Bailey, Warren and Huiwen, Lai, “On the Expected Earnings Hypothesis Explanation of the Aggregate Returns-Earnings Association Puzzle”, Journal of Financial and Quantitative Analysis, forthcoming. Abstract
We provide strong support for the underappreciated expected earnings hypothesis of negative correlation between aggregate stock returns and earnings (Sadka and Sadka (2009); Choi, Kalay, and Sadka (2016)). For the 1970 to 2000 period studied by Kothari, Lewellen, and Warner (2006), our powerful modeling strategy incorporating macroeconomic information reveals that aggregate returns are significantly 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 GDP growth.
Chen, Deqiu, Huasheng Gao, Jiang Luo, and Yujing Ma, The Effects of Rural-Urban Migration on Corporate Innovation: Evidence from a Natural Experiment in China, Financial Management forthcoming. Abstract
We show that the migration of low-skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers. Our tests exploit the staggered relaxation of city-level household registration system in China, which facilitates rural residents to migrate to cities. We find a significant decrease in innovation for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. Overall, our results support the view that an abundant supply of low-skilled workers increases the benefit of using existing low-skilled technology and thus reduces firms’ incentive to innovate.
Peng, Qiusha, 2019, Financial Frictions, Entry and Growth: A Study of China, Review of Economic Dynamics forthcoming. 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.
Lyer, Lakshmi, Xin, Meng, Nancy, Qian, Xiaoxue, Zhao, 2019, Economic transition and private-sector labor: Evidence from urban China, Journal of Comparative Economics forthcoming. Abstract
This paper studies the transition of labor from the state sector to the infant private sector in urban China. We examine the impact of the first wave of housing reforms, which untied access to housing in urban areas from working for the state sector. We find that the reform significantly increased private housing ownership and private-sector employment, and reduced private-sector wages. The housing reform had no effect on unemployment or self-employment.
Sequeira, Sandra, Natan, Nunn, Nancy, Qian, 2019, Immigrants and the Making of America, The Review of Economic Studies forthcoming. 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.
Christian, Hafner, Oliver, Linton, Haihan, Tang, 2019, Estimation of a Multiplicative Correlation Structure in the Large Dimensional Case, Journal of Econometrics forthcoming. 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.
Tong, Hui and Shang-Jin Wei, Did Unconventional Interventions Unfreeze the Credit Market?, American Economic Journal: Macroeconomics forthcoming. 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.
Patel, Nikhil, Zhi Wang, and Shang-Jin Wei “Global value chains and effective exchange rates at the country-sector level”, Journal of Money, Credit, and Banking, forthcoming. Abstract
The real effective exchange rate (REER) is one of the most cited statistical constructs 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 inter-country input-output tables to study the properties of the new measures of REER for 35 sectors in 40 countries.
Wang, Xiaoming, Weijun Wu, Chen Yin and Sili Zhou, “Trade Credit, Ownership and Informal Financing in China”, Pacific-Basin Finance Journal, forthcoming. Abstract
We investigate informal financing such as trade credit in China. The credit for both state-owned enterprises (SOEs) and non-SOEs dramatically increased over time. Our results suggest that non-SOEs rely more on trade credit financing, but this effect is mitigated by supplier’s liquidity position. Further results show that during financial crisis, non-SOEs reduce their account receivables due to high financing costs. Our research highlights the importance of informal financing and ownership structure in emerging markets.
Yang, Zhenyi, Yiwei Yu, Yubing Zhang and Sili Zhou, Policy uncertainty exposure and market value: Evidence from China, Pacific-Basin Finance Journal, Volume 57, Pages 101178. Abstract
Economic policy uncertainty under political opaqueness imposes great impact in the capital market. We construct ex ante firm exposure to China Economic Policy Uncertainty (CEPU) index from Baker et al. (2016). This measure of policy uncertainty exposure is significantly and negatively predictive to firm's market value and Tobin's Q, suggesting that high level of policy exposure causes significant value destruction in the capital market. The effect is more pronounced when the political opaqueness is higher. The analysis of influence channels shows that the negative effects are stronger for firms operating in less liberated market, with more policy-dependent business, unfavorable competitive status and poor corporate governance.
Wu, Weijun, Ling Yuan, Xiaoming Wang, Xiaping Cao and Sili Zhou “Does FDI Drive Economic Growth? Evidence from City Data in China”, Emerging Markets Finance and Trade, forthcoming. Abstract
Foreign Direct Investment (FDI) and government spending are two important drivers of economic growth. We use Chinese city level data and document an inverse U shape relation between FDI and GDP growth. FDI’s diminishing growth effect becomes more salient for cities with greater budget deficit or relying heavily on local corporate tax. When foreign firms account for sizable share of local capital formation in the economy, FDI significantly crowds out public spending. We attribute the inverse U shape of FDI and growth to both tax distortion and crowd-out effect.
