CHEN, Shiyi
Shiyi Chen, Joshua Graff-Zivin, Huanhuan Wang, and Jiaxin Xiong, Combating Cross-border Externalities: Evidence from China’s Inter-provincial Ecological Compensation Initiatives, Journal of Public Economics, 2025, Volume 252, 105495.
Abstract 
We examine China’s Ecological Compensation Initiative (ECI), which facilitates cross-provincial payments to reduce pollution in the Xin’an River. Using firm-level data, we find the policy significantly reduced upstream emissions, especially among firms closer to the river’s boundary. The ECI also increased firm exits and reduced new entries. A cost-benefit analysis shows that both upstream and downstream provinces benefited, as did the central government, supporting the ECI’s long-term feasibility and durability. Evidence from similar later programs highlights the ECI’s broader relevance, suggesting that well-designed compensation schemes can effectively address cross-jurisdictional environmental externalities.
CONG, William Lin
Nir Chemaya, Lin William Cong, Emma Jorgensen, Dingyue Zhang, and Luyao Zhang, A Dataset of Uniswap Daily Transaction Indices by Network, Nature, Scientific Data, 12, 93 (2025).
Abstract
Decentralized Finance (DeFi) is reshaping traditional finance by enabling direct transactions without intermediaries, creating a rich source of open financial data. Layer 2 (L2) solutions are emerging to enhance the scalability and efficiency of the DeFi ecosystem, surpassing Layer 1 (L1) systems. However, the impact of L2 solutions is still underexplored, mainly due to the lack of comprehensive transaction data indices for economic analysis. This study bridges that gap by analyzing over 50 million transactions from Uniswap, a major decentralized exchange, across both L1 and L2 networks. We created a set of daily indices from blockchain data on Ethereum, Optimism, Arbitrum, and Polygon, offering insights into DeFi adoption, scalability, decentralization, and wealth distribution. Additionally, we developed an open-source Python framework for calculating decentralization indices, making this dataset highly useful for advanced machine learning research. Our work provides valuable resources for data scientists and contributes to the growth of the intelligent Web3 ecosystem.
Lin William Cong, Gavin Feng, Jingyu He, and Xin He, Growing the Efficient Frontier on Panel Trees, Journal of Financial Economics, 2025, Volume 167, 104024.
Abstract
We introduce a new class of tree-based models, P-Trees, for analyzing (unbalanced) panel of individual asset returns, generalizing high-dimensional sorting with economic guidance and interpretability. Under the mean–variance efficient framework, P-Trees construct test assets that significantly advance the efficient frontier compared to commonly used test assets, with alphas unexplained by benchmark pricing models. P-Tree tangency portfolios also constitute traded factors, recovering the pricing kernel and outperforming popular observable and latent factor models for investments and cross-sectional pricing. Finally, P-Trees capture the complexity of asset returns with sparsity, achieving out-of-sample Sharpe ratios close to those attained only by over-parameterized large models.
Haichen Bai, Lin William Cong, Mei Luo, and Ping Xie, Adoption of Central Bank Digital Currencies: Initial Evidence from China, Journal of Corporate Finance, 2025, Volume 91, 102735.
Abstract
Central banks all over the world are at various stage of developing central bank digital currency (CBDC). Few countries have launched the CBDC or widely used it in the economy. In addition to surveying the literature, which features extremely scarce empirical studies due to data limitations, this paper provides likely the earliest and the most comprehensive empirical documentation of the adoption of China's CBDC (e-CNY) after the central bank launched and actively promoted it in pilot regions using both regulatory power and economic incentives. We find that regions with active promotions for e-CNY plausibly witness more frequent and larger e-CNY transactions, more wallet creations, and greater merchant adoption. However, despite the strong intervention, individual users mostly stick to existing electronic payment Apps and are reluctant to switch to e-CNY. Given the world eagerly learns from China's experiment and China plans to expand the application scope of e-CNY as a general payment tool domestically and internationally with added smart-contract functions, we discuss primary challenges and potential paths forward for the development of e-CNY and CBDCs in general.
William Lin Cong, Yuanyu Qu , and Guojun Wang, Blockchains for Environmental Monitoring: Theory and Empirical Evidence from China, Review of Finance, 2025, Volume 29, Issue 5, Pages 1303-1336.
Abstract
We explore the effects of a blockchain-based environmental monitoring technology on emissions. Our model of firm competition in the presence of regional regulators reveals that blockchain adoption reduces industrial pollution but triggers business relocation, creating trade-offs between local emission reduction and economic contraction. When pollution-induced social losses are highly dispersed across cities, a partial-adoption equilibrium fails to mitigate aggregate emissions because of the pollution leakage. We further present the first piece of empirical evidence corroborating model predictions, by taking advantage of a recent regulation change in China. The concentrations of SO2, NO2, and CO in blockchain-adopting cities are on average 16.6 percent, 7.9 percent, and 4.6 percent, respectively, lower than other cities. However, blockchain-based monitoring disproportionately hurts the industrial sector, and the average economic growth are 1.8–2.6 percent lower than other cities. Firms in adopting cities open more non-local plants to avoid regulation.
Lin William Cong, Tengyuan Liang, Xiao Zhang, and Wu Zhu, Textual Factors: A Scalable, Interpretable, and Data-Driven Approach to Analyzing Unstructured Information, Management Science, forthcoming.
Abstract
We introduce a general approach for analyzing large-scale text-based data, combining the strengths of neural network language processing and generative statistical modeling to create a factor structure of unstructured data for downstream regressions typically used in social sciences. We generate textual factors by (i) representing texts using vector word embedding, (ii) clustering the vectors using locality-sensitive hashing to generate supports of topics, and (iii) identifying relatively interpretable spanning clusters (i.e., textual factors) through topic modeling. Our data-driven approach captures complex linguistic structures while ensuring computational scalability and economic interpretability, plausibly attaining certain advantages over and complementing other unstructured data analytics used by researchers, including emergent large language models. We conduct initial validation tests of the framework and discuss three types of its applications: (i) enhancing prediction and inference with texts, (ii) interpreting (non–text-based) models, and (iii) constructing new text-based metrics and explanatory variables. We illustrate each of these applications using examples in finance and economics such as macroeconomic forecasting from news articles, interpreting multifactor asset pricing models from corporate filings, and measuring theme-based technology breakthroughs from patents. Finally, we provide a flexible statistical package of textual factors for online distribution to facilitate future research and applications.
Lin William Cong, Tengyuan Liang, Xiao Zhang, and Wu Zhu, Textual Factors: A Scalable, Interpretable, and Data-Driven Approach to Analyzing Unstructured Information, Management Science, forthcoming.
Abstract
We introduce a general approach for analyzing large-scale text-based data, combining the strengths of neural network language processing and generative statistical modeling to create a factor structure of unstructured data for downstream regressions typically used in social sciences. We generate textual factors by (i) representing texts using vector word embedding, (ii) clustering the vectors using locality-sensitive hashing to generate supports of topics, and (iii) identifying relatively interpretable spanning clusters (i.e., textual factors) through topic modeling. Our data-driven approach captures complex linguistic structures while ensuring computational scalability and economic interpretability, plausibly attaining certain advantages over and complementing other unstructured data analytics used by researchers, including emergent large language models. We conduct initial validation tests of the framework and discuss three types of its applications: (i) enhancing prediction and inference with texts, (ii) interpreting (non–text-based) models, and (iii) constructing new text-based metrics and explanatory variables. We illustrate each of these applications using examples in finance and economics such as macroeconomic forecasting from news articles, interpreting multifactor asset pricing models from corporate filings, and measuring theme-based technology breakthroughs from patents. Finally, we provide a flexible statistical package of textual factors for online distribution to facilitate future research and applications.
GAO, Huasheng
Huasheng Gao, Po-Hsuan Hsu, and Jin Zhang, Pay Transparency and Inventor Productivity: Evidence from State-level Pay Secrecy Laws, RAND Journal of Economics, 2025, Volume 56, Issue 4, Pages 389-418..
Abstract
We examine the role of pay transparency in the productivity of firms’ and inventors’ innovation activities. Our test exploits the staggered adoption of state-level pay secrecy laws, which enhance pay transparency in the workplace. We find a significant increase in inventor productivity of firms located in states that have passed such laws relative to firms elsewhere. This relation is more pronounced for firms in states with lower levels of pre-existing pay transparency. We further show that pay secrecy laws promote inventor productivity by motivating inventors—especially minority inventors—to exert more effort, enhancing the diversity of inventor teams, and encouraging all inventors to pursue promotions.
Simba Xin Chang, Huasheng Gao, and Wei Li, Discontinuous Distribution of Test Statistics Around Significance Thresholds in Empirical Accounting Studies, Journal of Accounting Research, 2025, Volume 63, Issue 1, Pages 165-206.
Abstract
Examining test statistics from articles in six leading accounting journals, we detect discontinuities in their distributions around conventional significance thresholds (p-values of 0.05 and 0.01) and find an unusual abundance of test statistics that are just significant. Further analysis reveals that these discontinuities are more prominent in studies with smaller samples and are more salient in experimental than in archival studies. The discontinuity discrepancy between experimental and archival studies relates to several proxies for researcher degrees of freedom. Nevertheless, this does not imply that experimental research is more prone to questionable research practices than archival studies. Overall, we provide suggestive evidence that some accounting researchers exercise undisclosed discretion to obtain and report statistically significant results. Thus, a healthy skepticism of some just-significant test statistics is warranted.
Huasheng Gao and Yuxi Wang, Tariff Uncertainty and the Cost of Debt: Evidence from United States–China Permanent Normal Trade Relations, Journal of Banking and Finance, 2025, Volume 178, 107515.
Abstract
We examine the causal effect of tariff uncertainty on firms’ cost of debt. Our tests exploit a unique trade policy that reduces tariff uncertainty on Chinese imports without affecting the actual tariff rate, United States (U.S.)–China permanent normal trade relations (PNTR). We reveal a significant drop in the loan spreads for firms affected by PNTR relative to other firms. We further demonstrate that such effects occur through the channel of increasing firms’ performance predictability. Overall, by examining a clean measure of uncertainty from the tariff source, we provide evidence that reducing uncertainty has a causal effect on reducing the cost of debt.
Huasheng Gao, Po-Hsuan Hsu, and Yuxi Wang, Second-tier Stock Exchanges and Growth of Entrepreneurship, Management Science, forthcoming.
Abstract
We examine the role of second-tier stock exchanges in an entrepreneurial context from a global perspective. We construct a country-industry-year panel of global VC-invested startups, and find a significant increase in entrepreneurial activity following the launch of such markets. A causal interpretation is supported by additional tests for staggered difference-in-differences regressions and interacted regressions based on industry-specific dependence on second-tier stock exchanges. We propose a VC exit mechanism that receives empirical support: the launch of second-tier stock exchanges positively predicts (i) VC investment in startups, (ii) VCs’ valuation of startups, (iii) startups’ patenting records, (iv) startups’ IPO likelihood, and (v) startups’ IPO valuation. We find that more startups are created in countries with more VC investment after the launch of such markets. We also find that the effect of second-tier stock exchanges on entrepreneurial ventures increases with financial resources, human capital, and intellectual property protection.
HONG, Liu
Min Dai, Yaoting Lei, Hong Liu, and Chen Yang, Optimal Tax-Timing with Transaction Costs, Management Science, forthcoming.
Abstract
We develop a dynamic portfolio model incorporating capital gains tax (CGT), transaction costs, and year-end taxation. We find that even tiny transaction costs can lead to significant deferral of large losses and transaction costs affect loss deferrals much more than gain deferrals. Our model can thus help explain the puzzle that even when investors face equal long-term/short-term CGT rates, they may still defer realizing large capital losses for an extended period of time, displaying the disposition effect. In addition, we find misestimating transaction costs is costly. We also provide several unique, empirically testable predictions and shed light on recently proposed tax policy changes.
JIANG, Liang
Liang Jiang, Liyao Li, Ke Miao, and Yichong Zhang, Adjustments with Many Regressors under Covariate-adaptive Randomizations, Journal of Econometrics, 2025, Volume 249, Part B, 105991.
Abstract
Our paper discovers a new trade-off of using regression adjustments (RAs) in causal inference under covariate-adaptive randomizations (CARs). On one hand, RAs can improve the efficiency of causal estimators by incorporating information from covariates that are not used in the randomization. On the other hand, RAs can degrade estimation efficiency due to their estimation errors, which are not asymptotically negligible when the number of regressors is of the same order as the sample size. Ignoring the estimation errors of RAs may result in serious over- rejection of causal inference under the null hypothesis. To address the issue, we construct a new ATE estimator by optimally linearly combining the estimators with and without RAs. We then develop a unified inference theory for this estimator under CARs. It has two features: (1) the Wald test based on it achieves the exact asymptotic size under the null hypothesis, regardless of whether the number of covariates is fixed or diverges no faster than the sample size; and (2) it guarantees weak efficiency improvement over estimators both with and without RAs.
KANIEL, Ron
Ron Kaniel, and Pingle Wang, Unmasking Mutual Fund Derivative Use, Review of Financial Studies, 2025, Volume 38, Issue 4, Pages 1120-1166.
Abstract
Using new SEC data, we study fund derivative use and its impact on performance. Despite small portfolio weights, derivatives contribute largely to fund returns. Contrary to prior research, we find most employ derivatives to amplify, not hedge, equity returns. Using machine learning to classify funds’ derivative strategies reveals high specializations linked to information-related trading, liquidity management, gaining exposure, or hedging motives. Long index derivative users drive the amplification. During the COVID-19 crisis, they significantly increased derivative use more than others and shifted strategies, but initially lost on existing positions and then on newly opened short positions when markets unexpectedly rebounded.
Ron Kaniel, and Dmitry Orlov, Intermediated Asymmetric Information, Compensation, and Career Prospects, American Economic Review, 2025, Volume 115, No. 10, Pages 3638-3674.
