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.     

The impact of derivatives hedging on the stock market: Evidence from Taiwan’s covered warrants market

We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant’s issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios.     

The real value of China’s stock market

What capital allocation role can China’s stock market play? Counter to perception, stock prices in China have become as informative about future profits as they are in the US. This rise in stock price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms.     

Asymmetric effect of financial stress on China’s precious metals market: Evidence from a quantile-on-quantile regression

Constructing the China’s financial stress index (CFSI), this paper investigates the asymmetric impact of financial stress on precious metals by employing a novel quantile-on-quantile approach. The results show that precious metals can be used as a safe haven to hedge financial market risks. However, the risk aversion of precious metals varies under different precious metals market conditions. In addition, the structural changes in the effect on precious metals are found after the global financial crisis, reflecting the heterogeneity of the relationship between financial stress and precious metals before and after the global financial crisis. These results have meaningful implications for investors and risk managers.     

Cross country linkages and transmission of sovereign risk: Evidence from China’s credit default swaps

China’s climb to a trading powerhouse has changed its position in the world and therefore its relationships with other economies. As a result, its sovereign credit risk, which we measure by the pricing of its credit default swaps (CDS), now has the potential to greatly impact other sovereign CDS spreads. Employing a dynamic approach, we find that changes in China’s sovereign risk has strong contagion effects on its goods and service providers, while China is vulnerable to contagion effects from its major importers, suggesting sovereign risk spills over to other regions via the global supply chain. China’s success hurts some of the weaker countries in Europe by competing for their customers, while China faces strong competition itself from its export-focused neighbors. FDI and portfolio investment also affect the CDS relationships between China and other economies.     

Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market

This study finds evidence that a rise in economic policy uncertainty (EPU) leads to a decline in stock returns in Chinese market; however, a positive coefficient was observed in the lagged EPU as stock prices rebound. This phenomenon also holds true for a rise in uncertainty innovations in fiscal policy, monetary policy, trade policy and global policy. The evidence leads to conclude that policy uncertainty premiums should be priced into China’s stock prices. An escalation of U.S. policy uncertainty has a significantly harmful effect on Chinese stocks regardless of whether firms are stated own or listed on U.S. market.     

Directors’ and Officers’ liability insurance and bond credit spreads: Evidence from China

Using hand-collected data on purchases of D&O insurance by Chinese listed firms for the period from 2008 to 2019, we empirically find that D&O insurance negatively associates with credit spreads. The negative relationship still holds after conducting a series of robustness tests and is not driven by the eyeball effect. We also show that D&O insurance can reduce credit spreads via the channels of internal controls, external monitoring, information asymmetry and default risk. Moreover, the negative effect of D&O insurance on credit spreads is more pronounced for non-state-owned firms, those located in regions with a low level of marketization or that employ rating agencies with a bad reputation. Our study complements the literature on the credit spreads and corporate governance.     

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.     

The impact of idiosyncratic risk on corporate financialisation——Evidence from China

Using the quarterly data of non-financial companies listed on China's A-share market from 2007 to 2019, this paper examines the relationship between the idiosyncratic risk formed based on the secondary market exchanges and the corporate financialization from the perspective of a market feedback effect. The empirical results show that idiosyncratic risk has a significant impact on the allocation of financial assets of non-financial enterprises, which is one of the motivating factors for the financialization of non-financial enterprises. Compared with SOEs, large enterprises and non-manufacturing enterprises; private enterprises, small and medium-sized enterprises, and manufacturing enterprises will allocate more financial assets when idiosyncratic risk increases. Mechanism analysis shows that managers risk aversion and financing constraints increase the impact of idiosyncratic risk on financial asset allocation while strengthening the external monitoring mechanism of institutional investors has the opposite effect. The research findings of this paper help to understand whether secondary financial markets affect the financial investment decisions of real firms in transition economies, and also have implications for how to govern the “transition from real to virtual” of real enterprises in China.     

FDI and Economic Development: Evidence from China’s Regional Growth

Abstract:

Using China’s provincial data for 1978–2011, we examine the channels through which foreign direct investment (FDI) affects China’s regional growth and inequality. We find that FDI facilitates growth by enhancing physical and human capital accumulation. FDI also has a negative effect on output growth by crowding out domestic investment, reducing local government revenue, and increasing the opportunity cost of technology innovations. The imbalance of FDI inflows among regions widens the interregional growth gap through its effect on physical capital accumulation and technology progress while it narrows the growth gap by affecting the level of higher education, industrial structure, government revenue, degree of openness, and trade surplus.     

The Jarrow/Turnbull default risk model—Evidence from the German market

Abstract

This article estimates default intensities within the continuous-time Jarrow and Turnbull model for German bank and corporate bond prices. It is shown that a joint implicit estimation of the default intensity and the recovery rate is numerically unstable. In addition to cross-sectional estimations, separate estimations (for each bond individually) are performed. Results strongly support separate estimation over the building of any cross-sections. In contrast to preceeding literature, the optimum volume of data required to provide reasonable estimates of the default intensity is also investigated. It is shown that calibration based on daily data as a rule does not minimize the ex ante mean squared pricing errors. Finally, it is shown that the constant default intensity assumption is not sound with the underlying data and the determinants of the default intensity are investigated. Regressions show that the lagged default intensity estimate, the level of the default-free term structure and liquidity proxies affect the estimated default intensity via joint parameters.     

