The more the better? Foreign ownership and corporate performance in China

We examine the relationship between the degree of foreign ownership and performance of recipient firms, using a panel of 21,582 Chinese firms over the period 2000–2005. We find that joint-ventures perform better than wholly foreign-owned and purely domestic firms. Although productivity and profitability initially rise with foreign ownership, they start declining once it reaches a certain point. This suggests that some domestic ownership is necessary to ensure optimal performance. We referred these findings to a model of a joint-venture, where strategic interactions between a foreign and a domestic owner's inputs may lead to an inverted U-shaped ownership–performance relationship.     

Board monitoring,director connections,and credit quality☆

Firms with poor board monitoring effectiveness receive lower credit ratings and larger credit spreads. I identify these effects by using director deaths as exogenous shocks to monitoring effectiveness. These effects are especially pronounced when firms are highly levered. Incremental decreases in monitoring effectiveness impact credit quality the most when a majority of the board members become co-opted by management and when firms are more likely to increase corporate risk.     

Independent director incentives: Where do talented directors spend their limited time and energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.     

Financialization and Corporate Performance in China: Promotion or Inhibition?

Using a sample of Chinese listed firms for the period 2009 to 2018, we analyze the relationship between the financialization of non-financial corporations (NFCs) and corporate performance from both long-term and short-term perspectives. Our results show that the impact of financialization on firm performance is not simply a crowding-out or pulling effect but rather depends on the type of financial assets held by the firms. The holdings of investment financial assets generally have a pulling effect on both the short-term performance and market expectations of a firm's future profits as proxied by Tobin's Q, but they crowd out the innovation activities that are critical to long-term performance. Although monetary financial assets positively affect corporate profitability, they inhibit the increase of return on invested capital and long-term performance. Additionally, compared with monetary financial assets, investment financial assets play a more important role in promoting short-term performance, although the crowding-out effect on innovation activities is more prominent for investment financial assets. Furthermore, this paper also concludes that compared with manufacturing and non-state-owned enterprises (NSOEs), the role of financialization in promoting the performance of non-manufacturing and state-owned enterprises (SOEs) is more significant.     

Correlation in corporate defaults: Contagion or conditional independence?

We revisit a method used by Das et al. (2007) (DDKS) who jointly test and reject a specification of firm default intensities and the doubly stochastic assumption in intensity models of default. The method relies on a time change result for counting processes. With an almost identical set of default histories recorded by Moody’s in the period from 1982 to 2006, but using a different specification of the default intensity, we cannot reject the tests based on time change used in DDKS. We then note that the method proposed by DDKS is mainly a misspecification test in that it has very limited power in detecting violations of the doubly stochastic assumption. For example, it will not detect contagion which spreads through the explanatory variables “covariates” that determine the default intensities of individual firms. Therefore, we perform a different test using a Hawkes process alternative to see if firm-specific variables are affected by occurrences of defaults, but find no evidence of default contagion.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

Blessing or curse? Government funding of deposit insurance and corporate lending

A key policy to limit the possibility of bank runs is an explicit deposit insurance scheme, which can be either privately or government funded. Using syndicated loans from 63 countries during the period 1985–2016, we study the effect of government involvement in deposit insurance funding on price and non-price characteristics of loans. We show that changes from purely private-funded to either government-funded or jointly funded deposit insurance increase all-in-spread-drawn by approximately 4.6 %, further increase loan fees, decrease loan maturity, and increase the use of performance pricing provisions. Our findings are consistent with the moral hazard problem behind government-funded deposit insurance schemes.     

Fiduciary duty or loyalty? Evidence from co-opted boards and corporate misconduct

We examine the effect of co-opted boards on corporate misconduct and document a significant positive relationship. Utilising a large sample of public U.S. companies from the period 2001 to 2015, we find that a one standard deviation increase in the proportion of co-opted directors on a board leads to a 4.3% rise in corporate misconduct. This outcome is robust to a series of sensitivity tests and continues to hold after accounting for potential endogeneity concerns. Further analyses indicate that co-opted directors propose fewer board agenda items, exhibit lower attendance at board meetings, and receive compensation packages in excess of industry norms, which exacerbate stakeholder-agency conflicts. Cross-sectional analysis demonstrates that the documented relationship is most pronounced among firms with weak external monitoring, greater CEO-board social ties, boards whose members have high career concerns, and where CEO power is low. Additional tests reveal that co-opted directors engage in more environmental- and workplace-related violations than other types of stakeholder violations. Overall, our investigation generates original evidence that the presence of co-opted directors aggravates the incidence of corporate wrongdoing. Our study contributes to the continuing debate on the role of boards of directors and has policy implications for those responsible for devising and monitoring effective systems of corporate governance.     

Local corruption and corporate cash holdings: Sheltering assets or agency conflict?

This study investigates the impact of corruption on corporate cash holdings in China. The political extraction argument predicts that firms might shelter liquid assets to avoid extraction by corrupt officials. Using data on A-shared listed firms between 2007 and 2012, we find that firms located in more corrupt regions hold less cash, supporting this hypothesis. Political resources help to diminish the risk of exploitation, reducing the extent to which liquid assets are sheltered. We find that the negative association between corruption and cash holding is more significant for non-state-owned enterprises (Non-SOEs) than for state-owned enterprises (SOEs). Moreover, the cash holdings of Non-SOEs without political connections are more sensitive to corruption than those of Non-SOEs with political connections. These findings demonstrate that expropriation by corrupt officials is an important factor driving firms to manage liquidity.     