Abstract
Adverse selection benefits firms able to identify talent. An informed intermediary expropriates agents' ability by threatening to fire and expose them to undervaluation of their skill. An agent's track record gradually reduces intermediary's information advantage. In response, the intermediary starts churning well-performing agents she knows are less skilled. The accelerated reduction in information advantage boosts profits, as retained agents accept below-reservation wages to build reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offset expropriation costs. Our analysis applies to professions where talent is essential and performance is publicly observable.
LU, Xiaomeng
Claire Yurong Hong, Xiaomeng Lu, and Jun Pan, FinTech Platforms and Mutual Fund Distribution, Management Science, 2025, Volume 71, Issue 1, Pages 488-517.
Abstract
We document a novel platform effect caused by the emergence of FinTech platforms in the intermediation of financial products. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered entrance of funds onto platforms, we find a marked increase of performance chasing, driven by the centralized information flow unique to FinTech platforms. This pattern is further confirmed using proprietary data from a top platform. Examining the platform impact on fund managers, we find that, incentivized by the amplified performance-chasing, fund managers increase risk taking to enhance their probability of getting onto the top ranking.
Claire Yurong Hong, Xiaomeng Lu, Jun Pan, Financial Inclusion via FinTech: From Digital Payments to Platform Investments, Management Science, forthcoming.
Abstract
We study household finance in the age of FinTech, where digital payments are integrated with various financial services through all-in-one super-apps. We hypothesize that increased FinTech adoption via digital payments can lower the non-monetary costs (e.g., psychological barriers) associated with financial market participation. We find that higher FinTech adoption leads to greater participation and increased risk-taking in mutual fund investments. Using distance from Ant as an instrument for FinTech penetration, as well as the exogenous penetration of QRPay in Shenzhen, we further provide causal evidence from digital payment to risky fund investment. Moreover, the effect of FinTech is stronger among individuals who are otherwise more constrained, those with higher risk tolerance, or those living in under-banked counties.
MA, Chang
Dominik Boddin, Daniel te Kaat, Chang Ma, and Alessandro Rebucci, Portfolio Flows and Household Portfolios, European Economic Review, 2025, Volume 172, 104904.
Abstract
In this paper, we show that cross-border portfolio flows around the peak of the European Crisis induced households to rebalance their portfolios toward housing. Estimating difference-in-differences regressions around Draghi’s “Whatever It Takes” speech in July 2012 with household data from the ECB’s Household Finance and Consumption Survey, we find that portfolio inflows induce households with larger ex-ante bond and equity shares to rebalance more strongly toward housing. The effect is not driven by higher pre-treatment access to credit or higher credit growth during the treatment period, and is stronger for wealthier and less risk-averse households.
QIAN, Jun
Viral V. Acharya, Jun Qian, Yang Su and Zhishu Yang, Fiscal Stimulus, Deposit Competition, and the Rise of Shadow Banking: Evidence from China, Management Science, 2025, Volume 71, Issue 7, Pages 5645-5675.
Abstract
The rise of shadow banking and attendant financial fragility in China can be traced to intensified deposit competition following the global financial crisis (GFC). A large, state-owned bank’s deposits from cross-border money inflows fell significantly following the GFC, and it supported the government’s fiscal stimulus more aggressively than other large banks by issuing larger volumes of new loans. Small and medium-sized banks with more branch-level overlaps with this large bank relied more on shadow banking, and issued more Wealth Management Products (WMPs)—short-maturity, off-balance-sheet substitutes for deposits. Greater amounts of WMPs created rollover risks for the issuers, as reflected by higher yields on new WMPs, higher borrowing rates in the interbank market, and lower stock-market performance during liquidity stress.
Financing the Growth of Science and Technology Innovation Enterprises: Frontier, Challenges, and Solutions, Jun Qian, Y. Hu, Y. Gu, and C. Shan, Bulletin of National Natural Science Foundation of China (in Chinese), May 2025, 39 (2), Pages 292-301.
Abstract
Financing the growth of "Science and Technology Innovation Enterprises (STIEs)" is a key objective of China' s financial system. We focus on equity and credit markets. First, as the registration system was introduced and implemented in various boards of the domestic stock market, it has facilitated the financing of STIEs and enhanced their valuation and governance through more efficient listing and delisting processes and trading mechanisms. Second, financing start-ups and non-listed STIEs at reasonable costs without the use of traditional types of collateral is the key challenge for the banking sector and credit markets. In this regard, pledged loans based on intangible capital, such as patents, has contributed to the financing of STIEs, which in turn promotes more R&D and innovations. Finally, we explore a few areas of further development, including a system of multiple financing channels for non-listed STIEs, better implementation of the registration system and governance regulations, as well as the application of AI in the areas of pledged credit using intangible capital.
QIAN, Nancy
Nancy Qian, and Marco Tabellini, Racial Discrimination and the Social Contract: Evidence from U.S. Army Enlistment during WWII, Review of Economic Studies, forthcoming.
Abstract
This paper documents that the Pearl Harbor attack triggered a sharp increase in volunteer enlistment rates of American men, the magnitude of the increase was smaller for Black men than for white men and the Black-white gap was larger in counties with higher levels of racial discrimination. The results suggest that political exclusion and discrimination can undermine support for the government during critical times such as times of war.
SHEN, Jialu
Nuno Coimbra, Francisco Gomes, Alexander Michaelides, and Jialu Shen, Asset Pricing and Risk-Sharing Implications of Alternative Pension Plan Systems, The Journal of Finance, published online.
Abstract
We show that incorporating defined benefit pension funds in an incomplete markets asset pricing model improves its ability to match the historical equity premium and riskless rate and has important risk-sharing implications. We document the importance of the pension fund's size and asset demands, and a new risk channel arising from fluctuations in the fund's returns. We use our calibrated model to study the implications of a shift to an economy with defined contribution plans. The new steady state is characterized by a higher riskless rate and a lower equity premium. Consumption volatility increases for retirees but decreases for workers.
SHI, Donghui
Charles M. Jones, Donghui Shi, Xiaoyan Zhang, and Xinran Zhang, Retail Trading and Return Predictability in China, Journal of Financial and Quantitative Analysis, 2025, Volume 60, Issue 1, Pages 68-104.
Abstract
Using comprehensive account-level data, we separate Chinese retail investors into five groups and document strong heterogeneity in trading dynamics and performances. Retail investors with smaller account sizes cannot predict future returns correctly, display daily momentum patterns, fail to process public news, and show overconfidence and gambling preferences; while retail investors with larger account balances predict future returns correctly, display contrarian patterns, and incorporate public news in trading. With Barber et al. (2009) performance measures, smaller retail investors suffer from poor stock selection abilities and trading costs, while large retail investors’ stock selection abilities are offset by trading costs.
Jennifer Huang, Donghui Shi, Zhongzhi Song, and Bin Zhao, Firm-initiated Stock Trading Suspension During A Market Crash, Journal of Banking and Finance, 2025, Volume 177, 107473.
Abstract
We study the determinants and impact of rm-initiated trading suspension during the Chinese stock market crash in July of 2015. We find that, when making suspension decisions, firms aim for not only stopping investors panic selling, but also reducing negative feedback effects on the real-side and protecting the interest of some shareholders. For the pricing impact, we find that suspended stocks are undervalued before suspension and fully catch-up with matching stocks suspension-period returns after trading resumption. Finally, for post-resumption trading profits across investors, small individuals and institutions are the losers, while large individuals and state agencies are the winners.
Christian T. Lundblad, Donghui Shi, Xiaoyan Zhang, and Zijian Zhang, Foreign Capital in the Chinese Stock Market: A Firm-Level Study, Journal of Financial and Quantitative Analysis, forthcoming.
Abstract
Using a proprietary dataset covering all foreign investors’ trades in the Chinese stock market from 2016 to 2019, we find that foreign order flows, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns, implying that these order flows are likely informed. We track the source of this informativeness and find that foreign order flows significantly predict firm-level news and news-day returns, which suggests that foreign investors can process local firm information. Finally, regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power.
TANG, Haihan
Oliver B. Linton, Haihan Tang, and Jianbin Wu, A Large Confirmatory Dynamic Factor Model for Stock Market Returns in Different Time Zones, Journal of Econometrics, 2025, Volume 249, Part B, 105971.
Abstract
We propose a confirmatory dynamic factor model for a large number of stocks whose returns are observed daily across multiple time zones. The model has a global factor and a continental factor that both drive the individual stock return series. We propose two estimators of the model: a quasi-maximum likelihood estimator (QML-just-identified), and an improved estimator based on an Expectation Maximization (EM) algorithm (QML-all-res). Our estimators are consistent and asymptotically normal under the large approximate factor model setting. In particular, the asymptotic distributions of QML-all-res are the same as those of the infeasible OLS estimators that treat factors as known and utilize all the restrictions on the parameters of the model. We apply the model to MSCI equity indices of 42 developed and emerging markets, and find that most markets are more integrated when the CBOE Volatility Index (VIX) is high.
WEI, Shang-Jin
Stephen Sun, Shang-Jin Wei and Jin Xie, Accounting Standards and Antidumping Investigation, Journal of Accounting and Economics, 2025, Volume 80, Issues 2–3, 101810.
Abstract
We document a new fact regarding the relationship between accounting standards and international trade: Following the mandatory adoption of International Financial Reporting Standards (IFRS), exporters accused of dumping in a destination market are more successful in defending their cases and are more likely to obtain exemption from duties.The greater the reduction in the gap between the firms’accounting standards and IFRS around adoption, the stronger the effects. The effects are robust to the exclusion or inclusion of China, and are especially strong in countries with stronger improvement in accounting reporting enforcement. We discuss channels through which accounting standards globalization either mitigates importing countries’ trade protectionism or curtail exporters’ dumping activities.
WU, Wenbin
Wenbin Wu, and Wei You, Should Governments Promote or Restrain Urbanization?, Journal of International Economics, forthcoming.
Abstract
In a system of cities model that incorporates urban externalities, equilibrium city sizes deviate from optimal city sizes, which suggests a role for government intervention. Using a general equilibrium framework that incorporates agglomeration benefits and costs and that is calibrated to data from China between 2000 and 2020, we show that it is generally welfare-reducing to control city sizes through internal migration restrictions since the frictions they introduce outweigh the benefits of correcting for city size deviations (a GDP loss of 13.6% and a welfare loss of 4.7%). However, we also find that most large Chinese cities have already surpassed the optimal sizes from their local perspective, so without controlling city sizes, the average welfare of city residents would decrease. This suggests that a combination of policies is needed to both improve aggregate welfare and alleviate the distributional consequences for a rapidly urbanizing country.
BAILEY, Warren
Warren B. Bailey, Xiaping Cao, Zhenyi Yang, and Sili Zhou, Who Leads and Who Follows? The Cross-Border Peer Effect in Investment by Chinese and US Firms, Journal of International Economics, 2024, Volume 147, 103875.
Abstract
We document a cross-border peer effect in corporate investment across two key economies, China and the US. Results show that investment by Chinese firms lags US peers without feedback in the other direction. This association is stronger for Chinese firms in manufacturing, with innovative US peers, or experiencing trade pressure, and is robust to diagnostic tests using trade conditions and business cycles. Furthermore, Chinese firms respond to domestic competition by learning from US peers. Information acquisition and managerial career concerns partly explain the peer effect. Our work illustrates how decision-makers in China’s rapidly-growing economy have learned from foreign peers.
Warren Bailey, Gulnur Muradoglu, Ceylan Onay, and Kate Phylaktis, Foreign Investors, Firm Level Productivity, and European Economic Integration, Journal of Corporate Finance, 2024, Volume 85, 102564.
Abstract
Using a comprehensive sample of listed and unlisted firms from 34 European countries, we study firm-level manufacturing outcomes conditioned on foreign investment, country characteristics, and EU membership. Higher foreign ownership is associated with higher productivity but lower employment, particularly when the host or source country is an EU member and scores high on disclosure and investor protection, and low on corruption. We confirm our interpretation using staggered EU accession dates and industry-level external financial dependence interacted with a financial crisis. The subset of Eastern European countries appears to benefit from foreign investment and EU accession without losing jobs. Nevertheless, manufacturing outcomes associated with survey findings on public sentiment towards globalization and migration confirm the social and political costs of globalization.
CHEN, Huafeng
Huafeng Chen, Jason V. Chen, and Feng Li, The Number of Estimates in Footnotes and Accruals, Management Science, 2024, Volume 70, Issue 1, Pages 283-308.
Abstract
This study quantifies the number of estimates involved in firms’ accruals and examines whether it is informative about the relation between accruals and future earnings. We measure the number of estimates using the frequency of the use of the word estimate in the qualitative portions of a firm’s Notes to the Financial Statements (footnotes). Motivated by arguments regarding the impact of estimation errors in accruals (Sloan 1996, Richardson et al. 2005), we hypothesize and find that the accruals of firms that have more estimates have a lower relation with future earnings (i.e., lower persistence) and a lower association with their past, current, and future cash flows, measured in accord with the approach of Dechow and Dichev (2002).
GAO, Huasheng
Yanke Dai, Ting Du, Huasheng Gao, Yan Gu, and Yongqin Wang, Patent Pledgeability, Trade Secrecy, and Corporate Patenting, Journal of Corporate Finance, 2024, Volume 85, 102563.
Abstract
We identify a positive effect of patent pledgeability on corporate patenting. Our tests exploit the staggered city-level policy change, which allows firms to use patents as collateral for financing. We find a significant increase in patents and patent citations for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. We further show that patent pledgeability increases corporate patenting through the channel of inducing firms to shift from secrecy-based innovation to patent-based innovation, rather than the channel of mitigating financial constraints.
HUANG, Yi
Yi Huang, Ugo Panizza, and Richard Portes, Corporate Foreign Bond Issuance and Interfirm Loans in China, Journal of International Economics, 2024, Volume 152, 103975.
