Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications – in which the role of shared background is identified from auditor turnover – we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor’s tenure, and is diminished for audits ordered by the provincial Organizations Department as a result of the departure of top city officials. We argue that our findings are most readily explained by leniency toward local officials rather than an endogenous response to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.

We use China's recent anti-corruption campaign as a natural experiment to examine the (market expected) equilibrium consequences of (anti-)corruption. We argue that the announcement of inspections of provincial governments by the Central Commission for Discipline Inspection (CCDI) on May 17, 2013 represents a significant departure of past norms of anti-corruption campaigns, and thus serves a rare empirical opportunity to examine the equilibrium effects of anti-corruption campaigns for firms. We first present a conceptual framework to illustrate the channels through which anti-corruption actions can influence firms. Using an event study approach and May 17, 2013 as the event date, we find that, overall, the stock market responded positively to the announcement of strong anti-corruption actions. The announcement returns are significantly lower for luxury-goods producers, and SOES, large firms, or politically connected firms earn lower returns than private, small, or non-connected firms. We also find that existing local institutions play a crucial role in determining the announcement returns across firms. Moreover, a long-term difference-in-differences analysis shows that higher returns during the event window are associated with more subsequent entries of new firms and faster expansions of existing firms. Finally, we also provide direct evidence consistent with the endogenous grits effect.

In Chinese culture, digit 8 (4) is taken as lucky (unlucky). We find that the numerological superstition has a profound impact across China’s stock, bond, foreign exchange and commodities markets, affecting asset prices in both the primary and secondary markets. The superstition effect, i.e., the probability of asset price ending with a lucky (unlucky) digit far exceeds (falls short of) what would be expected by chance, is prevalent. The effect is driven by investors’ reliance on superstition as an anchor to face uncertainty in asset pricing and the overoptimism of unsophisticated investors. While the superstition effect does not lead to systemic mispricing for assets traded by sophisticated investors, it implies overpricing for assets involving more unsophisticated investors.

We evaluate how prior mutual fund working experience affects private fund managers' performance. Using a novel Chinese private fund database from 2012 to 2016, we document significantly lower excess returns and higher left-tail risks for private fund managers with prior mutual fund working experience. Such effect is concentrated in switched managers with lower performance ranks in mutual funds. Additionally, the underperformance is attributable to reduced research support, change in investment styles, and deteriorated market timing skills, while incentive schemes help alleviate such underperformance. Our findings demonstrate the key role of industry-specific human capital in the asset management industry.

Environmental information disclosure is an effective way for corporate to fulfill environmental protection responsibilities and encourage environmental self-inspection and management. In this paper, we utilize the environment fee to tax reform implemented in 2018 as a quasi-experiment, to investigate the impact of mandatory environmental regulation change on firm environmental information disclosure quality. Using data from listed companies in China between 2015-2020, we found that the mandatary environment regulation positively affects the monetary and non-monetary environmental information disclosure in heavy polluting industries. We also found that, firms with higher environmental subsidies and market value tend to disclose more information. The mechanism analysis shows that external governance and internal control mediate the effect of mandatory environmental regulation on environmental information disclosure quality. Compared to a growing literature on voluntary regulation, our findings provide evidence emphasizing the role of mandatory regulation of government incentives in environmental improvement.

This paper studies how centralizing environmental administration affected air pollution in China. China launched a vertical administration reform in 2016 to empower upper-level Environmental Protection Bureaus to administer lower-level bureaus vertically through personnel control. Exploiting a stacked difference-in-differences strategy and a regression discontinuity design, we find that the verticalization reform significantly reduced air pollution. The effect was stronger in places where air pollution is less likely to be affected by spillovers from other provinces or where local governments paid less attention to environmental protection before the reform. Additionally, we find that the reform significantly increased the intensity of inspection by local agencies and environmental investments by heavily polluting firms.

