Do political connections matter in accessing capital markets? Evidence from China

We analyze the influence of political connections on firms' access to capital and the ensuing effect on the cost of raising capital. Using a dataset of 413 IPOs from 2009 to 2012, we exploit a research setting where government is still highly involved with the process. We find that firms rely on political connections to reduce IPO rejection risk as a firm's political connections are positively associated with the propensity of obtaining approval for an IPO. We further find that political connections are negatively associated with the cost of IPO and connected firms appear to perform better subsequent to their IPOs.     

Do Credible Firms Perform Better in Emerging Markets? Evidence from China

Prior research suggests that corporate credibility is associated with firm financial performance in developed countries. This article examines whether corporate credibility is related to firm performance using Economic Observer’s rating of corporate credibility in China, the largest emerging market in the world. Based on a four-stage valuation model, we find that more reputable and credible firms outperform those with low ratings by almost 20% in 3-year stock returns and have better 3-year net profit margins, return on equity, and sales growth. This study is the first to directly examine the relationship between corporate credibility and firm performance in emerging markets such as China, and our results confirm that firms with high credibility exhibit better financial and market performance at least in the following 3 years.     

Does bank efficiency affect the bank lending channel in China?

This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 148 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank's efficiency. We find limited evidence that bank efficiency hampers the effectiveness of monetary policy transmission. In addition, bank efficiency does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. These results suggest that bank efficiency may influence the bank lending channel in certain cases.     

Does share pledging affect firms' use of derivatives? Evidence from China

We investigate whether share pledging by controlling shareholders affects firms' use of derivatives. Our findings suggest that share-pledging firms are more likely to use derivatives than non-share-pledging firms. In cross-section analyses, we observe that the relationship is more pronounced when the margin call risk is higher, for example, if controlling shareholders own fewer shares, firms are located in regions with higher levels of marketization, or firms have a higher stock price crash risk. Our findings indicate that shares pledged by controlling shareholders steer firms toward the use of derivatives to hedge firm activities and alleviate the margin call risk.     

Do Entrepreneurial Social Networks Boost Enterprise Growth? Evidence from the Pearl River Delta in China

Against the backdrop of China’s traditional culture and economic transition, the effect of entrepreneurs’ social networks on enterprise growth has become an important topic attracting attention from both academics and practitioners. This paper decomposes entrepreneurs’ social networks into three dimensions: the external horizontal social network representing inter-firm relationship, external vertical social network in the form of interactions between enterprises and the government, and internal vertical social network referring to entrepreneurs’ control over enterprise operation. Results based on data from the Pearl River Delta reveal that all of the three dimensions of social network exert a positive impact on enterprise growth. The external horizontal social network plays the most influencing role, while the effects of the other two kinds of networks cannot be neglected either.     

Do Auditors Applaud Corporate Environmental Performance? Evidence from China

This paper examines the relationship between turnover among chief executive officers (CEOs) and corporate sustainability performance (CSP) by identifying the influence of two major types of succession to the top job (internal or external promotion) and the reasons for change. Our model also integrates the firm’s past prioritization of CSP and the impact of a company’s participation in the Global Reporting Initiative (GRI). Upper echelons theory and agency theory frameworks are adopted to understand CSP. Using an analysis of panel data for 88 public companies across 13 years in France, we find that a change of chief executive has a positive and significant effect on CSP 5 years after the change. This positive effect is stronger when the new CEO is recruited from outside the firm. The impact on CSP is invariably positive and significant, except for voluntary departures. The arrival of a new CEO affects CSP less when the firm has already achieved a high standard of CSP and participates in the GRI. These results are obtained after controlling CSP determinants already validated in the literature (financial performance, size, profitability, etc.). The findings show that expectations of CEOs are not solely economic and financial but also concern CSP. In terms of governance, they should prompt shareholders looking to strengthen CSP to choose new CEOs from outside the firm and to encourage the firm to participate in the GRI.     

Do Returnee Executives Value Corporate Philanthropy? Evidence from China

Journal of Business Ethics - The initial online publication contained a typesetting mistake. The original article has been corrected.     