Abstract
We use firm-level data to analyze international bond issuance by Chinese non-financial corporations, distinguishing those by sectors classed as ‘risky’. Dollar issuance is positively correlated with the differential between domestic and foreign interest rates, and this effect is particularly strong for firms in risky sectors. Strikingly, firms in risky sectors use the proceeds to do more interfirm lending than firms in non-risky sectors. Moreover, this lending rose significantly after the authorities sought to restrict the financial activities of risky sectors in 2008-09. Firms in risky sectors compound risk by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation.
Yi Huang, H. Hau, c. Lin, H. Shan, Z. Sheng and L. Wei, FinTech Credit and Entrepreneurial Growth, Journal of Finance, 2024, Volume 79, Issue 5, Pages 3309-3359.
Abstract
Based on automated credit lines to vendors trading on online platform and a discontinuity in the credit decision algorithm, we document that a vendor’s access to FinTech credit boosts its sales growth, transaction growth, and the level of customer satisfaction gauged by product, service, and consignment ratings. These effects are more pronounced for vendors characterized by greater information asymmetry about their credit risk and with less collateral, which reveals the information advantage of FinTech credit over traditional credit technology.
JIANG, Liang
Liang Jiang, Xiaobin Liu, Peter C.B. Phillips, and Yichong Zhang, Bootstrap Inference for Quantile Treatment Effects in Randomized Experiments with Matched Pairs, Review of Economics and Statistics, 2024, Volume 106, Issue 2, Pages 542-556.
Abstract
This paper examines methods of inference concerning quantile treatment effects (QTEs) inrandomized experiments with matched-pairs designs (MPDs). Standard multiplier bootstrapinference fails to capture the negative dependence of observations within each pair and is there-fore conservative. Analytical inference involves estimating multiplefunctional quantities thatrequire several tuning parameters. Instead, this paper proposes two bootstrap methods thatcan consistently approximate the limit distribution of the original QTEestimator and lessenthe burden of tuning parameter choice. Most especially, the inverse propensity score weightedmultiplier bootstrap can be implemented without knowledge of pair identities.
Yuehao Bai, Liang Jiang, Joseph P.Romano, Azeem M. Shaikh, and Yichong Zhang, Covariate Adjustment in Experiments with Matched Pairs, Journal of Econometrics, 2024, Volume 241, 105740.
Abstract
This paper studies inference for the average treatment effect (ATE) in experiments in which treatment status is determined according to “matched pairs” and it is additionally desired to adjust for observed, baseline covariates to gain further precision. By a “matched pairs” design, we mean that units are sampled i.i.d. from the population of interest, paired according to observed, baseline covariates, and finally, within each pair, one unit is selected at random for treatment. Importantly, we presume that not all observed, baseline covariates are used in determining treatment assignment. We study a broad class of estimators based on a “doubly robust” moment condition that permits us to study estimators with both finite-dimensional and high-dimensional forms of covariate adjustment. We find that estimators with finite-dimensional, linear adjustments need not lead to improvements in precision relative to the unadjusted difference-in-means estimator. This phenomenon persists even if the adjustments interact with treatment; in fact, doing so leads to no changes in precision. However, gains in precision can be ensured by including fixed effects for each of the pairs. Indeed, we show that this adjustment leads to the minimum asymptotic variance of the corresponding ATE estimator among all finite-dimensional, linear adjustments. We additionally study an estimator with a regularized adjustment, which can accommodate high-dimensional covariates. We show that this estimator leads to improvements in precision relative to the unadjusted difference-in-means estimator and also provides conditions under which it leads to the “optimal” nonparametric, covariate adjustment. A simulation study confirms the practical relevance of our theoretical analysis, and the methods are employed to reanalyze data from an experiment using a “matched pairs” design to study the effect of macroinsurance on microenterprise.
JIAO, Yang
Yang Jiao, Zhikuo Liu, Zhiwei Tian, and Xiaxin Wang, The Impacts of the U.S. Trade War on Chinese Exporters, Review of Economics and Statistics, 2024,Volume 106, Issue 6, Pages 1576-1587.
Abstract
This paper studies the impacts of the 2018 U.S. tariff surges on export prices and adjustments of sales across different markets of Chinese exporters. The finding that U.S. tariffs did not affect the free-on-board price of Chinese exports is robust to controlling for firm-related fixed effects. While firms’ exports to the U.S. dropped significantly, exports to the E.U. increased moderately and domestic sales or exports to other foreign markets were barely affected. Finally, by surveying managers of exporting firms, we shed light on potential impediments to firms’ adjustments of export prices and sales.
MA, Chang
Siming Liu, Chang Ma, and Hewei Shen, Sudden Stop with Local Currency Debt, Journal of International Economics, 2024, Volume 148, 103888.
Abstract
Over the past two decades, emerging market economies have improved their liability structures by increasing the share of their debt denominated in local currency. This paper introduces a local currency debt (i.e., in units of aggregate consumption) into a sudden stop model and explores how this alternative structure sheds new perspectives on financial regulations. Decentralized agents do not internalize the effects of their portfolio decisions on financial amplification and undervalue the insurance benefit of using local currency debt. However, due to debt-deflation incentives and the cost of buying insurance, a discretionary planner is reluctant to issue local currency debts, and capital controls are primarily used to restrict credit volumes. In contrast, a social planner with commitment would promise a higher future payoff to obtain a more favorable bond price. The capital control under commitment encourages borrowing in local currency, mitigates the severity of crises, and improves welfare relative to laissez-faire.
Chang Ma, and Fabián Valencia, Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk, Journal of International Money and Finance, 2024, Volume 142, 103028.
Abstract
Mexico has a long-standing practice of hedging oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.
QIAN, Jun
Franklin Allen, Jun "QJ" Qian, Chenyu Shan, and Julie Lei Zhu, Dissecting the Long-term Performance of the Chinese Stock Market, Journal of Finance, 2024, Volume 79, Issue 2, Pages 993-1054.
Abstract
Domestically listed Chinese (A share) firms have lower stock returns than externally listed Chinese, developed and emerging country firms during 2000-2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance in both stock and accounting returns is more pronounced for large A share firms, while small firms show no underperformance in either dimension. Investor sentiment explains low stock returns in the cross-country and within A share samples. Institutional deficiencies in IPO and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.
WANG, Xiaxin
Yang Jiao, Zhikuo Liu, Zhiwei Tian, and Xiaxin Wang, The Impacts of the U.S. Trade War on Chinese Exporters, Review of Economics and Statistics, 2024,Volume 106, Issue 6, Pages 1576-1587.
Abstract
This paper studies the impacts of the 2018 U.S. tariff surges on export prices and adjustments of sales across different markets of Chinese exporters. The finding that U.S. tariffs did not affect the free-on-board price of Chinese exports is robust to controlling for firm-related fixed effects. While firms’ exports to the U.S. dropped significantly, exports to the E.U. increased moderately and domestic sales or exports to other foreign markets were barely affected. Finally, by surveying managers of exporting firms, we shed light on potential impediments to firms’ adjustments of export prices and sales.
WEI, Shang-Jin
Xin Liu, Shang-Jin Wei, and Yifan Zhou, Liberalization Spillover: From Equities to Loans, Journal of Financial and Quantitative Analysis, 2024, Volume 59, Issue 1, Pages 395-433.
Abstract
The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (Bekaert, Harvey, and Lundblad, 2005) despite a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.
Sai Ding, Wei Jiang, Shengyu Li, Shang-Jin Wei, Fiscal Policy Volatility and Capital Misallocation: Evidence from China, European Economic Review, Volume 167, August 2024, 104797.
Abstract
This paper investigates how domestic policy uncertainty stemming from discretionary fiscal policy disrupts efficient capital allocation across firms. While fiscal policy represents the government’s reaction to economic conditions, its volatility presents firms with considerable uncertainty about conditions affecting their future profitability and consequently disrupts decisions about investment in the presence of capital adjustment costs. Using firm-level data from Chinese manufacturing industries spanning from 1998 to 2007, we find that reducing fiscal policy volatility leads to a decrease in the dispersion of the marginal revenue product of capital, accounting for 8.3 percent of the observed improvement in capital allocation during the sample period. In addition to various fiscal reforms to curb fiscal policy volatility directly, policies contributing to lower capital adjustment costs and lower reliance of firms on government expenditure can alleviate the adverse effects of fiscal policy volatility.
ZHOU, Yifan
Xin Liu, Shang-Jin Wei, and Yifan Zhou, Liberalization Spillover: From Equities to Loans, Journal of Financial and Quantitative Analysis, 2024, Volume 59, Issue 1, Pages 395-433.
Abstract
The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (Bekaert, Harvey, and Lundblad, 2005) despite a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.
ZHU, Lei
Franklin Allen, Jun "QJ" Qian, Chenyu Shan, and Julie Lei Zhu, Dissecting the Long-term Performance of the Chinese Stock Market, Journal of Finance, 2024, Volume 79, Issue 2, Pages 993-1054.
Abstract
Domestically listed Chinese (A share) firms have lower stock returns than externally listed Chinese, developed and emerging country firms during 2000-2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance in both stock and accounting returns is more pronounced for large A share firms, while small firms show no underperformance in either dimension. Investor sentiment explains low stock returns in the cross-country and within A share samples. Institutional deficiencies in IPO and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.
CHEN, Huafeng
Huafeng (Jason) Chen, Liang Jiang, and Weiwei Liu, Predicting Returns Out of Sample: A Naïve Model Averaging Approach, Review of Asset Pricing Studies, 2023, Volume 13, Isssue 3, Pages 579-614.
Abstract
We propose a naïve model averaging (NMA) method, averaging the OLS out-of-sample forecasts and the historical means, that produces mostly positive out-of-sample R2s for the variables that are significant in sample in forecasting market returns. Surprisingly, more sophisticated weighting schemes that combine the predictive variable and historical mean do not consistently perform better. With unstable economic relations and a limited sample size, sophisticated methods may lead to overfitting or be subject to more estimation errors. In such situations, our simple methods may work better. Model misspecification, rather than declining return predictability, likely explains the predictive performance of the NMA method.
DENG, Yongheng
Yongheng Deng, Shang-Jin Wei, and Jing Wu, Secrets in Asset Purchases: Estimating the Unofficial Income of Officials, Management Science, forthcoming.
Abstract
We estimate the size of the likely unofficial incomes by households with a government official by estimating how much to top up their official incomes in order to explain their observed home purchase behavior. Using unique and comprehensive administrative records on the House Provident Fund and home purchases between 2006 and 2013 in a large Chinese city, we reach three conclusions. First, an average official’s unofficial income is 83% of their official income; this percentage increases sharply with the official’s rank. Second, about 13% of officials have an unofficial income, and the proportion also increases with rank. Third, government officials are not underpaid, and their unofficial incomes are not compensation for low government salaries. There is some evidence that the unofficial income has declined after the recent anti-corruption campaign. The key conclusion is also corroborated by a second, cross-city dataset.
GAO, Huasheng
Huasheng Gao, Zhengkai Liu, and Chunliu Yang, Individual Investors’ Trading Behavior and Gender Difference in Tolerance of Sex Crimes: Evidence from a Natural Experiment, Journal of Empirical Finance, 2023, Volume 73, Pages 349-368.
Abstract
We present evidence that males are more tolerant of sex crimes than females. We exploit a natural experiment, in which a firm’s executive rapes a nine-year-old girl. Based on individual-level stock transaction data (over 0.2 million individual investors), we show that, after this crime, females are less likely to purchase this firm’s stock than males. This result is stronger for females who are likely more averse to sex crimes. We also find that females’ intolerance of sex crimes reduces their trading profits, and that the gender difference toward sex crimes is significantly larger than the gender difference toward non-sexually-related scandals.
HUANG, Yi
Yi Huang , Chen Lin, Sibo Liu, and Heiwai Tang, Trade Networks and Firm Value: Evidence from the U.S.-China Trade War, Journal of International Economics , 2023, Volume 145, 103811.
Abstract
We study the financial implications of the 2018–2019 U.S.-China trade war for global supply chains. Around the dates when higher tariffs are announced, U.S. firms that depend more on exports to and imports from China experience larger declines in market value, with the negative effect spilling over to the affected firms' suppliers and customers through production networks. The trade war effect is mainly concentrated among customers with low R&D intensity and suppliers outsourcing differentiated goods. We also exploit the within-firm variation in tariff exposure according to the detailed product lists and conduct a reverse experiment based on the 2019 trade talks. To explain the findings, we propose a theoretical model that highlights how complex trade structures shape shareholder wealth.
Yi Huang, Ernest Dautovic, and Harald Hau, Consumption Response to Minimum Wages: Evidence from Chinese Households, Review of Economics and Statistics, forthcoming.
Abstract
The paper evaluates the impact of the Chinese minimum wage policy on consumption of low-wage households for the period 2002-2009. Using a representative panel of urban households, we find that the consumption response to minimum wage income hikes increases in the share of minimum wage income in total household income. In particular, poorer households fully consume their additional income, while meaningful negative employment effects are absent. The large marginal propensity to consume is driven by households with at least one child, while poor, childless households save two-thirds of a minimum wage hike. The expenditure increase is concentrated in health care and education with potentially long-lasting benefits to household welfare.
JIANG, Liang
Liang Jiang, Peter C.B. Phillips, Yubo Tao, and Yichong Zhang, Regression-Adjusted Estimation of Quantile Treatment Effects under Covariate-Adaptive Randomizations, Journal of Econometrics, 2023, Volume 234, Issue 2, Pages 758-776.
Abstract
Datasets from field experiments with covariate-adaptive randomizations (CARs) usually contain extra covariates in addition to the strata indicators. We propose to incorporate these additional covariates via auxiliary regressions in the estimation and inference of unconditional quantile treatment effects (QTEs) under CARs. We establish the consistency and limit distribution of the regression-adjusted QTE estimator and prove that the use of multiplier bootstrap inference is non-conservative under CARs. The auxiliary regression may be estimated parametrically, nonparametrically, or via regularization when the data are high-dimensional. Even when the auxiliary regression is misspecified, the proposed bootstrap inferential procedure still achieves the nominal rejection probability in the limit under the null. When the auxiliary regression is correctly specified, the regression-adjusted estimator achieves the minimum asymptotic variance. We also discuss forms of adjustments that can improve the efficiency of the QTE estimators. The finite sample performance of the new estimation and inferential methods is studied in simulations, and an empirical application to a well-known dataset concerned with expanding access to basic bank accounts on savings is reported.