The market price of risk and the equity premium: A legacy of the Great Depression?

By positing learning and a pessimistic initial prior, we build a model that disconnects a representative consumer's subjective attitudes toward risk from the high price of risk that a rational-expectations econometrician would deduce from financial market data. We follow Friedman and Schwartz [1963. A Monetary History of the United States, 1857-1960. Princeton University Press, Princeton, NJ] in hypothesizing that the Great Depression heightened fears of economic instability. We use a robustness calculation to elicit a pessimistic prior for a representative consumer and let him update beliefs via Bayes’ law. Learning eventually erases pessimism, but while it persists, pessimism contributes a volatile multiplicative component to the stochastic discount factor that a rational-expectation econometrician would detect. With sufficient initial pessimism, the model generates substantial values for the market price of risk and equity premium and predicts high Sharpe ratios and forecastable excess stock returns.     

Do conference calls facilitate market price discovery? Evidence from Taiwan

This study examines whether conference calls accelerate the speed at which the market and analysts understand the implications of the accrual components of current earnings on future earnings. We analyze Taiwan’s listed firms from 2001 through 2014 and find that (1) delayed market reactions to earnings news during the following 12?months occur less often for firms than for host conference calls, and (2) conference calls are associated with a significant improvement in the accuracy of analysts’ earnings forecasts. One possible explanation for our results is that conference calls improve the efficacy of investors’ and analysts’ reactions to earnings announcements by conveying information regarding the accrual components of reported earnings. Our results have implications for other Asian economies that have relatively opaque information environments and weak shareholder protections.     

The effect of investment tax incentives: evidence from China’s value-added tax reform

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.     

Diversification benefits of risk portfolio models: a case of Taiwan’s stock market

How to construct effective investment strategies is a core issue for modern finance. In this paper, we investigate the benefits of various models by rebalancing portfolios using the daily stock return data in Taiwan. We further consider investment constraints in portfolios to ensure the feasibility of their applications. Using five performance criteria, we find the risk models, particularly the CVaR, yield higher ex ante and ex post performance than a naïve buy-and-hold portfolio. The two-stage regressions show that high return benefits are associated with a bear market while high reduction in risk is positively related to high volatility. Though VaR is regarded as a standard model applied in the real world, our findings suggest that CVaR can serve as a good alternative.     

Accounting and capital market measures of risk: Evidence from Asian banks during 1998–2003

This study examines the relation between accounting and capital market risk measures for a sample of 46 listed Asian banks during the period 1998–2003. By applying a panel data analysis that includes a control for country-specific factors, the results show that the standard deviation of the return-on-assets and loan-loss-reserves-to-gross-loans are significantly related to total risk. Also gross-loans-to-total-assets and loan-loss-reserves-to-gross-loans are significantly related to non-systematic risk. These results indicate that in these Asian countries, firm-specific risk is more important than systematic risk and the results are robust even though significant differences exist across Asian countries in banking activities, capital adequacy requirements, and deposit insurance protection.     

Trade Liberalization and China’s Exports of Renewable Energy Products: Evidence from Product Level Data

Using a large panel dataset that covers 116 countries and 62 renewable energy products over the period 2000–2012, this study evaluates the effects of trade liberalization on the export expansion of China’s renewable energy products. The results reveal that trade liberalization plays a crucial role in encouraging the exports of renewable energy products. Specifically, tariff reduction, in general, not only encourages the entry into new export markets, but also induces an increase in the volume of renewable energy products already traded. In addition, the positive effects of trade liberalization are more pronounced for foreign-owned exporters than for state-owned or privately-owned exporters. Also, the ways in which trade liberalization promotes exports of renewable energy products differ by the type, destination or origin of the renewable goods being exported.     

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.     

Energy-Efficiency Policies and Energy Productivity Improvements: Evidence from China’s Manufacturing Industry

To examine the effects of China’s energy saving and emissions reduction (ESER) policy implemented during the 11th Five-Year Plan (FYP) on energy efficiency of the manufacturing sector, this article evaluates and compares the environmental-adjusted energy productivity of 15 energy-intensive industries during the 10th and 11th FYPs using the data envelopment analysis (DEA) approach. The results indicate that four of the 15 studied industries had achieved significant energy productivity improvements during the 11th FYP than that in the 10th FYP, which can mainly be attributed to the effective implementations of relevant ESER policies. In contrast, energy productivity of the rest 11 industries acquired relatively minor improvements during the whole decade.     

Do significant risk warnings in annual reports increase corporate bond credit spreads? Evidence from China

Based on listed companies issuing bonds on the Shanghai and Shenzhen Stock Exchanges from 2007 to 2017, this study analyzes the relationship between significant risk warnings in Chinese companies’ annual reports and corporate bond credit spreads. The main findings are as follows. First, in the Chinese market, “substantial warnings of significant risks” can significantly improve corporate bond credit spreads, reflecting the risk-warning effect; second, state-owned property rights weaken this effect, which only pertains to listed companies with poor risk management and low information quality; third, significant risk warnings increase investors’ heterogeneous beliefs, also affecting credit spreads; and fourth, through textual analysis, it is found that the corporate bond credit spread is greater when the disclosed risk factors are more pessimistic and less similar to those of the previous year. The findings of this paper help to enrich the literature on credit spreads and risk disclosure.