The evidence on the relation between idiosyncratic risk and future market return is at odds with the theory in Merton (1987). We argue that this is because conventional idiosyncratic risk measures are too noisy that consequently camou?age the true pricing relation suggested by the theory in empirical tests. To reduce the noise, we employ a random portfolio approach to construct an alternative aggregate idiosyncratic risk measure. Due to a high correlation between the noise components of the conventional idiosyncratic risk measure and our portfolio idiosyncratic risk measure, we include both measures simultaneously in a predictive regression, in which the conventional idiosyncratic risk measure helps to further reduce the noise in our portfolio idiosyncratic risk measure. We ?nd that both variables are signi?cant and jointly predict returns on the market with an adjusted R2 of 2%. Our results are very robust to all conventional control variables, sample periods, the size deciles.

The evidence on the relation between idiosyncratic risk and future market return is at odds with the theory in Merton (1987). We argue that this is because conventional idiosyncratic risk measures are too noisy that consequently camou?age the true pricing relation suggested by the theory in empirical tests. To reduce the noise, we employ a random portfolio approach to construct an alternative aggregate idiosyncratic risk measure. Due to a high correlation between the noise components of the conventional idiosyncratic risk measure and our portfolio idiosyncratic risk measure, we include both measures simultaneously in a predictive regression, in which the conventional idiosyncratic risk measure helps to further reduce the noise in our portfolio idiosyncratic risk measure. We ?nd that both variables are signi?cant and jointly predict returns on the market with an adjusted R2 of 2%. Our results are very robust to all conventional control variables, sample periods, the size deciles

Volatility long memory is a stylized fact that has been documented for a long time. Existing literature have two ways to model volatility long memory: component volatility models and fractionally integrated volatility models. This paper develops a new fractionally integrated GARCH model, and investigates its performance by using the Standard and Poor’s 500 index returns and cross-sectional European option data. The fractionally integrated GARCH model signi?cantly outperforms the simple GARCH(1, 1) model by generating 37% less option pricing errors. With stronger volatility persistence, it also dominates a component volatility model, who has enjoyed a reputation for its outstanding option pricing performance, by generating 15% less option pricing errors. We also con?rm the fractionally integrated GARCH model’s robustness with the latest option prices. This paper indicates that capturing volatility persistence represents a very promising direction for future study.

This study examines for evidence of peer effects in the trading decisions of individual investors from Mainland China, a country whose cultural and social structures are vastly different from those of Western countries. Cultural differences, as widely documented, play a significant role in social interactions and word-of-mouth behavior. In contrast to U.S. studies, we find robust evidence that the trading decisions of Chinese investors are influenced, via word-ofmouth, by those of their peers who maintain brokerage accounts at the same branch, but not by those whose accounts are maintained at another branch located in the same city.

This paper examines the effects of the agency costs on firm value in 156 Chinese publicly listed companies with individual ultimate owners between 2002 and 2007. The ultimate owners’ agency costs, as measured by the divergence between control rights and cash flow rights, are shown to negatively and significantly affect firm value, as measured by the market-to-book ratio of assets (an approximation of Tobin’s Q). As the agency costs grow, the stock returns decrease around the connected party transaction announcements, and firms are more likely to engage in value-destroying connected party transactions. These effects are particularly strong for some types of connected party transactions, notably loan guarantees and direct fund transfers. Further, as the agency costs grow, the firms violate laws more frequently and the nature of legal violations becomes more severe. Evidence from an exogenous policy shock, the non-tradable share reform confirms that higher agency costs cause more unfavorable stock market reactions to connected party transaction announcements.

In this paper we argue that ine? cient bank loans can reduce the value of borrowing ?rms when the expropriation of minority share- holders by controlling shareholders is a major concern. Using data from Chinese ?nancial market, we ?nd that bank loan announcements generate signi?cantly negative abnormal returns to borrowing ?rms. The share devaluation following loan announcements are concentrated in ?rms that are perceived to be more vulnerable to controlling share- holders?expropriation. In addition, we ?nd weak evidence that bank quality mitigates the negative market reactions.

This paper studies the determinants of cash holdings and the marginal value of cash in China’s share-issued privatized firms from 1994 – 2007. We first analyze the effects of firm characteristics on corporate cash holdings and find empirical evidence that is largely consistent with U.S. and other international evidence in previous studies. Specifically, we find that smaller, more profitable and high growth firms hold more cash. Debt and net working capital are negatively related to cash holdings, suggesting that debt and working capital may be treated as cash substitutes. We also find that state ownership is negatively related to cash holdings. Firms with high state ownership are less financially constrained in that they have better access to credit in the mostly state-owned bank lending environment. We further examine the cross-sectional variations in the marginal value of corporate cash holdings. We find that the marginal value of cash declines with higher level of cash and higher level of debt, consistent with evidence in U.S. firms. Our most important finding is that the marginal value of cash declines as the equity ownership retained by the state increases. For the average firm in our sample, the value of an additional dollar is $0.94. An additional dollar is valued $0.33-$0.47 higher in firms with zero percent state ownership than in firms with 50 percent or higher state ownership. This difference is both statistically and economically significant.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is critical. We focus on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich database of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. To identify the causal effect of provincial level IP rights enforcement on firm behavior, we use several approaches to deal with the issues of endogeneity, reverse causality, and simultaneity. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms’ ability to acquire new external debt (including formal and informal financing) and external equity. Firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more innovation patents, and produce more sales from new products. We also find better enforcement of IP rights encourages financing of and investment in R&D in foreign and ethnic joint ventures. The results confirm that enforcement of IP rights matters even in China. Our paper provides firm level evidence that financing of and investing in R&D are the channels that link enforcement of IP rights and economic growth.

The Chinese market is characterized by state-controlled and closely held firms as well as significant differences in economic development and legal structures at the provincial level and corporate regulations that require firms seeking external financing to show a history of dividend payment. Using a sample of listed Chinese firms, we investigate the likelihood of paying dividends, different forms of dividends and market reactions to various dividend announcements. We find that profitable, low leverage, high cash holding, stronger shareholder protection firms, and those firms with state ownership prior to listing and undertaking subsequent equity offerings are more likely to pay dividends and cash dividends, in particular. Firms appear to cater to investor demands in setting dividend policy; hence firms with a large proportion of non-tradable shares are more likely to pay cash dividends. Consistent with the use of stock dividends to attract the attention of analysts, we also find that growing firms with high levels of retained earnings and greater investment in fixed assets pay stock dividends and these firms’ dividend announcements are associated with significant positive market reactions and increased analyst following.

Numerous studies have focused on the theoretical and empirical aspects of corporate capital structure since the 1960s. As a new branch of capital structure, however, debt maturity structure has not yet received as much attention as the debt-equity choice. We use the existing theories of corporate debt maturity to investigate the potential determinants of debt maturity of the Chinese listed firms. In addition to the traditional estimation methods, the system-GMM technique is used to explicitly control for the endogeneity problem. We find that the size of the firm, asset maturity and liquidity have significant effects in extending the maturity of debt employed by Chinese companies. The amount of collateralized assets and growth opportunities also tend to be important. However, proxies for a firm’s quality and effective tax rate apparently report mixed or unexpected results. Debt market and equity market conditions are also examined in relation to corporate loan maturity. The system-GMM results show that market factors seem to influence debt maturity decisions. Finally, corporate equity ownership structure has also been found to have some impact on debt maturity mix.