Huafeng (Jason) Chen, Liang Jiang, and Weiwei Liu, Predicting Returns Out of Sample: A Naïve Model Averaging Approach, Review of Asset Pricing Studies, 2023, Volume 13, Isssue 3, Pages 579-614.
Abstract
We propose a naïve model averaging (NMA) method, averaging the OLS out-of-sample forecasts and the historical means, that produces mostly positive out-of-sample R2s for the variables that are significant in sample in forecasting market returns. Surprisingly, more sophisticated weighting schemes that combine the predictive variable and historical mean do not consistently perform better. With unstable economic relations and a limited sample size, sophisticated methods may lead to overfitting or be subject to more estimation errors. In such situations, our simple methods may work better. Model misspecification, rather than declining return predictability, likely explains the predictive performance of the NMA method.
Tao Huang, Liang Jiang, and Junye Li, Downside Variance Premium, Firm Fundamentals, and Expected Corporate Bond Returns, Journal of Banking and Finance, 2023, Volume 154, 106946.
Abstract
We find a strong and robust positive relationship between individual downside variance premia (DVP)--the difference between risk-neutral and physical expected downside variances--and future corporate bond returns. The spread portfolio that longs the high DVP bond portfolio and shorts the low DVP bond portfolio earns a statistically significant excess return of 0.37% (0.42%) per month in value- (equal-)weighted returns. The alpha estimates from various factor models remain statistically significant and economically substantial. The predictive power of the downside variance premium is stronger in noninvestment-grade (long-maturity) corporate bonds than in investment-grade (short-maturity) bonds. We show that the downside variance premium positively relates to the likelihood of future default and cash flow uncertainty and negatively relates to future cash flows.
Liang Jiang, Oliver B. Linton, Haihan Tang, and Yichong Zhang, Improving Estimation Efficiency via Regression-Adjustment in Covariate-Adaptive Randomizations with Imperfect Compliance, Review of Economics and Statistics, forthcoming.
Abstract
We document a novel platform effect caused by the emergence of FinTech platforms in the intermediation of financial products. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered entrance of funds onto platforms, we find a marked increase of performance chasing, driven by the centralized information flow unique to FinTech platforms. This pattern is further confirmed using proprietary data from a top platform. Examining the platform impact on fund managers, we find that, incentivized by the amplified performance-chasing, fund managers increase risk taking to enhance their probability of getting onto the top ranking.
KANIEL, Ron
Peter M. Demarzo, and Ron Kaniel, Contracting in Peer Networks, Journal of Finance, 2023, Volume 78, Issue 5, Pages 2725-2778.
Abstract
We consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.
Ron Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh, Machine-learning the Skill of Mutual Fund Managers, Journal of Financial Economics, 2023, Volume 150, Issue 1, Pages 94-138.
Abstract
We show, using machine learning, that fund characteristics can consistently differentiate high from low-performing mutual funds, before and after fees. The outperformance persists for more than three years. Fund momentum and fund flow are the most important predictors of future risk-adjusted fund performance, while characteristics of the stocks that funds hold are not predictive. Returns of predictive long-short portfolios are higher following a period of high sentiment. Our estimation with neural networks enables us to uncover novel and substantial interaction effects between sentiment and both fund flow and fund momentum.
Jeffrey L. Callen, Ron Kaniel, and Dan Segal, Filing Speed, Information Leakage, and Price Formation, Review of Accounting Studies, 2023, Volume 28, Pages 1618-1656.
Abstract
This study investigates the price discovery process in equity markets with informed institutional investors. Consistent with extant theories, we show empirically that institutional investors, in contrast to retail investors, trade based on the leaked sign of unanticipated news and then (partially) reverse their trades when the news become public. We also find that the longer the leakage period for institutional investors to exploit, the less informative the news is when it becomes public. These results are robust to controls for firm press releases and news articles and endogeneity concerns.
LIU, Hong
Min Dai, Yipeng Jiang, Hong Liu, and Jing Xu, A Rational Theory for Disposition Effects, Review of Economic Dynamics, 2023, Volume 47, Pages 131-157.
Abstract
Extant theories on the disposition effect are largely silent on most of the disposition-effect related trading patterns, including the V-shaped probabilities of buying and selling against unrealized profit. On the other hand, portfolio rebalancing and learning have been shown to be important, even for retail investors. We show that rational rebalancing with transaction costs and unknown expected returns can generate many disposition-effect-related trading patterns, including the V-shape results. Our paper complements the extant theories by suggesting that portfolio rebalancing may also constitute a significant driving force behind the disposition effect and the related patterns.
MA, Chang
Chang Ma, John Rogers, and Sili Zhou, Modern Pandemics: Recession and Recovery, Journal of the European Economic Association, 2023, Volume 21, Issue 5, Pages 2098-2130.
Abstract
We examine the immediate and bounce-back effects from six modern health crises that preceded Covid-19. Time-series models for a large cross-section of economies indicate that real GDP growth falls by around two percentage points in affected economies relative to unaffected economies in the year of the outbreak. Bounce-back in GDP growth is rapid and strong, especially when compared to non-health crises. Unemployment for less educated workers is higher and exhibits more persistence, and there is significantly greater persistence in female unemployment than male. Moreover, the negative initial effects of pandemics and bounce-back are economically contagious through international trade. The negative effects on GDP and unemployment are felt less in economies with larger first-year responses in government spending, especially on health care. Our estimates imply that the impact effect of the Covid-19 shock on world GDP growth is approximately four standard deviations worse than the average past pandemic.
QIAN, Jun
Franklin Allen, Xian Gu, Wei Li, Jun "QJ" Qian, and Yiming Qian, Implicit Guarantees and the Rise of Shadow Banking: the Case of Trust Products, Journal of Financial Economics, 2023, Volume 149, Issue 2, Pages 115-141.
Abstract
Implicit guarantees provided by financial intermediaries are important in China. We argue theoretically that project screening by financial intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement. It can also mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a comprehensive set of trusts' investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.
Feng Li, Jun "QJ" Qian, Haofei Wang, and Julie Lei Zhu, Stock Pledged Loans and Market Crash Risk: Evidence from China, The Journal of Finance and Data Science, 2023, Volume 9, 100104.
Abstract
Stock pledged loans have become prevalent among large shareholders of listed firms in China. The largest shareholder pledges a greater fraction of her holdings as collateral for credit when the firm is in growth industries, less profitable, not state owned, and has higher leverage. Stock performance of highly pledged firms is indistinguishable from that of firms with low pledge ratios in 2017. During 2018, however, highly pledged firms have worse stock returns and operating performance, and experienced 'contagion' – the crash risk of one highly pledged stock spreading to others. Using a regulatory reform in 2013 that allowed securities companies to provide stock pledged loans, we find that obtaining these personal loans had no adverse effects on the firms when the pledge ratio was low. Overall, forced sales of pledged stocks and worsened agency conflict are responsible for the poor performance of highly pledged firms during the 2018 bear market.
QIAN, Nancy
Johannes Haushofer, Sara Lowes, Abednego Musau, David Ndetei, Nathan Nunn, Moritz Poll, and Nancy Qian, Stress, Ethnicity, and Prosocial Behavior, Journal of Political Economy Microeconomics, 2023, Volume 1, Number 2, Pages 225-269.
Abstract
While observational evidence suggests that people behave more prosocially towards members of their own ethnic group, many laboratory studies fail to find this effect. One possible explanation is that coethnic preference only emerges during times of stress. To test this hypothesis, we pharmacologically increase levels of the stress hormone cortisol, after which participants complete laboratory experiments with coethnics and noncoethnics. We find mixed evidence that increased cortisol decreases prosocial behavior. Coethnic preferences do not vary with cortisol. However, in contrast to previous studies, we find strong and robust evidence of coethnic preference.
SHI, Wenyun
Robert Kieschnick, and Wenyun Shi, Spillover Effects in Managerial Compensation, Journal of Empirical Finance, 2023, Volume 70, Pages 62-73.
Abstract
Prior
evidence on how executive compensation influences managerial incentives to take
risks in shareholder’s interest ignores potential spillover effects, even
though there is evidence that compensation in one firm affects the compensation
in other firms. We address this issue in a way that considers a broader view of
corporate networks. Specifically, we examine the effects of a tax law change
that induced a change in the vega of CEO compensation. We find that this change
is associated with a larger increase in the vegas of directly affected CEOs
than would be estimated without considering spillover effects. Moreover, we
find evidence for the diffusion of these changes to other firms within their
industry. Further, this diffusion is greater the more affected firms within an
industry. And finally, we find that these changes are associated with increases
in the asset volatility of both treated and untreated firms.
TANG, Haihan
Liang Jiang, Oliver B. Linton, Haihan Tang, and Yichong Zhang, Improving Estimation Efficiency via Regression-Adjustment in Covariate-Adaptive Randomizations with Imperfect Compliance, Review of Economics and Statistics, forthcoming.
Abstract
We document a novel platform effect caused by the emergence of FinTech platforms in the intermediation of financial products. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered entrance of funds onto platforms, we find a marked increase of performance chasing, driven by the centralized information flow unique to FinTech platforms. This pattern is further confirmed using proprietary data from a top platform. Examining the platform impact on fund managers, we find that, incentivized by the amplified performance-chasing, fund managers increase risk taking to enhance their probability of getting onto the top ranking.
TONG, Guoshi
Dashan Huang, Fuwei Jiang, Kunpeng Li, Guoshi Tong, and Guofu Zhou, Are Bond Returns Predictable with Real-Time Macro Data? Journal of Econometrics, 2023, Volume 237, Issue 2, Part C, 105438.
Abstract
We investigate the predictability of bond returns using real-time macro variables and consider the possibility of a nonlinear predictive relationship and the presence of weak factors. To address these issues, we propose a scaled sufficient forecasting method and analyze its asymptotic properties. Using both the existing and the new method, we find empirically that macro factor which loads on real-time release of new housing units starts has significant forecasting power both in-sample and out-of-sample. Moreover, they generate sizable economic values, and their predictability is not spanned by the yield curve. We also observe that the forecasted bond returns are countercyclical, and the magnitude of predictability is stronger during economic recessions, which lends empirical support to well-known macro finance theories.
WANG, Yongqin
Julan Du, Chang Li, and Yongqin Wang, Shadow Banking of Non-Financial Firms: Arbitrage between Formal and Informal Credit Markets in China, Journal of Financial Intermediation, 2023, Volume 55, 101032.
Abstract
In China’s credit markets with financial repression, state-controlled non-financial firms (SOEs) are privileged in gaining access to bank credit, while non-SOEs, especially those small- and medium-sized firms, are disadvantaged. Corporate re-lending emerges as a response wherein the former secure bank loans and then re-lend to the latter. We document the characteristics of inter-corporate loans from a sample of legal cases. We employ four empirical strategies to conduct a forensic study of re-lending by detecting abnormal relations between financial accounts of listed firms. State-controlled companies conduct more re-lending, and firms with better growth opportunities, stronger corporate governance, and more financial constraints engage less. We compare re-lending with entrusted loans and find that firms extending nonaffiliated entrusted loans conduct re-lending actively, while firms offering affiliated entrusted loans do not. We also compare inter-corporate loans with micro-credit company loans in a review of legal cases.
WEI, Shang-Jin
Xuepeng Liu, Heiwai Tang, Zhi Wang, and Shang-Jin Wei, Currency Carry Trade by Trucks: The Curious Case of China's Massive Imports from Itself, Review of Finance, 2023, Volume 27, Issue 2, Pages 469-493.
Abstract
With capital controls, the standard financial market transactions needed for currency carry trade are hard to implement. Using detailed trade data reported by both the mainland Chinese and Hong Kong’s governments, we present evidence that indirect currency carry trade likely takes place via round-trip reimports. We also show that greater state control in terms of more state-owned firms does not reduce such “carry trade by trucks.”
Yongheng Deng, Shang-Jin Wei, and Jing Wu, Secrets in Asset Purchases: Estimating the Unofficial Income of Officials, Management Science, forthcoming.
Abstract
We estimate the size of the likely unofficial incomes by households with a government official by estimating how much to top up their official incomes in order to explain their observed home purchase behavior. Using unique and comprehensive administrative records on the House Provident Fund and home purchases between 2006 and 2013 in a large Chinese city, we reach three conclusions. First, an average official’s unofficial income is 83% of their official income; this percentage increases sharply with the official’s rank. Second, about 13% of officials have an unofficial income, and the proportion also increases with rank. Third, government officials are not underpaid, and their unofficial incomes are not compensation for low government salaries. There is some evidence that the unofficial income has declined after the recent anti-corruption campaign. The key conclusion is also corroborated by a second, cross-city dataset.
YANG, Chunliu
Huasheng Gao, Zhengkai Liu, and Chunliu Yang, Individual Investors’ Trading Behavior and Gender Difference in Tolerance of Sex Crimes: Evidence from a Natural Experiment, Journal of Empirical Finance, 2023, Volume 73, Pages 349-368.
Abstract
We present evidence that males are more tolerant of sex crimes than females. We exploit a natural experiment, in which a firm’s executive rapes a nine-year-old girl. Based on individual-level stock transaction data (over 0.2 million individual investors), we show that, after this crime, females are less likely to purchase this firm’s stock than males. This result is stronger for females who are likely more averse to sex crimes. We also find that females’ intolerance of sex crimes reduces their trading profits, and that the gender difference toward sex crimes is significantly larger than the gender difference toward non-sexually-related scandals.