Do Lenders Value Corporate Social Responsibility? Evidence from China

Drawing on risk mitigation theory, this article examines whether the improvement of firms’ social performance reduces debt financing costs (CDFs) in China, the world’s largest emerging market. Employing both the ordinary least square (OLS) and the two-stage instrumental variable regression methods, we find that improved corporate social responsibility (CSR) reduces the CDF when firms’ CSR investment is lower than an optimal level; however, this relationship is reversed after the CSR investment exceeds the optimal level. Firms with extremely low or extremely high CSR are subject to a higher CDF. The results also suggest that the optimal CSR level for small firms is higher than that for large firms. This study is the first to document a U-shaped relationship between CSR and CDF and also the first to investigate this relationship within an emerging market context.     

Do Internal Governance Mechanisms Impact on Firm Performance? Empirical Evidence from the Financial Sector in China

The financial sector plays an important intermediary role in the Chinese economy. However, there has been very limited research concerning improvement in corporate governance within this sector. Using an unbalanced data set of 139 firm-year observations covering 1999 to 2009, this study examines the impact of internal governance mechanisms on the performance of Chinese listed financial institutions. Findings suggest that state ownership, legal person ownership, board size, and supervisory board meetings are negatively related to the profitability of these institutions, whereas factors including ownership concentration, foreign ownership, independent directors, board meetings, and supervisory board size have no impacts.     

Do investors value the nonfinancial disclosure in emerging markets?

This paper studies the impact of the nonfinancial disclosure on firm value for a large sample of Indian firms, arguably emerging market with poor investor protections and legal enforcement. We proxy the nonfinancial disclosure by the Bloomberg score on the extent of a firm's Environmental, Social, and Governance disclosures, and find positive valuation effects associated with the nonfinancial disclosure. We find the nonfinancial disclosure is more valuable to standalone firms compared to business group firms. This paper shows that the positive valuation effects associated with the nonfinancial disclosure are attributable to lower cost of funds and higher operating cash flows.     

Do mergers and acquisitions promote trade? Evidence from China

Many studies have shown that mergers and acquisitions (M&A) raise firms' productivity. Few researches investigate whether exporters can enhance export performance after M&A through higher levels of efficiency. Based on detailed information on M&A activities of Chinese firms, China's customs trade data and National Bureau of Statistics surveys, we investigate the causal effect of M&A on trade performance. In particular, the value and the volume of firm exports, product quality, product scope and the number of export destinations have been examined. We find positive and significant effects of M&A on all the examined indicators of export performance. These findings are generally robust to a variety of robustness checks. We further observe that state-owned firms are the least likely to benefit from M&A. We also obtain evidence that firms benefit more from M&A deals if they are targets or merge with foreign firms. Overall, this paper is to our knowledge the first study that uses micro-level data in multiple industries to examine the relationship between M&A and exports of heterogeneous firms. Our results deepen our understanding of the consequences of M&A by suggesting another potential benefit, and hence provide policy implications for merger regulation.     

Do Continuous and Categorical Measures Capture the Same Construct of Diversity? Evidence from China

Chinese researchers have long preferred substantive research (i.e., examination of relationships among variables) to construct validation research, while failing to realize that construct validation research is the foundation of substantive research. This paper endeavors to answer a question: Do Rumelt’s (1974) categorical and Standard Industrial Classification (SIC) and skill-based continuous measures capture the same construct of diversity in the context of China? We take two steps to investigate the question. First, are continuous measures (SIC & skill-based entropy and Montgomery product count) appropriately differentiated among Rumelt’s categories? Second, are the categories converted from SIC & Skill-based measures convergent to Rumelt’s categorical measures? Results show that the two measures are consistent with each other.     

Do negative investor attitudes drive corporate social responsibility? Evidence from China

This study explores the association between negative investor attitudes and corporate social responsibility. We conjecture that negative investor attitudes may drive firms to engage more actively in corporate social responsibility to improve shareholder perceptions. Consistent with this expectation, we find that firms facing negative investor attitudes exhibit better CSR performance, and this association is more pronounced in firms that receive more attention from investors and attach more importance to investor relationships. Overall, this study highlights the influence of investor attitudes on corporate social responsibility and contributes to the literature on the determinants of corporate social responsibility.     

