We examine the process of stock prices adjusting to information conveyed by the trading process. Using the price impact of a trade to measure its information content, our analysis shows that the weekly price impact of market transactions has significant cross-sectional predictive power for returns in the subsequent week. The effect is sensitive to the level of informational asymmetry and is not due to excess liquidity demands or variations in rational risk premia. This finding suggests that prices may slowly incorporate trading information. We then characterize the key channel through which price underreaction occurs. We find that the price impact contains information that is not fully captured by public order flows and that a lead-lag effect exists regarding the arrival of information to different groups of investors. Hong and Stein’s (1999) gradual-information-diffusion theory seems the most likely explanation for price underreaction.

This study investigates attributes of local firms that determine investment biases using mutual funds holding data across 48 markets. Controlling for variations in market level environments, we find that firm characteristics related to transaction cost, corporate governance, information asymmetry and local familiarity create significant barriers to foreign investments. The extent to which information asymmetry and familiarity constrain investment allocation is more observable for foreign than for domestic investors, even in developed and liberalized markets. However, in emerging and restricted markets, variations in foreign investment bias are mainly driven by market level cross-border investment barriers. Overall, the well-documented “home bias” phenomenon may be a joint effect of both firm and market level investment barriers.

Fund managers usually set aside certain amount of cash to pay for possible redemptions, and it is believed that this will affect overall fund performance. This paper examines the properties of efficient portfolios in the mean-variance framework in the presence of a cash account. We show that investors will retain part of funds in cash, as long as the required return is lower than the expected rerun on the portfolio corresponding to the point of intersection of the traditional efficient frontier and the straight line that passes through the minimum-variance portfolio and the origin in the mean-variance plane (portfolio q1 ). In addition, the efficient portfolios determined by our model are proportional to portfolio q1 , and are more efficient than traditional efficient portfolios. Using a simulation, we illustrate that 6% to 9% of total funds are to be retained in the cash account if no-short-selling constraint is imposed. Based on real data, our out-of-sample empirical results confirm the theoretical findings.

We examine the dynamic adjustment of cash holdings of publicly traded Chinese firms over the period 1998-2006. The empirical evidences are supportive of the dynamic trade-off theory of cash holdings. Importantly, there is strong evidence to support asymmetric adjustments. That is, the adjustments from above the target are significantly faster than adjustments from below. In addition, adjustment speeds are heterogeneous for firms facing differential adjustment costs. In particular, adjustment speed is negatively related to firm size, but positively related to the deviation from the target. Furthermore, in terms of adjustment method, Chinese listed firms make adjustments to their targets primarily through internal financing, while debt financing and dividend payment play a minimal role. Finally, we find that the precautionary motive arising from financial constraints explains the cash holdings adjustment behaviors of Chinese Listed firms well.

The paper studies the effect of social capital on the firms’ debt capacity and capital structure in China. We measure the social capital of China’s 31 provinces through four indexes: the number of NGOs per capita, the index of trust among peoples, the volunteer blood donation ratio of civics, and the money and material donation of civics. The results show that in those areas with more social capital, the firms are more likely to have higher debt ratio and longer debt maturity, and the firms can get debt financing with less tangible assets. And in those districts, the firms are easier to obtain bank credits and trade credits. The paper has two contributions to the economics literature: first, it confirms the economic value of social capital from a micro view; second, it provides a new perspective to understand the firms’ capital structure choice.

Multiunit structure can internalize the managerial market to promote competition among subsidiary managers, and create an internal capital market within firms to alleviate external financing constrains, and it also may lead to diversification to lower the operation risk and regulation. While it brings in more agency problem created by subsidiary managers, causing the efficiency of internal capital market and diversification confusing. Using the data of listed firms in China, an emerging market, this paper examines the efficiency of multiunit structure within the firm, investigating the influence on capital allocation and firm performance. We find that multiunit structure is better in emerging market since it is efficient in capital allocation, reducing the inefficient investment by reducing the overinvestment and alleviating the underinvestment, and the bright side of multiunit structure dominates the agency problem associated, thus beneficial for firm performance, both short-term and long-term accounting returns. In less developed capital market under current situation, multiunit structure is better.

The long-run underperformance of the initial public offerings is one of the three hot issues in IPO research area,until 2000,the scholars in China began to research it,hence,the related theory is far from absent,therefore,many theories need to be completed. The article studied the long-run performance of 174 shares issued in Small and Medium-sized Board from the day after the first trading day to three years.It found that the shares show underperformance since the first month after its going to public,which will continue to the second year.But the shares showed strong performance compared with the Shenzhen A-share Composite Index.

China began allowing short selling and margin trading in 90 stocks in March 2010. This event provides an opportunity to test the relative effect of margin trading and short selling. We find the prices of these 90 stocks decrease, on average, relative to peer stocks in China and cross-listed H-shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators? intention, and recent empirical evidence, liquidity declines in the shortable stocks. This may imply avoidance of these stocks by uninformed investors. There is also evidence of higher bid-ask spreads following the regulation change.

This paper empirically models China’s stock prices using conventional fundamentals: corporate earnings, risk-free interest rate, and a proxy for equity risk premium. It uses the estimated long-run stock price misalignments to date booms and busts, and analyses equity market reforms and excess liquidity as potential drivers of these stock price misalignments. Our results show that China’s equity prices can be reasonable well modelled using fundamentals, but that various booms and busts can be identified. Policy actions, either taking the form of deposit rate changes, equity market reforms or excess liquidity, seem to have significantly contributed to these misalignments.

This paper examines the impact of renminbi revaluation on foreign firm valuation and, by implication, firm prospects. To deal with the potential endogeneity of exchange rate movements, we consider not just official announcements of exchange rate policy but also 27 instances of market-perceived changes in China’s currency policy driven by domestic or foreign political pressure. Using information on 12,300 firms in 44 countries, we find that stock returns increased with renminbi revaluation expectations. This reaction was related as much to improved market sentiment as to specific trade channels, however. In terms of trade channels, we find that expectations of renminbi appreciation reduce the relative stock returns of firms providing components and raw materials to China as inputs for the country’s exports. There is also some evidence that expectations of renminbi appreciation reduce the stock prices of financiallyconstrained firms.