ZHOU, Yifan
Conggang Li, Rong Xu, and Yifan Zhou, Star Academicians: Gimmicks or Game-Changers?, Journal of Corporate Finance, 2023, Volume 82, 102452.
Abstract
This
paper examines the benefits of having an executive or director elected as a
fellow of the Chinese Academies of Sciences and Engineering (i.e., a star
academician). Evidence indicates that markets react positively to news of
company executives/directors being elected. We further document that having a
fellow spurs innovation, brings additional government subsidy, increases
Tobin’s q, lowers costs of capital, attracts analyst attention, and
suppresses audit fees in the years following successful elections. These
outcomes appear to be largely driven by fellows who (i) are executives rather
than non-executive directors, and (ii) have held no government office.
Yifan Zhou, Politically Influenced Bank Lending, Journal of Banking and Finance, 2023, Volume 157, 107020.
Abstract
Borrowers from the same state as the chairman of the US Senate Banking Committee (“connected borrowers”) are able to borrow at spreads 19 bps lower than other borrowers. Banks that provide connected loans enjoy regulatory relief in the form of fewer future investigations. Connected borrowers’ contributions toward the chairman are influenced by their cost of loans, but the same is not true for nonconnected borrowers. Findings suggest the chairman is incentivized by re-election to help connected borrowers obtain cheaper loans. Results are largely consistent with the existence of an indirect triangular quid pro quo relationship between firms, banks, and politicians.
ZHU, Lei
Feng Li, Jun "QJ" Qian, Haofei Wang, and Julie Lei Zhu, Stock Pledged Loans and Market Crash Risk: Evidence from China, The Journal of Finance and Data Science, 2023, Volume 9, 100104.
Abstract
Stock pledged loans have become prevalent among large shareholders of listed firms in China. The largest shareholder pledges a greater fraction of her holdings as collateral for credit when the firm is in growth industries, less profitable, not state owned, and has higher leverage. Stock performance of highly pledged firms is indistinguishable from that of firms with low pledge ratios in 2017. During 2018, however, highly pledged firms have worse stock returns and operating performance, and experienced 'contagion' – the crash risk of one highly pledged stock spreading to others. Using a regulatory reform in 2013 that allowed securities companies to provide stock pledged loans, we find that obtaining these personal loans had no adverse effects on the firms when the pledge ratio was low. Overall, forced sales of pledged stocks and worsened agency conflict are responsible for the poor performance of highly pledged firms during the 2018 bear market.
CHEN, Huafeng
Huafeng (Jason) Chen, Jason V. Chen, Feng Li, and Pengfei Li, Measuring Operating Leverage, Review of Asset Pricing Studies, 2022, Volume 12, Issue 1, Page 112-154.
Abstract
We examine a simple measure of operating leverage: the ratio of fixed costs (measured by depreciation and amortization plus selling, general, and administrative expenses) to the market (or book) value of assets. We find that this measure of operating leverage positively predicts returns. This operating leverage measure is not explained by common factors and performs better than the traditional measures of operating leverage. Furthermore, an exploratory two-factor model with the operating leverage factor works at least as well as, but does not subsume, the Fama and French five-factor model.
GAO, Huasheng
Huasheng Gao, and Vanya Petrova, Do Prostitution Laws Turn a John into a Rapist? Evidence from Europe, Journal of Law and Economics, 2022, Volume 65, Number 4.
Abstract
We identify a causal effect of the liberalization and prohibition of commercial sex on rape rates, using the staggered legislative changes in European countries. We find that liberalizing prostitution leads to a significant decrease in rape rates, while prohibiting it does the opposite. These results are stronger when the rape under-reporting problem is less severe and when it is more difficult for men to obtain sex via marriage/partnership. We also provide the first evidence on the asymmetric effect of prostitution regulation on rape rates: The magnitude of prostitution prohibition is much larger than that of prostitution liberalization. Our placebo tests show that prostitution laws only affect rape and have no impact on non-sexual crimes. Overall, our results indicate that prostitution is a substitute for sexual violence and that the recent global trend of prohibiting commercial sex (especially the Nordic model) could have unforeseen consequences of proliferating sexual violence.
HARFORD, Jarrad
Maryam Fathollahi, Jarrad Harford, and Sandy Klasa, Anticompetitive Effects of Horizontal Acquisitions: The Impact of Within-industry Product Similarity, Journal of Financial Economics, 2022, Volume 144, Issue 2, Pages 645-669.
Abstract
Theory predicts that horizontal acquisitions can effectively increase incumbent firms' market power in concentrated industries with high product similarity. Using a novel measure for industry product similarity, we show that in such industries firms' propensity to make horizontal acquisitions is greater and that the acquisitions result in more positive announcement returns for the acquirer and rival firms and in a larger premium paid for the target. Also, the deals harm dependent customer and supplier firms and they are more likely to be challenged by antitrust authorities. Overall, by emphasizing the importance of product similarity, our results help explain mixed empirical findings on whether horizontal acquisitions are used to reduce competition intensity.
LIU, Hong
Hong Liu, Xiaoxiao Tang, and Guofu Zhou, Recovering the FOMC Risk Premium, Journal of Financial Economics, 2022, Volume 145, Issue 1, Pages 45-68.
Abstract
The Federal Open Market Committee (FOMC) meetings are among the most important economic events. We propose a novel method to recover the FOMC risk premium and drift sizes. Empirically, we find that for the 192 meetings from 1996 to 2019, the FOMC risk premium varies across meetings, from 1 to 326 basis points (bps) with an average of 45 bps. We obtain an out-of-sample R2 of 7.51% when using the recovered FOMC premium to predict the meeting returns around the announcement. The average predicted upward drift size is 101 bps, and the average predicted downward drift size is 129 bps, matching well with the realized ones.
MA, Chang
Haoyuan Ding, Yuying Jin, Kees Koedijk, and Chang Ma, Reform of the International Economic Order: Uncertainty and Economic Policy Coordination, Journal of International Money and Finance, 2022, Volume 127, 102692.
Abstract
This special issue contains a selection of articles on globalization and fintech. The contributions provide new insights on reform of the international economic order, paying special attention to uncertainty and economic policy coordination. They will certainly help improve our understanding of these topics.
QIAN, Nancy
Nancy Qian,Monica Martinez-Bravo, and Yang Yao, The Rise and Fall of Local Elections in China, American Economic Review, 2022, Volume 112, Issue 9, Pages 2921-2958.
Abstract
We posit that autocrats introduce local elections when their bureaucratic capacity is low. Lo- cal elections exploit the citizens’ informational advantage in keeping local officials accountable, but they also weaken vertical control. As bureaucratic capacity increases, the autocrat limits the role of elected bodies to regain vertical control. We argue that these insights can explain the introduction of village elections in rural China and the subsequent erosion of village autonomy years later. We construct a novel dataset to document political reforms, policy outcomes and de facto power for almost four decades. We find that the introduction of elections improves popular policies and weakens unpopular ones. Increases in regional government resources lead to loss of village autonomy, but less so in remote villages. These patterns are consistent with an organizational view of local elections within autocracies
SHI, Donghui
Li An, Dong Lou, and Donghui Shi, Wealth Redistribution in Bubbles and Crashes, Journal of Monetary Economics, 2022, Volume 126, Page 134-153.
Abstract
What are the social-economic consequences of financial market bubbles and crashes? Using novel comprehensive administrative data from China, we document a substantial increase in inequality of wealth held in equity by Chinese households in the 2014-15 bubble-crash episode: the largest 0.5% households in the equity market gain, while the bottom 85% lose, 250B RMB through active trading in this period, or 30% of either group’s initial equity wealth. In comparison, the return differential between the top and bottom household groups in 2012-14, a period of a relatively calm market, is on the order of 1 to 3%. We examine several possible explanations for these findings and discuss their broader implications.
SUN, Lin
Hao Liang, Lin Sun, and Melvyn Teo, Responsible Hedge Funds, Review of Finance, Volume 26, Issue 6, Pages 1585-1633.
Abstract
Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences.
TANG, Haihan
Oliver B. Linton, and Haihan Tang, Estimation of the Kronecker Covariance Model by Quadratic Form, Econometric Theory, 2022, Volume 38, Issue 5, Pages 1014-1067.
Abstract
We propose a new estimator, the quadratic form estimator, of the Kronecker product model for covariance matrices. We show that this estimator has good properties in the large dimensional case (i.e., the cross-sectional dimension n is large relative to the sample size T). In particular, the quadratic form estimator is consistent in a relative Frobenius norm sense provided log^3n/T tending to zero. We obtain the limiting distributions of the Lagrange multiplier (LM) and Wald tests under both the null and local alternatives concerning the mean vector mu. Testing linear restrictions of mu is also investigated. Finally, our methodology is shown to perform well in finite sample situations both when the Kronecker product model is true, and when it is not true.
TONG, Guoshi
Dashan Huang, Fuwei Jiang, Kunpeng Li, Guoshi Tong, and Guofu Zhou, Scaled PCA: A New Approach to Dimension Reduction, Management Science, 2022, Volume 68, Issue 3, Page 1678-1695.
Abstract
This paper proposes a novel supervised learning technique for forecasting: scaled principal component analysis (sPCA). The sPCA improves the traditional principal component analysis (PCA) by scaling each predictor with its predictive slope on the target to be forecasted. Unlike the PCA that maximizes the common variation of the predictors, the sPCA assigns more weight to those predictors with stronger forecasting power. In a general factor framework, we show that, under some appropriate conditions on data, the sPCA forecast beats the PCA forecast, and when these conditions break down, extensive simulations indicate that the sPCA still has a large chance to outperform the PCA. A real data example on macroeconomic forecasting shows that the sPCA has better performance in general.
WEI, Shang-Jin
Zhi Wang, Shang-Jin Wei, Xinding Yu, and Kunfu Zhu, Global Value Chains over Business Cycles, Journal of International Money and Finance, 2022, Volume 126, 102643.
Abstract
Global Value Chains (GVCs) now represent a key aspect of economic interdependence across countries. This paper makes two methodological contributions. First, it proposes a framework with which to decompose total production activities at the country, sector, or country-sector level into different types depending on whether they are for pure domestic demand, traditional international trade, simple GVC activities, and complex GVC activities. Second, this work proposes a set of GVC participation indices that improves on measures used in the literature. Upon applying this framework to international panel data, we find a number of interesting patterns connecting value chains and business cycles. First, the composition of global production has evolved dramatically since 1995. Second, production activities of complex GVC activities comove with global business cycles more than other types of production activities. Third, the level of GVC participation affects the performance of economic growth.
Kunfu Zhu, Xinding Yu, Shang-Jin Wei, and Zhi Wang, Measuring the Role of MNEs and Decomposition and Tracing MNEs' Value-added in GVCs, Economic Research Journal, 2022, Volume 57, No. 3 Pages 136-154.
Abstract
Multinational Enterprises (MNEs) are the organizers and key players in the Global Value Chains (GVCs) by establishing foreign branches and forming production networks through cross-border direct investment. The production and trade activities of MNEs are significantly heterogeneous from domestic firms, yet the existing GVC accounting framework does not distinguish between MNEs and local enterprises. In this paper, based on the GVC production decomposition framework proposed by Wang et al. (2017), we consider the heterogeneity of MNEs and propose a new GVC accounting framework that can identify and measure the production activities of MNEs. Using this framework, we find that: 1). GVC activities related to FDI account for about 10% of global GDP, which makes the traditional international trade-based measurement of GVC activities approximately underestimated by half, and this underestimation is particularly pronounced in high R&D intensive sectors and high income economies. 2). Compared with the US, China's manufacturing industry has a relatively high share of trade-related GVC activities, but investment-related GVC activities are at a relatively low level. 3). More than two-thirds of China's FDI-related GVC activities come from production linkages between FIEs and domestic firms. 4). we further explore the distribution of investment income of MNEs and change the statistical method of trade in value-added from “Territorial-Based” to “Ownership-Based”. The trade imbalance of the U.S. and China would be significantly reduced under the “Ownership-Based” approach.
WU, Wenbin
Wenbin Wu, Sales of Durable Goods and The Real Effects of Monetary Policy, Review of Economic Dynamics, 2022, Volume 43, Pages 80-92.
Abstract
Despite their prevalence in the microdata, sales (i.e., temporary price cuts) are often ignored by macroeconomists. If sales are taken into account, price rigidity is small in the data. Using the microdata underlying the Consumer Price Index (CPI), I first demonstrate that sales of durable goods have a substantial impact on the aggregate price index, and that the price index decreases gradually after these sales. To quantify the changes in the real effects of monetary policy due to sales, I propose a two-sector menu-cost model, in which sales are allowed. The model, which is able to match salient features of the microdata, predicts that the real effects of monetary policy will be significantly overestimated if sales of durable goods are not taken into consideration. Compared to my benchmark model, the model without sales and the Calvo model calibrated to the frequency of regular price changes both generate much greater real effects of monetary policy.
Gabriele Ciminelli, John Rogers, and Wenbin Wu, The Effects of U.S. Monetary Policy on International Mutual Fund Investment, Journal of International Money and Finance, 2022, Volume 127, 102676.
Abstract
We study the effects of U.S. monetary policy on international mutual fund investment. We apply a novel variant of the shock identification procedure in Bu, Rogers, and Wu (2021) to decompose observed U.S. monetary policy surprises into pure monetary policy shock and information news shock components. An increase in interest rates driven by a pure monetary policy shock leads to large and persistent outflows from emerging markets (EMs) and to a lesser extent global funds. On the other hand, increases in interest rates driven by positive information news shocks (i) do not cause outflows from EM funds, and (ii) lead investors to reallocate capital out of safe U.S. bond funds and into growth-sensitive U.S. and global equity funds. We attribute these differences to the risk-taking channel of monetary policy. Pure monetary policy shocks heighten risk aversion, while information news shocks lower uncertainty.
ZHOU, Sili
Zihua Liu, and Sili Zhou, Political Favoritism Towards Resource Allocation: Evidence of Grants by Natural Science Foundation in China, Emerging Markets Review, 2022, Volume 51, Part A, 100866.