Does Religion Matter to Owner-Manager Agency Costs? Evidence from China

In China, Buddhism and Taoism are two major religions. Using a sample of 10,363 firm-year observations from the Chinese stock market for the period of 2001–2010, I provide strong and robust evidence that religion (i.e., Buddhism and Taoism on the whole) is significantly negatively associated with owner-manager agency costs. In particular, using firm-level religion data measured by the number of religious sites within a radius of certain distance around a listed firm’s registered address, I find that religion is significantly negatively (positively) associated with expense ratio (asset utilization ratio), the positive (reverse) proxy for owner-manager agency costs. This finding is consistent with the following view: religiosity has remarkable effects on the way how an individual thinks and behaves, and thereof can curb managers from unethical business practices. Moreover, my findings suggest that the negative association between religion and owner-manager agency costs is attenuated for firms with strong external monitoring mechanisms such as higher Marketization and high-quality auditors. Furthermore, after separating Buddhism from Taoism, my finding indicates that above conclusions are only available for Buddhism, suggesting that different religions may have asymmetric influence on owner-manager agency costs. Above results are robust to various measures of religiosity and a variety of robustness checks.     

Do Japanese electronics firms still follow traditional vertical integration strategies? Evidence from the liquid crystal display industry

In the past, Japanese electronics firms have been known for following vertical integration strategies. Such strategies are consistent with Japanese managerial preferences, traditional relationships, and institutions in Japan. However, changes in the technological and competitive environment have resulted in increasing vertical specialization in the electronics industry outside of Japan. This paper examines whether and to what extent Japanese information technology and consumer electronics firms involved in active matrix Liquid Crystal Display production implemented and maintained integration strategies. While focusing on one industry, this paper aims to shed further light on changing attitudes and practices in Japanese management relating to strategy and internationalization.     

Do firms manipulate earnings after winning public-private partnership bids? Evidence from China

We examine whether firms manipulate their reported earnings after winning investment project bids. China's adoption of the public-private partnership (PPP) provides a unique setting for our analysis. Using the PPP announcements to identify the firms participating in PPP projects, we find that firms conduct both accrual-based and real earnings management after PPP participation. Our findings survive difference-in-differences design with different matching methods. We document that PPP-participating firms have strong incentives to manipulate earnings because of abnormal administrative expenditure and greater short-term performance pressure than non-PPP-participating firms. The auditors respond by charging higher audit fees due to the increased risk. Moreover, government subsidies relieve performance pressure and decrease the likelihood of earnings management among PPP-participating firms. Overall, this study documents the unintended consequences of PPP participation.     

Does the Internet Accelerate the Integration of Domestic Markets? Evidence from China

This paper employs a hybrid methodology that combines case study and econometric research to examine the impact of the Internet on domestic market integration. There is not much research on this issue in the literature. From the multi-case analysis, this paper firstly obtains two main indications which are clear yet contrary to each other about how the Internet influences the market integration process. To be specific, although the Internet has both the ability and the potential to promote market integration, it is not always effective and could even harm this process due to several constraints. Using a provincial-level panel dataset from 2007 to 2013 in China, this paper empirically investigates whether the Internet plays a positive role in the market integration process. Contradictory to common expectations, we do not find any empirical evidence that the Internet accelerates the integration of domestic markets. Thus, when compared with taking advantage of Internet tools, manmade obstacles to market integration that exist in current trading systems and business models deserve more attention.     

How to reduce the default contagion risk of intercorporate credit guarantee networks? Evidence from China

This study uses data from 2011 to 2018 for Chinese small and medium-sized enterprises to construct a weighted directed network to investigate the topology of intercorporate credit guarantee networks. Moreover, based on the DebtRank algorithm, it develops a novel GuaranteeRank model that includes three factors to comprehensively examine default risk contagion and systemic risk in various scenarios. The results demonstrate that (1) credit guarantee network has the topological characteristics of “scale-free” and “small world”; (2) default contagion and systemic risk increase significantly when the macro-external shock and company's off-balance-sheet debt exceed certain threshold values, while continuous bank credit support can notably reduce the risk; (3) credit guarantee network is “robust yet fragile”, such that targeted shocks increase systemic risk much more than do random shocks; (4) in addition to the prevalent “too big to fail” and “too central to fail” phenomena, a “too connected with the central to fail” phenomenon is also identified for the first time. Therefore, this study provides an important reference for regulators and financial institutions to reduce the default contagion risk of intercorporate credit guarantee networks.