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...     

Does broadband infrastructure affect corporate mergers and acquisitions? Quasi-natural experimental evidence from China

This study investigates the relationship between broadband infrastructure and corporate M&A. Using the shock of “Broadband China” policy, we conduct difference-in-differences estimations and find that broadband infrastructure significantly increases corporate M&A, which remains robust after a series of robustness checks. Further analysis shows that the underlying mechanism is alleviating information asymmetry and increasing market competition. Finally, the heterogeneity analysis shows that our results are significant mainly in the group with high regional market segmentation, manufacturing industries, and non-state enterprises. Overall, this study enriches the research on the driving factors of M&A at the firm level and provides a micro-level evaluation of economic consequences of broadband infrastructure.     

Stock dividends in China: signalling or liquidity explanations?

We test alternative hypotheses on a sample of Chinese stock dividends. The inverse Mills ratio, a signal about future performance, is positively related to announcement returns but does not predict higher future performance. Analysts do not revise their earnings forecasts after the announcement date. Our results are more consistent with liquidity‐based theories. We find that managers choose higher stock dividend ratios if share prices deviate more from the industry‐wide average. Increases in proportional spreads, depth, and the number of trades and decreases in average trade size, and price impact suggest greater participation of liquidity and small investors following stock dividends.     

IPO initial returns in China: Underpricing or overvaluation?

This paper separates the amount of IPO underpricing(primary market underpricing) and overvaluation(secondary market overvaluation) from the value of an IPO's initial return to evaluate the relative importance of these two factors and their main determinants. Using data on the IPOs of 948 Chinese firms, we find that average initial returns are 66% and that underpricing and overvaluation are between 14–22% and 44–53%, respectively, depending on the method used to assess firms' intrinsic values. In addition, while both the value of the initial return and the extent of overvaluation are significantly negatively related to post-IPO long-run stock performance, overvaluation can predict post-IPO performance better than the value of the initial return. Value uncertainty in IPOs is positively related to both underpricing and overvaluation, and both the underwriter's reputation and the existence of pricing regulation are positively related to underpricing. Investor sentiment has a positive effect on overvaluation but has no effect or a negative effect on underpricing. Overall, our results suggest that in China overvaluation accounts for a larger proportion of the initial return than underpricing,and that underpricing and overvaluation have different determinants.     

Do bank regulation,supervision and monitoring enhance or impede bank efficiency?

The recent global financial crisis has spurred renewed interest in identifying those reforms in bank regulation that would work best to promote bank development, performance and stability. Building upon three recent world-wide surveys on bank regulation (,  and ), we contribute to this assessment by examining whether bank regulation, supervision and monitoring enhance or impede bank operating efficiency. Based on an un-balanced panel analysis of 4050 banks observations in 72 countries over the period 1999–2007, we find that tighter restrictions on bank activities are negatively associated with bank efficiency, while greater capital regulation stringency is marginally and positively associated with bank efficiency. We also find that a strengthening of official supervisory power is positively associated with bank efficiency only in countries with independent supervisory authorities. Moreover, independence coupled with a more experienced supervisory authority tends to enhance bank efficiency. Finally, market-based monitoring of banks in terms of more financial transparency is positively associated with bank efficiency.     

Are corruption and corporate tax avoidance in the United States related?

Review of Accounting Studies - We examine whether state-level corruption and corporate tax avoidance in the United States (U.S) are related. Using a sample of 36,078 U.S. firm-year...     

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.     

Market misvaluation and corporate innovation: “Catering” or “risk aversion”?—Empirical evidence from China capital market

This paper tests how market misvaluation affects corporate innovation. Unlike the “catering effect” observed in the US, we find that estimated stock overvaluation in China is strongly negatively associated with corporate innovation, conforming to our “risk-aversion” hypothesis. In China, misvaluation affects innovation via finance and management behavior channels. The effect is more significant in non-state-owned corporations than in state-owned corporations. Stock turnover rate and ownership concentration play moderating roles in the effect. The evidence sheds light on the relationship between market risks and corporate innovation in an emerging market.     

Can minority investor activism promote corporate risk-taking? Evidence from a quasi-natural experiment in China

In this study, we investigate the potential of minority investor activism to alleviate risk-related agency problems. We focus on the China Securities Investor Services Centre (CSISC), a not-for-profit minority investor promoted by the China Securities Regulatory Commission to protect the interests of minority investors. Taking the popularity of the CSISC as a quasi-natural experiment, we find that CSISC shareholding significantly promotes corporate risk-taking. We also find that this positive effect is more pronounced when the controlling shareholder has a lower shareholding ratio or the counterbalancing force of other shareholders is larger. Large cash holdings and financial capacity, fierce market competition, and being in a non-high-tech industry also strengthen the role of the CSISC. Further, our analysis of the economic consequences of CSISC shareholding demonstrates that it can improve investment efficiency, constrain insiders' tunnelling activities, and improve information quality. Overall, the results shed light on the effectiveness of the CSISC in increasing investor activism and restraining insiders' risk aversion. As such, our findings have policy implications for the protection of minority investors.     

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.     

Fiscal transparency or fiscal illusion? Housing and credit market responses to fiscal monitoring

International Tax and Public Finance - Nongovernmental stakeholders, including taxpayers and investors of government bonds, have an interest in government financial information. Fiscal transparency...