Abstract
We study the effect of political power on resource allocation for knowledge production dictated by central planning in a non-market system. Our empirical results suggest that, compared to non-connected scholars, political connected (PC) scholars have 15.7% more allocation granted by the National Natural Science Foundation of China (NSFC). Variations in grant allocation is related to weaker institutional environments, less reputable universities, and hard-to-value project. Additional analysis suggests that access to the NSFC fund not only benefits individual PC scholars in terms of their research quality, but also brings more high-impact publications for their affiliated institution.
Jerry Cao, Hanyang Wang, and Sili Zhou, Soft Activism and Corporate Dividend Policy: Evidence from Institutional Investors Site Visits, Journal of Corporate Finance, 2022, Volume 75, 102221.
Abstract
We study the governance effect of institutional site visits and focus on corporate payout. Due to the weak investor protection and poor information quality in China, institutional investors resort to site visits as a form of soft activism. We show the site visits lead to an increase of corporate cash dividend, through the mechanism of disciplining management with exit threats. Such effect is more pronounced for visits by state-owned institutions. We further confirm the causal link with both difference-in-difference analysis and instrumental variable regression. The paper contributes to soft activism and governance device of institutional investors in weak institutional environments.
ZHU, Lei
Stephen Penman, and Julie Zhu, An Accounting-based Asset Pricing Model and a Fundamental Factor, Journal of Accounting and Economics, 2022, Volume 73, No.2-3, 101476.
Abstract
This paper recasts the consumption asset pricing model in terms of accounting numbers that connect to consumption and the risk to consumption under accounting principles. The modeling yields an expected return measure that forecasts realized returns and the risk to those returns. It leads to the construction of a pricing factor from the accounting information. The factor performs well relative to extant factors in explaining cross-sectional returns. The factor return has negative correlation with the market portfolio and exhibits the property of protecting payoffs in bad states when consumption is low. This then prompts a two-factor representation that combines the market portfolio with a hedge portfolio against loss to consumption.
BAILEY, Warren
Kee-Hong Bae, Warren B. Bailey, and Jisok Kang, Why is Stock Market Concentration Bad for the Economy?, Journal of Financial Economics, 2021, Volume 140, Issue 2, Page 436-459.
Abstract
The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth. However, using three decades of data from 47 countries, we show that concentrated stock markets dominated by a small number of very successful firms are associated with less efficient capital allocation, sluggish initial public offering and innovation activity, and slower economic growth. These findings are robust to alternative sample periods, econometric specifications, and competing explanatory variables. Our evidence is consistent with the paradox that the capital market of a competitive economy can impede the continuing competitiveness of that economy.
CHEN, Shiyi
Shiyi Chen, Michael T. Chng, and Qingfu Liu, The Implied Arbitrage Mechanism in Financial Markets, Journal of Econometrics, 2021, Volume 222, Issue 1, Part B, Pages 468-483.
Abstract
The no-arbitrage condition is a cornerstone concept in financial market research. However, the arbitrage mechanism that is inherent in the trading process for related securities, is not readily observable. We develop a generalized smooth-transition vector error-correction model, or GST-VECM, to estimate the arbitrage mechanism from financial market data. The GST-VECM can (i) back out the implied no-arbitrage band, (ii) estimate arbitrage intensity for upper and lower bound violations, and (iii) accommodate convergence risk for statistical arbitrage. Using the introduction of CSI300 ETF trading in China as a natural experiment, we estimate the GST-VECM to reveal some insight into how a microstructural policy, by altering the index arbitrage mechanism, affects the pricing link between spot and futures markets.
GAO, Huasheng
Deqiu Chen, Huasheng Gao, and Yujing Ma, Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine, Management Science, 2021, Volume 67, Issue 8, Pages 4643-4664.
Abstract
We present evidence that the desire to gain human capital is an important motive for corporate acquisitions. Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts, which prevents employees with trade secret knowledge from working for other firms. We find a significant increase in the likelihood of being acquired for firms headquartered in states that recognize such a doctrine relative to firms headquartered in states that do not. Our result is stronger for firms with greater human capital and for firms whose employees have better ex-ante employment mobility. We show that the IDD is positively associated with the retention of target firms’ key technicians, employees, and top executives after an acquisition. We also show that the IDD is positively associated with synergy creation, acquirers’ announcement returns, and acquirers’ long-run stock and operating performance. Overall, our result indicates that corporate acquisitions can be used as a means for firms to overcome labor market frictions and gain access to valuable human capital.
Huasheng Gao, Kai Li, and Yujing Ma, Stakeholder Orientation and the Cost of Debt: Evidence from State-Level Adoption of Constituency Statutes, Journal of Financial and Quantitative Analysis, 2021, Volume 56, Pages 1908-1944.
Abstract
We examine the causal effect of stakeholder orientation on firms' cost of debt. Our test exploits the staggered adoption of state-level constituency statutes, which allows directors to consider stakeholders' interests when making business decisions. We find a significant drop in loan spreads for firms incorporated in states that adopted such statutes relative to firms incorporated elsewhere. We further show that constituency statutes reduce the cost of debt through the channels of mitigating conflicts of interest between residual and fixed claimants and between holders of liquid claims and holders of illiquid claims, limiting legal liability, and lowering takeover threats.
Tao Chen, Huasheng Gao, and Yuxi Wang, Tariff Uncertainty and Firm Innovation: Evidence from the U.S.-China Permanent Normal Trade Relation, Journal of Empirical Finance, 2021, Volume 62, Pages 12-27.
Abstract
We examine the effect of the tariff uncertainty associated with Chinese imports on U.S. firm innovation. Our test exploits the U.S. conferral of Permanent Normal Trade Relations (PNTR) on China—a policy that reduces the uncertainty of future tariff increases for Chinese goods. We find a significant increase in the number of patents and patent citations for U.S. firms affected by PNTR relative to other firms. This result is stronger for firms with more irreversible investments and for firms that experience a greater increase in Chinese goods following PNTR. Overall, our evidence is consistent with the view that lowering the tariff uncertainty of Chinese imports boosts the attractiveness for U.S. firms to make long-term irreversible investment (such as technological innovation) and thus induces U.S. firms to innovate more.
Huasheng Gao, Donghui Shi, and Bin Zhao, Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market, Journal of Corporate Finance, 2021, Volume 42, Issue 13, Pages 2493-2510.
Abstract
This paper examines the changes in investors’ trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these investors subsequently become overconfident: They trade more frequently and lose more money relative to other investors. This effect is stronger when investors are inexperienced and when investors’ pre-existing level of overconfidence is low. We also show that investors exhibit a stronger gambling propensity and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.
Guoli Chen, Xin Deng, Huasheng Gao, and Ithai Stern, The “Butterfly Effect” in Strategic Human Capital: Mitigating the Endogeneity Concern About the Relationship Between Turnover and Performance, Strategic Management Journal, 2021, Volume 42, Issue 13, Pages 2493-2510.
Abstract
Prior literature on the relationship between the departure of strategic human capital (SHC) and firm performance is equivocal. One source of this ambiguity is the potential endogeneity: is it the SHC departure that leads to poor firm performance, or is it poor firm performance leading to the SHC departure? We respond to repeated calls to address this issue by using the Fukushima nuclear accident in Japan as an exogenous event which triggered a “butterfly effect” that influenced the departure decisions of individuals working for firms near a nuclear plant in the U.S. but not the firms’ performance. Our results provide strong evidence that the departure of strategic human capital undermines firm performance, and that the effect is amplified by the strength of employee-firm relationships.
HARFORD, Jarrad
Muhammad Farooq Ahmad, Eric de Bodt, and Jarrad Harford, International Trade and the Propagation of Merger Waves, Review of Financial Studies, 2021, Volume34, Issue 10, Pages 4876-4925.
Abstract
Cross-border merger activity is growing in importance. We map the global trade network each year from 1989 to 2016 and compare it to cross-border and domestic merger activity. Trade-weighted merger activity in trading partner countries has statistically and economically significant explanatory power for the likelihood that a given country will be in a merger wave state, at both the cross-border and domestic levels, even controlling for its own lagged merger activity. The role of trade as a channel for transmitting merger waves is confirmed using import tariff cuts and trade sanctions as instruments to mitigate endogeneity. Overall, the full trade network helps our understanding of merger waves and how merger activity propagate across borders.
MA, Chang
Peter Bednarek, Daniel Marcel te Kaat, Chang Ma, and Alessandro Rebucci, Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms, Review of Financial Studies, 2021, Volume 34, Issue 10, Page 5077-5134.
Abstract
We study how a capital flow shock impacts German cities' GDP growth depending on the state of their local real estate markets. Identification exploits a policy framework assigning refugees to cities on a quasi-random basis and variation in non-developable area for the construction of a measure of exposure to local real estate market tightness. We estimate that the German cities most exposed to real estate market tightness grew at least 1.9 percentage points more than the least exposed ones, cumulatively, during the 2009-2014 period. Capital inflows shift credit to firms with more collateral. More collateral also leads firms to hire and invest more in response to these shocks.
QIAN, Jun
Franklin Allen, Elena Carletti, Robert Cull, Jun "QJ" Qian, Lemma Senbet, and Patricio Valenzuela, Improving Access to Banking: Evidence from Kenya, Review of Finance, 2021, Volume 25, Issue 2, Pages 403-447.
Abstract
We explore the relationship between bank branch expansion, financial inclusion, and profitability for Equity Bank. Unlike traditional banks, including foreign and government owned banks in Kenya, Equity Bank targets less developed territories and less privileged households. Its presence increased financial inclusion by 31% of the adult population between 2006 and 2015, especially for Kenyans who were less educated, did not own their own home, and lived in less-developed areas. The bank’s business model proves to be highly effective, with branch-level profits rising in areas with a smaller number of operating banks. Overall, the growth of Equity Bank demonstrates that financial inclusion can be achieved and sustained through profitable branching and service strategies that also serve the needs of underserved regions and populations. Thus, financial inclusion need not come at the sacrifice of bank profitability.
Huang, Zhangkai, Lixing Li, Guangrong Ma, and Jun “QJ” Qian, The Reversal of Privatization in China: A Political Economy, Journal of Corporate Finance, 2021, Volume 71, 102115.
Abstract
We document reversals of privatization in China—local governments re-possessing ownership stakes in a quarter of previously privatized firms during 1998–2007, a period when the privatization process was still ongoing. This type of ownership restructuring helped ease the unemployment burden in the local labor markets, and was more likely to occur in firms located in provinces led by officials without strong status in the governmental hierarchy. A reversal in privatization led to higher leverage, lower profitability and lower labor productivity. Our paper sheds light on how frictions in the political structure affect the implementation of economic policies in a top-down system.
SHI, Donghui
Huasheng Gao, Donghui Shi, and Bin Zhao, Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market, Journal of Corporate Finance, 2021, Volume 42, Issue 13, Pages 2493-2510.
Abstract
This paper examines the changes in investors’ trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these investors subsequently become overconfident: They trade more frequently and lose more money relative to other investors. This effect is stronger when investors are inexperienced and when investors’ pre-existing level of overconfidence is low. We also show that investors exhibit a stronger gambling propensity and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.
WANG, Xiaxin
Daixin He, Langchuan Peng, and Xiaxin Wang, Understanding the Elasticity of Taxable Income: A Tale of Two Approaches, Journal of Public Economics, 2021, Volume 197, 104375.
Abstract
This paper conducts the first formal comparison of two main approaches (tax reform versus bunching approach) to estimate the elasticity of taxable income (ETI), a central parameter in the public finance literature since Feldstein (1999). Using a novel panel of administrative tax data from China and exploiting China's progressive monthly wage income tax schedule and a tax reform in 2011, we document two key differences in the ETI estimates obtained from these two approaches. First, the tax reform ETI estimates increase concavely over time, while the bunching ETI estimates are much more stable. Second, the tax reform ETI estimates (around 4 in the long-run) are much larger than the bunching ETI (around 0.5), and the difference is statistically significant. To account for these facts, we develop a simple model where individuals in each period have some probability to permanently change hours of work without paying other costs but can temporarily adjust hours by paying additional costs. With stable wage rates, the two estimators should converge to the same underlying value. But with normal wage growth, the tax reform estimates converge to the true underlying parameter, whereas the bunching estimates can be far below the true figure.
WEI, Shang-Jin
Jiandong Ju, Kang Shi, and Shang-Jin Wei, Trade Reforms and Current Account Imbalances, Journal of International Economics, 2021, Volume 131, 103451.
Abstract
This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China's accession to the WTO is likely an important factor driving the rise of current account surplus during 2001–2010.
Zhibo Tan, Shang-Jin Wei, and Xiaobo Zhang, Deadly Discrimination: Implications of “Missing Girls” for Workplace Safety, Journal of Development Economics, 2021, Volume 152, 102678.
Abstract
We examine an indirect but potentially deadly consequence of the “missing girls” phenomenon. A shortage of brides causes many parents with sons of marriageable age to work harder and seek higher-paying but dangerous jobs. In response, employers invest less in workplace safety, which in turn increases work-related mortality. Drawing from a broad range of data sets and taking advantage of large regional and temporal variations in sex ratios in China, we demonstrate that in areas with more severe shortages of young women, the cohort of parents with sons of marriageable age suffers a higher incidence of accidental injuries and workplace deaths.
Hui Tong, and Shang-Jin Wei, Endogenous Corporate Leverage Response to A Safer Macro Environment: The Case of Foreign Exchange Reserve Accumulation, Journal of International Economics, 2021, Volume 132, 103499.