Fuh, C. D. and Tartakovsky, A. G. “Asymptotic Bayesian theory of quickest change de- tection for hidden Markov models.” IEEE Transactions on Information Theory, accepted, 2018. Abstract
In the 1960s, Shiryaev developed a Bayesian theory of change-point detection in the i.i.d. case, which was generalized in the early 2000s by Tartakovsky and Veeravalli and recently by Tartakovsky (2017) for general stochastic models assuming a certain stability of the loglikelihood ratio process. Hidden Markov models represent a wide class of stochastic processes in a variety of applications. In this paper, we investigate the performance of the Bayesian Shiryaev change-point detection rule for hidden Markov models. We propose a set of regularity conditions under which the Shiryaev procedure is firstorder asymptotically optimal in a Bayesian context, minimizing moments of the detection delay up to certain order asymptotically as the probability of false alarm goes to zero. The developed theory for hidden Markov models is based on Markov chain representation for the likelihood ratio and r-quick convergence for Markov random walks. In addition, applying Markov nonlinear renewal theory, we present a high-order asymptotic approximation for the expected delay to detection and a first-order asymptotic approximation for the probability of false alarm of the Shiryaev detection rule. We also study asymptotic properties of another popular change detection rule, the Shiryaev– Roberts rule, and provide some interesting examples.
Julie Lei Zhu
Ana Albuquerque and Julie Lei Zhu, 2018, Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment, Harvard Law School Forum on Corporate Governance and Financial Regulation 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.
Charles Chang, Hung-Wen Cheng, and Cheng-Der Fuh, "Ensuring More is Better: On the Simultaneous Application of Stock and Options Data to Estimate the GARCH Options Pricing Model," Journal of Derivatives forthcoming. Abstract
We show via asymptotic derivation and simulation that traditional methods of applying stock or options data separately to estimate GARCH models of implied volatility generate inefficient or biased estimates. Estimation error impacts risk management metrics as options deltas and gammas vary substantially depending on the method used. We resolve this dilemma by introducing an error term to the options pricing model, lending slack to the estimation process and allowing simultaneous application of stock and options data. The result is unbiased estimates that are maximally efficient and that dominate those obtained when using stock and options data separately. Finally, we demonstrate the consistency and asymptotic normality of the quasi-maximum likelihood estimator in stationary EGARCH and NAGARCH settings.
Huasheng Gao, and Jin Zhang, “SOX Section 404 and Corporate Innovation”, Journal of Financial and Quantitative Analysis, forthcoming. 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.
Huasheng Gao, and Zhongda He
Huasheng Gao, and Zhongda He, “Board Structure and Role of Outside Directors in Private Firms,” European Financial Management, forthcoming. Abstract
We examine the board composition and the role of outside directors in U.S. private firms. We find that compared with public firms, private firms have a higher proportion of outside directors on the boards and select their outside directors in a more responsive way to their advisory and monitoring needs. We also find that private firms’ CEO turnover-performance sensitivity, earnings quality, going-public likelihood, and IPO value increase with the proportion of outside directors. These results are consistent with the view that lack of external governance in private firms leads to a greater demand for board monitoring for private firms.
Huasheng Gao, Huai Zhang, and
Huasheng Gao, Huai Zhang, and Jin Zhang, “Employee Turnover Likelihood and Earnings Management: Evidence from the Inevitable Disclosure Doctrine”, Review of Accounting Studies, forthcoming 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.
Kock, Anders Bredahl, and Haihan Tang, "Uniform Inference in High-Dimensional Dynamic Panel Data Models With Approximately Sparse Fixed Effects”，Econometric Theory, forthcoming. 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.
Cao, Jerry, Yuchen Wang, and Sili Zhou, "Anti-Corruption Campaigns and Corporate Information Release in China", Journal of Corporate Finance, forthcoming. 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.
Huasheng Gao, Po-Hsuan Hsu and Kai Li, ““Innovation Strategy of Private Firms,” Journal of Financial and Quantitative Analysis 53 (2018), 1-32 (Lead article). 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.
Jiang, Liang and Xiaohu Wang, “New Distribution Theory for the Estimation of Structural Break Point in Mean,” Journal of Econometrics， forthcoming. Abstract
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
Qian, Jun, and Julie Lei Zhu, “Return to invested capital and the performance of mergers and acquisitions,” Management Science, forthcoming. 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.
Qian, Jun, Aragon George and Lei Li, “The Use of Credit Default Swaps by Bond Mutual Funds: Liquidity Provision and Counterparty Risk,” Journal of Financial Economics, forthcoming. 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, and Melvyn Teo, “Public Hedge Funds”, Journal of Financial Economics, forthcoming. 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.
Wei, Shang-Jin, Yongheng Deng, and Xin Liu, “One Fundamental and Two Taxes: When Does a Tobin Tax ReduceFinancial Price Volatility?” Journal of Financial Economics, forthcoming. 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, forthcoming. 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, “The Credit Channel at the Zero Lower Bound through the Lens of Equity Price,” Journal of Money, Credit and Banking, forthcoming. 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.