We study the relationship between firm value and related party transactions (RPTs) in China. We find that firm value (as measured by Tobin’s Q) is negatively related to RPTs but the relation becomes insignificant after controlling for corporate governance characteristics. Following Cheung, Rau and Stouraitis (2006), we use abnormal returns in response to announcements of RPTs as a direct measure of the impact of RPTs on firm value. We observe significantly negative abnormal returns before the Share Structure Reform. After the reform, the abnormal returns become insignificant. The evidence suggests that RPTs are not as detrimental to firm value after the reform as they were before the reform. This is consistent with our hypothesis that the reform increases the takeover pressure from external market and thus moderates controlling shareholders’ propensity to tunnel wealth via RPTs.

We examine the diversification patterns of almost all publicly listed non-financial companies in China during the 2001 to 2005 period. More than 70 percent of the firms in our sample are diversified. We document that patterns of diversification strongly depend on firms’ political connections. Former local bureaucrats are more likely than other CEOs to enter multiple industries. This effect is particularly pronounced in state-owned enterprises (SOEs) that operate in weak institutional environments. These companies are particularly prone to entering low-growth, low-profitability, and unrelated industries. Consequently, the performance effects of diversification differ sharply across SOEs and private firms. While the latter earn a premium from diversifying their operations, SOEs do not. Our results are consistent with the view that provincial and local governments push Chinese SOEs into unattractive sectors of the economy and that politically connected CEOs use their relationships to build corporate empires.

The 2005 policy decision to change the status of non-tradable state and non-state shares into tradable A shares ushers in a new era in the stock markets of China. Over time all of these shares will be tradable and potentially transferred to foreign and domestic private sector investors. These changes have the potential to significantly alter the monitoring and control of the majority of listed firms that until now have been controlled by tightly held blockholders of non-tradable shares. It is therefore timely to reassess the corporate governance of Chinese listed firms. This paper reviews the theoretical and empirical corporate governance literature in China.

The trade size Omega has direct impact on the price formation of the stock traded. Econophysical analyses of transaction data for the US and Australian stock markets have uncovered market-specific scaling laws, where a master curve of price impact can be obtained in each market when stock capitalization C is included as an argument in the scaling relation. However, the rationale of introducing stock capitalization in the scaling is unclear and the anomalous negative correlation between price change r and trade size Omega for small trades is unexplained. Here we show that these issues can be addressed by taking into account the aggressiveness of orders that result in trades together with a proper normalization technique. Using order book data from the Chinese market, we show that trades from filled and partially filled limit orders have very different price impact. The price impact of trades from partially filled orders is constant when the volume is not too large, while that of filled orders shows power-law behavior r-omega^alpha with alpha=2/3. When returns and volumes are normalized by stock-dependent averages, capitalization-independent scaling laws emerge for both types of trades. However, no scaling relation in terms of stock capitalization can be constructed. In addition, the relation alpha=alpha_omega/alpha_r is verified, where alpha_omega and alpha_r are the tail exponents of trade sizes and returns. These observations also enable us to explain the anomalous negative correlation between r and Omega for small-size trades. We anticipate that these regularities may hold in other order-driven markets.

In this paper, real and financial linkage is to be investigated. We focus on six typical stock markets after time zone effect taken into consideration. We select monthly annual CPI rate as transition variable in Smooth Transition Conditional Correlation CARR (named STCC-CARR for short) model to scrutinize interdependence among international stock markets. As it is testified, correlations among them are fluctuant with different inflation cycles and could not be ignored arbitrarily. The highest correlations come out between countries when both are in contractionary phase, while the lowest correlations do when both are in expansionary phase.

We examine the effect of illiquidity discount on stock prices on the warrants prices in China. We construct measures of liquidity based on market microstructure models, and find that they explain a significant portion of the cross-section variation in the warrants pricing biases and implied stock discounts in the market. We conclude that, due to the T+1 rule in Chinese stock market, equity market is illiquid relative to the warrants market that doesn’t bear the T+1 rule. This imposed illiquidity cause the discount on the stock price, which is not reflected in the warrants market. Thus the illiquidity in stock market contributes to the pricing bias in warrants market.

This paper investigates the impact of macro variables on the volatility of bond returns. Using the principal components analysis, we extract the “real” and “money” factors from the real activities and monetary variables, respectively. Following Campbell, Lettau, Malkiel, and Xu (2001), we decompose the bond volatility into market-level volatility and maturity volatility. Using the daily returns on the 1-, 5-, 10- and 30-year US treasury bonds, we find that the macro factors significantly affect the bond volatility. In particular, the “real” factor affects the bond volatility of all maturities while the monetary variables are significantly related to the volatility of short-term bonds and weakly related to the volatility of medium-term bonds.

We examine the independent and dominating effects of the liquidity level, the information asymmetry and the divergence of opinion on asset returns in an important emerging market, Chinese stock market. We use the variable ILLIQ from Amihud (2002) to proxy for the liquidity level, the variable PIN from Easley, Hvidkjaer, and O'Hara (2002) to proxy for the information asymmetry and the variable OBS based on Nas and Skjeltorp (2006) to proxy for the divergence of opinion. We find striking evidence that stocks with a higher liquidity level, or a lower information asymmetry, or a higher divergence of opinion, experience significantly lower excess returns. More importantly, the explanatory power of the liquidity level on asset returns may only reflect those from the information asymmetry and the divergence of opinion. Moreover, we find no evidence on the dominating effect between the information asymmetry and the divergence of opinion when examining their impact on asset returns.

When the government is simultaneously the owner and regulator of the securities market, the evolution of securities market regulation follows a path of compulsory institutional change. China’s government authorities have played a dual role in this process by acting both as the securities market regulator and the controlling owner of the stock exchanges. This paper uses the evolution of China’s securities market regulation from 1980 to 2007 to illustrate this theoretical framework. It provides unique evidence of how securities regulation evolves in response to government direction and supervision if the government is both the owner and the regulator of the securities market.

Using a sample of China’s partially privatized state-owned enterprises (SOEs) that have emerged in the global equity markets, this paper examines the decision to list overseas and its consequences. We find that overseas listing of Chinese SOEs is primarily determined by political needs, not by firms’ desire to fund growth and expand foreign sales. In addition, we find that overseas listed SOEs have more professional boards of directors, use greater accounting conservatism, exhibit higher investment efficiency, and have better one-year and two-year post-listing stock performance than their domestically listed counterparts. Additional analysis exploring the impact of political relations on overseas listing effects finds that strong political connections weaken the overseas listing effect on investment efficiency and post-listing stock performance, consistent with the positive overseas listing effect on investment efficiency being attenuated by government influence to satisfy state objectives such as excess employment. Taken together, our study suggests that overseas listing provides a mechanism for constraining politicians’ pursuit of private benefits and improving efficiency for partially privatized Chinese SOEs. However, the effectiveness of this mechanism is limited for SOEs with strong ties to the government.