Abstract
A country may adopt policy measures such as raising its foreign exchange reserves to better prepare for foreign interest rate shocks or sudden reversal of international capital flows, which in principle should reduce financial vulnerability for its firms and the entire economy, but the beneficial effect of such policies may be partially offset by endogenous firms’ decisions to take on more risks. We present a robust but previously undocumented relationship between corporate leverage and country-level foreign exchange reserve holdings. For 6610 non-financial firms in 23 emerging markets from 2000 to 2006, we show that more foreign reserve accumulation leads to higher corporate leverage. While the reserve accumulation can reduce macroeconomic uncertainty, the increase in corporate leverage is also significantly greater in sectors that are intrinsically more sensitive to policy uncertainty. We go from correlation to causality via a two-prong instrumental variable strategy: simultaneously (1) instrumenting FX reserves by global commodity price movement, and (2) examining leverage of firms outside the commodity-sensitive sectors.
WERNER, Richard
Achraf Mkhaiber, and Richard Werner, The Relationship between Bank Size and the Propensity to Lend to Small Firms: New Empirical Evidence from a Large Sample, Journal of International Money and Finance, 2021, Volume 110, 102281.
Abstract
Small and medium-sized enterprises, in aggregate, are the biggest employer in most countries, accounting for about two thirds of all employment in the UK, and an even greater proportion in Germany and Japan. Small firms are largely dependent on bank credit for external funding. This paper examines the question whether there is a significant relationship between bank size and customer size and whether bigger or smaller banks are more likely to be helpful to small and very small businesses in terms of providing loans. Using data on over 14,000 active and inactive U.S. banks of all sizes, from 1994 to 2013, utilising over 178,000 observations, we conduct hitherto the largest empirical examination of this question, applying a new and superior methodology that resolves prior controversies. The results are robust and indicate an inverse relationship between bank size and the propensity of banks to lend to small businesses. We thus contribute towards settling a long-standing debate about the influence of bank size on bank finance for small firms. Policy implications are discussed, such as the importance of a diverse and decentralised banking sector that includes a large number of small banks, such as exists in the US (but not in the UK), in order to help overcome growth constraints on small and micro businesses.
WU, Wenbin
Chunya Bu, John Rogers, and Wenbin Wu, A Unified Measure of Fed Monetary Policy Shocks, Journal of Monetary Economics, 2021, Volume 118, Pages 331-349.
Abstract
We develop a U.S. monetary policy shock series that stably bridges periods of conventional and unconventional policymaking, is largely unpredictable, and contains no significant central bank information effect. We attribute differences between our measure and often-used alternatives to our econometric procedure, a partial least squares approach, and our using the full maturity spectrum of interest rates in estimating the shock. We find that shocks to our monetary policy series have particularly large effects on maturities in the middle of the term structure and produce conventionally-signed impulse responses of output and inflation.
ZHOU, Yifan
Travers Barclay Child, Nadia Massoud, Mario Schabus, and Yifan Zhou, Surprise Election for Trump Connections, Journal of Financial Economics, 2021, Volume 140, Issue 2, Pages 676-697.
Abstract
We exploit Donald Trump’s nonpolitical background and surprise election victory to identify the value of sudden presidential ties among S&P 500 firms. In our setting firms did not choose to become politically connected, so we identify treatment effects comparatively free of selection bias prevalent in this literature. Firms with presidential ties enjoyed greater abnormal returns around the 2016 election. Since Trump’s inauguration, connected firms had better performance, received more government contracts, and were less subject to unfavorable regulatory actions. We rule out a number of confounding factors, including industry designation, sensitivity to Republican platforms, campaign finance, and lobbying expenditures.
BAILEY, Warren
Warren Bailey, and Huiwen Lai, On the Expected Earnings Hypothesis Explanation of the Aggregate Returns-Earnings Association Puzzle, Journal of Financial and Quantitative Analysis, 2020, Volume 55, Issue 8, Pages 2732-2763.
Abstract
We provide strong support for the underappreciated expected earnings hypothesis of a negative correlation between aggregate stock returns and earnings. For 1970–2000, our powerful modeling strategy incorporating macroeconomic information reveals that aggregate returns are significantly and negatively correlated with expected aggregate earnings changes but uncorrelated with unexpected aggregate earnings changes. However, this negative correlation changes after 2000, perhaps from heightened volatility or accounting changes. We also show that underlying macroeconomic information explains the power of aggregate earnings to predict future gross domestic product growth.
GAO, Huasheng
Huasheng Gao, Po-Hsuan Hsu, Kai Li, and Jin Zhang, The Real Effect of Smoking Bans: Evidence from Corporate Innovation, Journal of Financial and Quantitative Analysis, 2020, Volume 55, Issue 2, Pages 387-427.
Abstract
We identify a positive causal effect of healthy working environments on corporate innovation, using the staggered passage of U.S. state-level smoke-free laws that ban smoking in workplaces. We find a significant increase in patents and patent citations for firms headquartered in states that have adopted such laws relative to firms headquartered in states without such laws. The increase is more pronounced for firms in states with stronger enforcement of such laws and in states with weaker pre-existing tobacco controls. We present suggestive evidence that smoke-free laws affect innovation by improving inventor health and productivity and by attracting more productive inventors.
MA, Chang
Chang Ma, Financial Stability, Growth and Macroprudential Policy, Journal of International Economics, 2020, Volume 122, 103259.
Abstract
This paper studies the effect of optimal macroprudential policy in a small open economy model where growth is endogenous. By introducing endogenous growth, this model is able to capture the persistent effect of financial crises on output, which is different from previous literature but consistent with the data. Furthermore, there is a new policy trade-off between cyclical and trend consumption growth. In a calibrated version of the baseline model, I find that the impact of the optimal macroprudential policy on growth and welfare is quantitatively small even if it significantly increases financial stability. I consider two extensions of the model in which the optimal macroprudential policy has a larger impact on growth and welfare: one in which macroprudential policy is jointly used with a growth subsidy that helps reduce the cost of financial crises; and another extension with a direct growth externality.
QIAN, Jun
Ke li, Lei Lu, Jun Qian, and Julie Lei Zhu, Enforceability and the Effectiveness of Laws and Regulations, Journal of Corporate Finance, 2020, Volume 62, 101598.
Abstract
A major threat to the development of financial markets in emerging markets is “tunneling.” In China, this took on the form of controlling shareholders diverting assets from listed firms or coercing firms to serve as guarantors on questionable loans. A new set of rules enacted in 2005 prohibited asset diversion for “non-operational” purposes. Firms complying with these rules have experienced a reduction in related party transactions, an increase in investment, and better performance. In contrast, another set of contemporary rules, which aimed to standardize the practice of firms providing loan guarantees, has had very little impact. We attribute the contrasting design, implementation, and effectiveness of these two sets of rules to the difference in enforcement costs of the two types of tunneling activities. Relative to loan guarantees, it is much easier for a third party to determine (ex ante) whether a particular form of diversion destroys firm value, and to verify (ex post) that the losses to the firm resulted from the diversion. Our results highlight the importance of enforceability—laws and regulations that can be enforced at lower costs are more likely to succeed, especially in countries with underdeveloped formal institutions.
QIAN, Nancy
Sandra Sequeira, Nathan Nunn, and Nancy Qian, Immigrants and the Making of America, Review of Economic Studies, 2020, Volume 87, Issue 1, Pages 382-419.
Abstract
We study the effects of European immigration to the U.S. during the Age of Mass Migration (1850–1920) on economic prosperity. Exploiting cross-county variation in immigration that arises from the interaction of fluctuations in aggregate immigrant flows and of the gradual expansion of the railway network, we find that counties with more historical immigration have higher income, less poverty, less unemployment, higher rates of urbanization, and greater educational attainment today. The long-run effects seem to capture the persistence of short-run benefits, including greater industrialization, increased agricultural productivity, and more innovation.
TANG, Haihan
Christian Hafner, Oliver Linton, and Haihan Tang, Estimation of a Multiplicative Correlation Structure in the Large Dimensional Case, Journal of Econometrics, 2020, Volume 217, Issue 2, Pages 431-470.
Abstract
We propose a Kronecker product model for correlation or covariance matrices in the large dimensional case. The number of parameters of the model increases logarithmically with the dimension of the matrix. We propose a minimum distance (MD) estimator based on a log-linear property of the model, as well as a one-step estimator, which is a one-step approximation to the quasi-maximum likelihood estimator (QMLE). We establish rates of convergence and central limit theorems (CLT) for our estimators in the large dimensional case. A specification test and tools for Kronecker product model selection and inference are provided. In a Monte Carlo study where a Kronecker product model is correctly specified, our estimators exhibit superior performance. In an empirical application to portfolio choice for S&P500 daily returns, we demonstrate that certain Kronecker product models are good approximations to the general covariance matrix.
WEI, Shang-Jin
Hui Tong, and Shang-Jin Wei, Did Unconventional Interventions Unfreeze the Credit Market?, American Economic Journal: Macroeconomics, 2020, Volume 12, Issue 2, Pages 284-309.
Abstract
This paper investigates whether and how the unconventional interventions in 2008- 2010 unfreeze the credit market. We first construct a novel dataset of 192 interventions for 15 countries from September 2008 to July 2010. We then examine heterogeneous responses in stock prices to the interventions across 5516 non-financial firms in those countries. The stock prices increased when the interventions were announced, particularly for firms with large intrinsic liquidity needs for working capital. Moreover, recapitalization is more effective than other types of interventions. The results become stronger for interventions that are broad-based or more likely to contain surprise components. Hence the interventions alleviated the liquidity constraint on non-financial firms. However, the quantitative effect of any given intervention was limited.
Xuepeng Liu, Aaditya Mattoo, Zhi Wang, and Shang-Jin Wei, Services Development and Comparative Advantage in Manufacturing, Journal of Development Economics, 2020, Volume 144, 102438.
Abstract
Most manufacturing activities use inputs from the financial and business services sectors. But these services sectors also compete for resources with manufacturing activities, provoking concerns about deindustrialization attributable to financial services in developed countries like the United States and United Kingdom, and business services in developing countries like India and the Philippines. This paper examines the implications of services development for the export performance of manufacturing sectors. We develop a methodology to quantify the indirect role of services in international trade in goods and construct new measures of revealed comparative advantage based on value-added exports. We show that the development of financial and business services enhances the revealed comparative advantage of manufacturing sectors that use these services intensively but not of other manufacturing sectors. We also find that a country can partially overcome the handicap of an underdeveloped domestic services sector by relying more on imported services inputs. Thus, lower services trade barriers in developing countries can help to promote their manufacturing exports.
Shang-Jin Wei, and Yinxi Xie, Monetary Policy in an Era of Global Supply Chains, Journal of International Economics, 2020, Volume 124, 103299.
Abstract
We study the implications of global supply chains for the design of monetary policy, using a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules with commitment, a rule that targets separate producer price inflation at different production stages, in addition to output gap and real exchange rate, is found to deliver a higher welfare level than alternative policy rules. As an economy becomes more open, measured by export share, the optimal weight on the upstream inflation rises relative to that on the final stage inflation. If we have to choose among aggregate price indicators, targeting PPI inflation yields a smaller welfare loss than targeting CPI inflation alone. As the production chain becomes longer, the optimal weight on PPI inflation in the policy rule that targets both PPI and CPI inflation will also rise. A trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables.
ZHOU, Sili
Xiaping Cao, Douglas Cumming, and Sili Zhou, State Ownership and Corporate Innovative Efficiency, Emerging Markets Review, 2020, Volume 44, 100699.
Abstract
In this paper, we investigate the innovative efficiency of SOEs in China. Innovative efficiency refers to output of patents per dollar spending of R&D expenditure. The data indicate that minority SOEs are substantially more innovatively efficient than non-SOEs and majority SOEs. The relative innovative efficiency of minority SOEs is more pronounced among firms with high financial constraints. The data are consistent with the view that, in the Chinese context, there are favorable benefits to partial state ownership through access to talent, connections, and technological resources that enable efficient patent outcomes from R&D expenditure.
ZHU, Lei
Ke li, Lei Lu, Jun Qian, and Julie Lei Zhu, Enforceability and the Effectiveness of Laws and Regulations, Journal of Corporate Finance, 2020, Volume 62, 101598.
Abstract
A major threat to the development of financial markets in emerging markets is “tunneling.” In China, this took on the form of controlling shareholders diverting assets from listed firms or coercing firms to serve as guarantors on questionable loans. A new set of rules enacted in 2005 prohibited asset diversion for “non-operational” purposes. Firms complying with these rules have experienced a reduction in related party transactions, an increase in investment, and better performance. In contrast, another set of contemporary rules, which aimed to standardize the practice of firms providing loan guarantees, has had very little impact. We attribute the contrasting design, implementation, and effectiveness of these two sets of rules to the difference in enforcement costs of the two types of tunneling activities. Relative to loan guarantees, it is much easier for a third party to determine (ex ante) whether a particular form of diversion destroys firm value, and to verify (ex post) that the losses to the firm resulted from the diversion. Our results highlight the importance of enforceability—laws and regulations that can be enforced at lower costs are more likely to succeed, especially in countries with underdeveloped formal institutions.
CHEN, Shiyi
Shiyi Chen, and Dengke Chen, A Study of China's Fiscal Expenditure Multiplier in the Light of Economic Cycles, Social Sciences in China, 2019, Volume 8, Pages111-207.
Abstract
A systematic examination of the fiscal expenditure multiplier and the way it evolves in the course of the economic cycle is the fundamental premise for a scientific evaluation of the effect of government fiscal expenditure and an important basis for the rational formulation and effective implementation of “precise” fiscal policy. This will contribute to a regulatory system for economic and financial risk in the new era and to the accelerated establishment of a modern fiscal system. Our research overcomes the limitations of existing models, incorporates the features of economic cycles into the framework of research on the issue of China’s fiscal expenditure multiplier, systematically measures China’s fiscal expenditure multiplier, and stresses the quantitative examination of the relationship between fiscal expenditure multipliers and the economic cycle. Our findings show that China has a larger fiscal expenditure multiplier than less developed countries but is still some distance away from the world’s major developed economies. Chinese fiscal expenditure multiplier has relatively clear countercyclical characteristics; during the economic downturn. It was 2.3 times larger than during the boom, and it was significantly larger during the 1998 Asian financial crisis and the 2008 international financial crisis than at other periods. The timing of the presentation of fiscal stimulus policies is crucial; to improve the effect of fiscal expenditure, fiscal expenditure policies should be introduced promptly as soon as the crisis occurs.
