. Using Chinese listed firms' panel data from 2011 to 2021 and the FinTech indicators we constructed, we find that FinTech development significantly facilitates firms' innovation by alleviating their information asymmetry and financing constraints. This finding continues to hold after a series of robustness tests and endogeneity discussions. Moreover, we find that the effect of FinTech development on innovation is more pronounced for non-state-owned firms, firms in the central region, and high-tech firms. These results offer important policy implications as they demonstrate the crucial role of FinTech in the high-quality development of the real economy.     

Government auditing and corruption control: Evidence from China’s provincial panel data

Since its foundation, China’s government auditing system has played a very important role in maintaining financial and economic order and improving government accountability and transparency. Though a great deal of research has discussed the role of government auditing in discovering and deterring corruption, there is little empirical evidence on whether government auditing actually helps to reduce corruption. Using China’s provincial panel data from 1999 to 2008, this paper empirically examines the role of government auditing in China’s corruption control initiatives. Our findings indicate that the number of irregularities detected in government auditing is positively related to the corruption level in that province, which means the more severe the corruption is in a province, the more irregularities in government accounts are found by local audit institutions. Also, post-audit rectification effort is negatively related to the corruption level in that province, indicating that greater rectification effort is associated with less corruption. This paper provides empirical evidence on how government auditing can contribute to curbing corruption, which is also helpful for understanding the role of China’s local audit institutions in government governance and can enrich the literature on both government auditing and corruption control.     

Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China

China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.     

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).     

Does foreign institutional ownership increase return volatility? Evidence from China

This paper investigates the impact of foreign institutional ownership on firm-level stock return volatility in China, based on our study of a sample of 1458 firms between 1998 and 2008. The empirical results show that share ownership by foreign institutions (both financial and non-financial) increases firm-level stock return volatility, even after controlling for a complete ownership structure, firm size, turnover, and leverage, and correcting for potential endogeneity problems. However, the results also show that foreign individual shareholdings reduce volatility. Furthermore, we document a positive relationship between domestic shareholdings (individual, institutional, and governmental) and firm-level stock return volatility. Empirical results with interaction terms show that foreign institutional ownership increases firm-level return volatility by strengthening the positive impact of liquidity on volatility. The volatility reduction effect of foreign individual ownership is attenuated by government ownership suggests a poor governance environment as a result of the involvement of the Chinese government.     

Can third-party online sales disclosure help reduce earnings management? Evidence from China

Alternative data plays an increasingly important role in investment and commodities market analysis. This study empirically investigates the effect on earnings management of disclosure of third-party online sales as a type of alternative data. We show that earnings management is reduced with the public disclosure of a firm’s third-party online sales data in a well-known Chinese financial database. Our results are robust to a series of endogeneity corrections and robustness checks. We also find that the negative association between third-party online sales disclosure and earnings management is more pronounced in firms with an opaque external information environment, weaker corporate governance, a higher proportion of online sales relative to total sales, and when sales are more likely to be the target of manipulation. Our results indicate that third-party online sales disclosure reduces earnings management by decreasing its benefits and increasing the risk of its detection. Our findings yield important implications for regulators and policy makers.     

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 an item change trigger earnings management? Evidence from asset disposal income in China

We explore a unique regulatory change in 2017 in China that requires firms to move the non-current assets disposal income in the income statement from below the line of operating income to above it. We find that firms that have incentives to avoid losses conduct upward earnings management using the non-current assets disposal income after the regulatory change. We also find that this earnings management behaviour is more pronounced for firms in the growth and decline stages, and for firms with weak market competition power. In addition, such behaviour damages firm’s operating performance and innovation in the next year.     

Does privatization reform alleviate ownership discrimination? Evidence from the Split-share structure reform in China

This paper investigates the institutional origins of ownership discrimination in bank lending through a staggered quasi-natural experiment: China's Split-share Structure Reform. State-Owned Enterprises (SOEs) have an advantage over non-SOEs in securing external financing to protect investment opportunities from cash flow fluctuations. This financing privilege declined significantly after the reform, which mandatorily converted SOEs' non-tradable state-owned shares into tradable shares, sharply increasing the likelihood of further privatization. Consistent evidence also exists in terms of bank lending behaviors. Further, we show both direct and indirect evidence that the effects were more pronounced among SOEs under higher threats of privatization (e.g., firms with larger increases in tradable shares, smaller workforce, and in industries peripheral to national strategy). The evidence suggests that banks proactively prefer SOEs for the perceived safety of loans under implicit government guarantee; when this privilege disappeared after the reform, banks reacted by allocating credits more fairly. This paper provides new evidence on the bright side of share structure reforms in mitigating credit misallocation and enlightens policy makers to practical resolutions to the financing inefficiency in emerging capital markets.     

Does the reputation mechanism apply to independent directors in emerging markets? Evidence from China

We examine whether reputable independent directors improve firm performance and governance quality in emerging markets, using data from China. Firms with such directors, measured as the number of directorships in other listed firms, have higher profitability, operating efficiency and productivity. They suffer from fewer agency problems, pay more cash dividends and have lower likelihoods of receiving modified audit opinions and participating in financial disclosure-related irregularities than their counterparts. In China’s unique institutional context, the reputation mechanism for independent directors applies to firms in regions with weak marketization environments, non-state-owned enterprises and firms without political connections; it also applies when external governance is weak. Overall, reputable independent directors appear to occupy valuable advising and monitoring roles and compensate for weak institutions and governance in China.     

How Does Being Public Affect Firm Investment? Further Evidence from China

What role does the stock market play in the allocation of capital? Few studies have examined how being public affects firm investment in emerging markets. This study fills this gap by comparing investment behavior in public and private Chinese firms over the period 2004–2010. We find an overall improved capital allocation of public firms relative to private firms in China. By disentangling the financial constraints effect from the agency effect, we show that public firms are less likely to underinvest when there is cash flow insufficiency and more likely to overinvest when there is free cash flow. We conclude that both effects coexist and that whether or not being public improves investment behavior depends on the net effect of loosening financial constraints and worsening agency conflicts. Further examination shows that financial information plays a limited role in these effects, implying that the association between being public and firm investment may not be attributed to information asymmetry but, rather, institutional arrangement in China.     

Does U.S. CEO connectedness in China matter? Evidence from Chinese import penetration

Review of Quantitative Finance and Accounting - I study whether U.S. CEOs well connected in China better capture investment opportunities from China. I find that Chinese connected CEOs realize...