In contrast with the evidence for the US and UK, the percentage of Chinese firms that pay dividends is increasing. We find that the level of dividend payment is positively related to ownership concentration but is negatively related to the percentage of outside directors. We further determine that after paying dividends, these firms issue new equity more often than non-payer while enjoying higher market-to-book ratios. These findings suggest that dividends might substitute for board monitoring for Chinese firms and hence contributes to resolving the conflict of interest between the controlling and minority shareholders.

In this paper, we examine investors’ valuations of corporate cash hoardings and dividend payout to explicitly isolate the monitoring effect from the information effect of corporate disclosure activity. In a sample of 951 firms from 38 countries, we find that cash resources are rewarded with higher market valuation when greater disclosure improves a firm’s transparency. These results suggest that extensive disclosure enhances external monitoring and thus limits insiders’ ability to accumulate cash to expropriate minority shareholders. In further support of the monitoring effect of strong disclosure, we find that dividend payout is valued at a premium in opaque firms where cash is more vulnerable to consumption of private control benefits. Overall, our findings support the disciplinary role of firm-level disclosure policy in corporate governance mechanisms.

Previous studies find mixed results on the relation between exchange rate movement and stock return. We revisit the issue by exploring the effect of market efficiency and heterogeneous investor’s reaction to exchange rate changes using the recent event of Chinese currency appreciation. Our results show that different investor groups react differently to the exchange rate appreciation and that this can be explained by the differences in information access and demand elasticity. In addition, we find that investors with limited investment opportunities react more positively to exchange rate appreciation. Our results suggest that it is important to consider the issues of market efficiency and the differences among investors when one analyzes the relation between exchange rate movement and stock return.

This study investigates the effectiveness of the dual-board corporate governance mechanism on enterprise risk management and financial stability in emerging markets. Taking into account both market risk and total risk, we find activities of both boards, board of directors and the supervisory board, in these companies affect corporate risk-taking behaviors significantly, but shed light on different aspects. These findings are of interest and counter-intuitive since prior research concludes ineffectiveness of the dual-board system in China. More detailed issues, such as the endogeneity of board activities and characteristics, reciprocal causality between board behaviors and risk-taking issues, effects of political/governmental policies and ownership structure of controlling shareholders on board behaviors, asymmetrical monitoring effects of two boards on companies with various levels of financial risk, and non-linear effects of meeting frequencies of two boards, are addressed to help better understand the corporate governance-enterprise risk management relationship.

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 also critical. We concentrate on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich sample 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. 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. The firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more patents, and produce more sales from new products. We also find better enforcement of IP rights helps mitigate the problem of appropriation by local partners in foreign and ethnic joint ventures. To deal with the problems of reverse causality and omitted common variables, we adopt the instrumental variable method and the approach used by Rajan and Zingales (1998), and the impact of IP rights enforcement is robust to different specifications. Our evidence confirms that enforcement of IP rights matters even in China. Furthermore, our results support that the enforcement of IP rights affects the growth in the economy via the channels of financing of and investing in R&D.

In this paper we set out to show that China has certain significant specificities in terms of the gradual (i.e. "step by step") approach it has followed in implementing reforms affecting its financial system. This is in contrast with the traditional shock or "big bang" therapy adopted by other emerging or transition countries, on the basis of what is known as the Washington Consensus, which notoriously prescribes the immediate, wholesale introduction of market-oriented systems through large-scale liberalisations and privatizations. Nevertheless, as we will endeavour to demonstrate the process of reform of China's financial system has not prevented problems of financial fragility from arising in the banking sector, and of corporate governance for firms, such as to threaten the very sustainability of growth in the future.

Is the demand curve for stocks downward-sloping? The index-inclusion literature tries to answer this question by looking at price reactions to stocks added or deleted from major stock indices. We look for new evidence using another well-established event: the negative price reaction to the seasoned equity offerings. While this can be caused by asymmetric information, another plausible explanation might be a downward-sloping demand curve for stocks. We argue that we can disentangle the two factors using a natural experiment in China's stock market, where companies' equity offering plans need to be approved by the regulator. We find strong negative price reactions to the announcement of such approval. Since all information on the overvaluation of the firm is released when the firm announces its equity offering plan, the negative reaction to the approval of the plan cannot be explained by changes in the valuation of the firm. Furthermore, we find different price reactions in China's segmented stock market when the firm only issues new shares in one of the two domestic markets (A- and B-share markets). The evidence suggests that a significant part of the negative price reaction of equity offerings is related to a supply shock to a downward sloping demand curve.

This paper investigates the replacement and appointment of top executives in a business highly involved by the government and their consequences on firm performance and corporate governance. It provides a dynamic setting to test the value of political connection as prior studies do not discern government interests and incorporate ambiguous institutions and self-selection problems by cross-section test. Using data of China’s listed state-owned enterprises (SOEs), this paper finds that the state owner is more likely to replace top executives and appoint a politically-connected executive when SOEs encounter economic distress such as poor ROA, earnings loss, high financial risk, or political distress such as SEC regulation violation. It implies that the politically-connected executive may be considered helpful by the government in response to firm distress. Further, it is found that the political top executives improve firm performance following their appointments and reduce the frequency of executives’ illegal actions, by initiating modification of internal governance structures and mitigating manager’s discretion. And those firms do not have preferential access to resources or government assistances such as fiscal subsidies, tax benefits, or the credit market. All these findings support that political executives could serve as a disciplinary or monitoring mechanism in a political economy lack of external market for corporate control and legal protection for investors, instead of being only a form of bail-out. Their efficacy is based on their administrative power, regulatory expertise and accountability to the government interests. These results provide better understanding of government interests and their impact on corporate governance.

This paper explores the empirical results of the implementation of an independent director system in China, and identifies the advisory role of the board. The results show that firms implement board independence by adding extra members, instead of removing inside directors, except in the case where the board size (before the recruitment of independent directors) has already been too large. It has been found that complex (large and diversified) firms prefer a large board with more independent directors on the board. However, the largest shareholders have a strong incentive to organise a small and insider-controlled board. Although there is a negative relationship between board size, board independence and firm performance, Tobin’s Q increases in relation to board size and board independence for complex firms.

This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a "political-pecking order" in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints faced by private Chinese firms. Thirdly, geographical and sectoral presence of state firms aggravates financial constraints for private Chinese firms (“crowding out”). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firms.