GAO, Huasheng
Huasheng Gao, and Jin Zhang, SOX Section 404 and Corporate Innovation, Journal of Financial and Quantitative Analysis, 2019, Volume 54, Issue 2, Pages 759-787.
Abstract
This paper exploits a quasi-natural experiment to investigate the relation between Sarbanes-Oxley Act (SOX) and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the Act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imposes real costs to the economy by decreasing corporate innovativeness.
KANIEL, Ron
Ron Kaniel, Stathis Tompaidis, and Ti Zhou, Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows, Management Science, 2019, Volume 65, Issue 7, Pages 2947-3448.
Abstract
We present a model with dynamic investment flows, where fund managers have the ability to generate excess returns, and study how forcing them to commit part or all of their personal wealth to the fund they manage affects fund risk taking. We contrast the behavior of a manager who may invest her personal wealth in a private account to a manager who is either forced to commit her wealth to the fund she manages or not allowed to hold risky assets held by the fund privately. We show that a fund managed by a manager with higher ability does not necessarily achieve higher expected returns but achieves lower idiosyncratic volatility. For a manager with constant ability, restrictions placed on her personal account do not influence her choices in the fund, while for a manager whose ability varies stochastically, they result in higher expected returns and idiosyncratic volatilities. Fund strategies can be nonmonotone both in the manager’s commitment level and the ratio of manager to investor wealth. Our results are robust to incomplete information and to competing managers with correlated ability.
LIU, Hong
Hong Liu, and Yajun Wang, Asset Pricing Implications of Short-Sale Constraints in Imperfectly Competitive Markets, Management Science, 2019, Volume 65, Issue 9, Pages 4422-4439.
Abstract
We study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets in which market makers have market power. In contrast to the existing literature, we show that because competition is imperfect, short-sale constraints decrease bid prices, increase ask prices, and drive up bid-ask spread volatility, with or without information asymmetry. If market makers are risk neutral, then short-sale constraints do not affect ask prices or ask depths. In addition, the impact of short-sale constraints can increase with market transparency. Our main results are unaffected by endogenous information acquisition or reduced information revelation because of short-sale constraints.
PENG, Qiusha
Qiusha Peng, Financial Frictions, Entry and Growth: A Study of China, Review of Economic Dynamics, 2019, Volume 34, Pages 267-282.
Abstract
With a focus on the entry channel, this paper investigates the role of business deregulation and financial reform in China's credit and stock markets in explaining the rapid economic growth of China over the past twenty years. A dynamic general equilibrium growth model with heterogeneous consumers and firms is developed. Quantitative results using firm-level data show that the structural reforms that facilitated business formation and growth led to significantly higher aggregate output. This was driven by resource reallocation resulting from stronger market competition, in particular caused by the massive influx of new firms. Policy analysis shows that further reform could also have a large impact.
QIAN, Jun
Aragon George, Lei Li, and Jun Qian, The Use of Credit Default Swaps by Bond Mutual Funds: Liquidity Provision and Counterparty Risk, Journal of Financial Economics, 2019, Volume 131, Issue 1, Pages 168-185.
Abstract
Corporate bond mutual funds increased their selling of credit protection in the credit default swaps (CDS) market during the 2007-08 financial crisis. This trading activity was primarily in multi-name CDSs, greater among larger and established funds, and directed towards counterparty dealers in financial distress. Funds that sold credit protection during the crisis experienced greater credit market risk and superior post-crisis performance, consistent with higher expected returns from liquidity provision. Funds using Lehman Brothers as a counterparty experienced abnormal outflows and returns of -2% immediately following Lehman’s bankruptcy, suggesting that funds’ opportunistic trading in CDSs exposed investors to counterparty risk.
SUN, Lin
Lin Sun, and Melvyn Teo, Public Hedge Funds, Journal of Financial Economics, 2019, Volume 131, Pages 44-60.
Abstract
Hedge funds managed by listed firms significantly underperform funds managed by unlisted firms. The underperformance is more severe for funds with low manager deltas, poor governance, and no manager co-investment, or managed by firms whose prices are sensitive to earnings news. Notwithstanding the underperformance, listed asset management firms raise more capital, by growing existing funds and launching new funds post listing, and harvest greater fee revenues than do comparable unlisted firms. The results are consistent with the view that, for asset management firms, going public weakens the alignment between ownership, control, and investment capital, thereby engendering conflicts of interest.
TANG, Haihan
Anders Bredahl Kock, and Haihan Tang, Uniform Inference in High-Dimensional Dynamic Panel Data Models With Approximately Sparse Fixed Effects, Econometric Theory, 2019, Volume 35, Issue 2, Pages 295-359.
Abstract
We establish oracle inequalities for a version of the Lasso in high-dimensional fixed effects dynamic panel data models. The inequalities are valid for the coefficients of the dynamic and exogenous regressors. Separate oracle inequalities are derived for the fixed effects. Next, we show how one can conduct uniformly valid inference on the parameters of the model and construct a uniformly valid estimator of the asymptotic covariance matrix which is robust to conditional heteroskedasticity in the error terms. Allowing for conditional heteroskedasticity is important in dynamic models as the conditional error variance may be non-constant over time and depend on the covariates. Furthermore, our procedure allows for inference on high-dimensional subsets of the parameter vector of an increasing cardinality. We show that the confidence bands resulting from our procedure are asymptotically honest and contract at the optimal rate. This rate is different for the fixed effects than for the remaining parts of the parameter vector.
WEI, Shang-Jin
Nikhil Patel, Zhi Wang, and Shang-Jin Wei, Global Value Chains and Effective Exchange Rates at the Country-sector Level, Journal of Money, Credit and Banking, 2019, Volume 51, Issue S1, Pages 7-42.
Abstract
The real effective exchange rate (REER) is one of the most cited statistics in open-economy macroeconomics. We show that the models used to compute these numbers are not rich enough to allow for the rising importance of global value chains. Moreover, because different sectors within a country participate in international production sharing at different stages, sector-level variations are also important for determining competitiveness. Incorporating these features, we develop a framework to compute REER at both the sector and country level and apply it on intercountry input-output tables to study the properties of the new measures.
ZHU, Lei
Ana Albuquerque, and Julie Lei Zhu, Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment, Management Science, 2019, Volume 65, Issue 7, Pages 2947-3448.
Abstract
Prior studies conclude that an unintended consequence of firms complying with the Sarbanes-Oxley Act is lower levels of risk-taking activities, including investment. We first show that prior studies cannot isolate the effects of SOX from other contemporaneous events. We then use the implementation requirements of SOX404 to construct a natural experiment that isolates the effects of SOX404 for a sample of small firms. We do not find a reduction in investment and other risk-taking activities for firms that had to comply with SOX404, relative to other firms. Because small firms are expected to be the most adversely affected by the regulation, our results cast doubt on the notion that SOX404 had a negative impact on larger firms.
DENG, Yongheng
Yongheng Deng, Xin Liu, and Shang-Jin Wei, One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?, Journal of Financial Economics, 2018, Volume 130, Pages 663-692.
Abstract
We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by using a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges; binding capital controls; different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group and is therefore far cleaner than any in the existing literature. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland. Second, we entertain the possibility that a given transaction cost can have different effects in immature and mature markets. In an immature market where trading is dominated by retail investors with little knowledge of accounting and finance, a Tobin tax should have the best chance of generating its intended effect. In a more mature market, higher transaction costs may also discourage sophisticated investors, hence impeding timely incorporation of fundamental information into prices. We find a significantly negative relation in the Chinese market, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of traders' pool, we find an opposite effect. This suggests that a Tobin tax may work in an immature market but can backfire in a more developed market.
GAO, Huasheng
Huasheng Gao, Po-Hsuan Hsu, and Kai Li, Innovation Strategy of Private Firms, Journal of Financial and Quantitative Analysis, 2018, Volume 53, Issue 1, Pages 1-32.
Abstract
We compare innovation strategies of public and private firms based on a large sample over the period 1997-2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.
Huasheng Gao, Huai Zhang, and Jin Zhang, Employee Turnover Likelihood and Earnings Management: Evidence from the Inevitable Disclosure Doctrine, Review of Accounting Studies, 2018, Volume 23, Issue 4, Pages 1424-1470.
Abstract
We present evidence that managers consider employee turnover likelihood in their accounting choices. Our tests exploit U.S. state courts’ staggered recognition of the Inevitable Disclosure Doctrine (IDD), which reduces employees’ ability to switch employers. We find a significant decrease in upward earnings management for firms headquartered in states that recognize the IDD relative to firms headquartered elsewhere. The effect of the IDD is stronger for firms relying more on human capital and for firms whose employees have higher ex-ante turnover likelihood, confirming the employee retention channel. Overall, our results support the view that retaining employees is an important motive for corporate earnings management.
JIANG, Liang
Liang Jiang, Xiaohu Wang, and Jun Yu, New Distribution Theory for the Estimation of Structural Break Point in Mean, Journal of Econometrics, 2018, Volume 205, Issue 1, Pages 156-176.
Abstract
Based on the Girsanov theorem, this paper obtains the exact distribution of the maximum likelihood estimator of structural break point in a continuous time model. The exact distribution is asymmetric and tri-modal, indicating that the estimator is biased. These two properties are also found in the nite sample distribution of the least squares (LS) estimator of structural break point in the discrete time model, suggesting the classical long-span asymptotic theory is inadequate. The paper then builds a continuous time approximation to the discrete time model and develops an in-ll asymptotic theory for the LS estimator. The in-ll asymptotic distribution is asymmetric and tri-modal and delivers good approximations to the nite sample distribution. To reduce the bias in the estimation of both the continuous time and the discrete time models, a simulation-based method based on the indirect estimation (IE) approach is proposed. Monte Carlo studies show that IE achieves substantial bias reductions.
QIAN, Jun
Jun “QJ” Qian, and Julie Lei Zhu, Return to Invested Capital and the Performance of Mergers and Acquisitions, Management Science, 2018, Volume 64, Issue 10, Pages 4471-4965.
Abstract
We evaluate the efficiency of capital deployment for acquiring firms before mergers and acquisitions (M&As), defined as the return on invested capital net of the cost of capital, and link this measure to firms’ postacquisition performance. Acquirers with higher preacquisition net returns on investment have superior long-run operating and stock performance than do acquirers with lower returns. Acquirers with low net returns on investment also underperform matching nonacquirers. The relationship between preacquisition investment return and postacquisition performance is weakened when chief executive officer turnover occurs after deal completion. These results imply that managerial ability in deploying capital and creating value for shareholders persists through M&As.
WEI, Shang-jin
Yongheng Deng, Xin Liu, and Shang-Jin Wei, One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?, Journal of Financial Economics, 2018, Volume 130, Pages 663-692.
Abstract
We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by using a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges; binding capital controls; different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group and is therefore far cleaner than any in the existing literature. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland. Second, we entertain the possibility that a given transaction cost can have different effects in immature and mature markets. In an immature market where trading is dominated by retail investors with little knowledge of accounting and finance, a Tobin tax should have the best chance of generating its intended effect. In a more mature market, higher transaction costs may also discourage sophisticated investors, hence impeding timely incorporation of fundamental information into prices. We find a significantly negative relation in the Chinese market, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of traders' pool, we find an opposite effect. This suggests that a Tobin tax may work in an immature market but can backfire in a more developed market.
Xuehui Han, and Shang-Jin Wei, International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma, Journal of International Economics, 2018, Volume 110, Pages 205-219.
Abstract
This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.
WU, Wenbin
Wenbin Wu, The Credit Channel at the Zero Lower Bound through the Lens of Equity Price, Journal of Money, Credit and Banking, 2018, Volume 50, Pages 435-448.
Abstract
This study examines the impact of unconventional monetary policies on the stock market when the short-term nominal interest rate is stuck at the zero lower bound. Unconventional monetary policies appear to have significant effects on stock prices and the effects differ across stocks. In agreement with existing credit channel theories, I find that firms subject to financial constraints react more strongly to unconventional monetary policy shocks (especially large-scale asset purchases) than do less constrained firms. These results imply that the credit channel is as important as the interest rate channel in the transmission of unconventional monetary policies at the zero lower bound.
ZHOU, Sili
Xiaping Cao, Yuchen Wang, and Sili Zhou, Anti-Corruption Campaigns and Corporate Information Release in China, Journal of Corporate Finance, 2018, Volume 49, Pages 186-203.
Abstract
Chinese anti-corruption campaigns executed by CCDI (Central Commission for Discipline Inspection) put politicians into high scrutiny. We employ CCDI’s inspections as the event and use counterfactual analysis to show that corporations in inspected provinces significantly suppress negative information release evidenced from stock prices following Chen, Hong and Stein (2001). The variation of political maneuvers to suppress negative information release is consistent with local politician’s influences and incentives in affiliated firms, e.g., SOEs or politically connected non-SOEs. SOEs continue to suppress negative information release while non-SOEs experience meanreversion after inspections. Good governance and auditor’s quality partially mitigate manager’s incentives to suppress bad news.
ZHU, Lei
Jun “QJ” Qian, and Julie Lei Zhu, Return to Invested Capital and the Performance of Mergers and Acquisitions, Management Science, 2018, Volume 64, Issue 10, Pages 4471-4965.
Abstract
We evaluate the efficiency of capital deployment for acquiring firms before mergers and acquisitions (M&As), defined as the return on invested capital net of the cost of capital, and link this measure to firms’ postacquisition performance. Acquirers with higher preacquisition net returns on investment have superior long-run operating and stock performance than do acquirers with lower returns. Acquirers with low net returns on investment also underperform matching nonacquirers. The relationship between preacquisition investment return and postacquisition performance is weakened when chief executive officer turnover occurs after deal completion. These results imply that managerial ability in deploying capital and creating value for shareholders persists through M&As.
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