Climate change has become mankind’s main challenge. Greenhouse gas (GHG) emissions from shipping are not irresponsible for this, representing 3% of the global total; an amount equal to that of Germany’s emissions. The Fourth Greenhouse Gas Study 2020 of the International Maritime Organization (IMO) predicts that the proportion of GHG emissions from shipping will rise further, as global trade continues to recover and grow, along with the economic development of India, China and Africa. China and the European Union have proposed to include shipping in their carbon emissions trading systems (ETS). As a result, the study of the relationship between the carbon finance market and the shipping industry, attempted here for the first time, is particularly important both for policymakers and shipowners. We use wavelet analysis and the spillover index methods to explore the dynamic dependence and information spillovers between the carbon finance market and shipping. We discover a long-term dependence and information linkages between the two markets, with the carbon finance market being the dominant one. Major events, such as the 2009 global financial crisis; Brexit in 2016; the 2018 China-US trade frictions; and COVID-19 are shown to strengthen the dependence of carbon finance and shipping. We find that the dependence is strongest between the EU carbon finance market and dry bulk shipping, while the link is weaker in the case of tanker shipping. Nonetheless, carbon finance and tanker shipping showed a relatively stronger dependence when OPEC refused to cut production in 2014, and when the China-US trade dispute led to the collapse of oil prices after 2018. We show that information spillovers between carbon finance and shipping are bidirectional and asymmetric. The carbon finance market is the principal transmitter of information. Our results and their interpretation provide guidance to governments on whether (and how) to include shipping in emissions trading schemes, supporting at the same time the environmental sustainability decisions of shipping companies.

It has been confirmed that sustainable investments contributing to environmental protection can benefit from the deterioration of air pollution, but this influence mechanism has not been fully discussed. This paper proposes a mediation model to study air pollution's influence on green bonds. Theoretically, air pollution raises public environmental awareness and perceptions of physical health risks, leading to increased public concern. Enhanced public concern drives investors' green preference and environmental responsibility, thus expanding green bond demand. Our studies show air pollution is significantly positive related to public concern. Public concern positively links with green bond investment willingness, resulting in increased volatility. The total positive effect of air pollution on green bond is partly absorbed by the effect of public concern. These findings confirm the mediation role of public concern. In addition, major crisis events (e.g., COVID-19) may hinder the mediation process by generating a negative trend and distracting the public.

Low demand for crop insurance, even when subsidized at highly favorable rates, remains a challenge for policymakers in developing countries attempting to create insurance-based farm safety nets. Evidence from a series of surveys and experiments with 477 vegetable farmers in China reveals several anomalies in farmers’ demand for crop insurance as well as deviations from predictions under both expected utility theory and cumulative prospect theory. Farmers are willing to pay higher price for neutral-frame risk protection tool than for an insurance-frame equivalent. Moreover, they tend to be more likely to purchase low-coverage than high-coverage insurance, even when high coverage provides greater subsidized value. Among risk- and loss-averse farmers, who theoretically should be more interested in adopting risk protection tools, we find less willingness to purchase high-coverage level insurance.

The crypto and noncrypto markets used to be separated from each other. We argue that with the rapid development of stablecoins since 2018, risks are now transmitted between the crypto and noncrypto markets through stablecoins, which are both pegged to noncrypto assets and play a central role in crypto trading. Applying copula-based CoVaR approaches, we find significant risk spillovers between stablecoins and cryptocurrencies as well as between stablecoins and noncrypto markets, which could help explain the tail dependency between the crypto and noncrypto markets from 2019 to 2021. We also document that the risk spillovers through stablecoins are asymmetric—stronger in the direction from the US dollar to the crypto market than vice versa—which suggests the crypto market is re-dollarizing. Further analyses consider alternative explanations, such as the COVID-19 pandemic and institutional crypto holdings, and determine that the primary channels of risk transmission are stablecoins' US dollar peg to the noncrypto market and their transaction-medium function in the crypto ecosystem. Our results have important implications for financial stability and shed light on the future of stablecoin regulation.