We examine empirically whether internal corporate governance mechanisms play a role in reducing the probability of being sued by lending banks due to bank loan default and the market reaction to the announcement of bank loan litigation. Using bank loan litigation events in Chinese financial markets, our results show that companies with better internal corporate governance mechanisms are associated with a lower probability of being sued. We also find a significant negative market reaction to the announcement of a bank loan filing while insignificant market reaction to the announcement of bank loan litigation verdict. Moreover, we test whether internal corporate governance mechanisms can play a role in mitigating the effect of market reactions. Our findings indicate that there is no evidence of internal corporate governance in mitigating this effect. Our paper suggests that internal corporate governance mechanisms are important in preventing the trigger of external governance mechanisms (litigation) but do not play any role once external governance (litigation) takes over.

According to the standard neoclassical model of trade theory, technology and factor endowments are both important determinants of specialization. This paper attempts to investigate the industrial specialization in China determined by both of the sources of comparative advantage. Using a 30 provinces, 9 years panel of China’s manufacturing industrial data and seemingly unrelated regression (SUR) technique, we find that the effect of relative technology differences is quite large and significant during the recent years. Factor endowments differences also have effects on the output share, but the results are inexplicit and elusive in some industries.

A political-macroeconomic model is developed to explain why small differences in fiscal decentralization may ultimately lead to dramatically di¤erent economic policies toward FDI hence starkly different amount of FDI flows into two otherwise identical developing countries. Too much fiscal decentralization hurts incentives of the central government while too little fiscal decentralization renders the local governments captured by the protectionist special interest group. Moreover, the local government's preference for FDI can be endogenously polarized and sensitive to fiscal decentralization. Calibration and counterfactual experiments results support fiscal decentralization as the major reason for China and India's nine-fold difference in FDI per capita.

In this paper, we study the pricing and hedging of catastrophe European option when catastrophe loss is described by a regime-switching jump di?usion process. We derive the close-form pricing formula of catastrophe European options and brie°y discuss the pricing issue of catastrophe bonds. We extend the formulas of static hedging strategies to the regime-switching setting and provide some discussions on the static hedging of catastrophe options. Numerical examples show that static hedging strategy of catastrophe options is effective.

This paper empirically investigates the determinants of financing decisions in Chinese listed firms, using 3,196 firm-year observations from the Shanghai Stock Exchange during the period 2001–2005. Thereby, we investigate the effects of differences in institutions across Chinese provinces and municipalities, and compare the financing choices of state-controlled and private-controlled enterprises. We find that a better legal environment negatively affects the debt ratio and the proportion of debt that consists of bank loans in SOEs as well as private enterprises. Conversely, regional banking development positively influences these two variables. If anything, these effects of the rule of law and regional banking development on leverage are stronger for private-controlled firms. SOEs have lower debt ratios in regions with better stock market access, while private firms rely less on bank loans in regions with more government intervention in business. Finally, we document that SOE bank loans have a longer maturity, while their overall debt ratio and debt mix are comparable to those of private firms.

We investigate the endogenous choice problem of Chinese state-owned enterprises in their decision on whether to corporatize or privatize. Corporatization differs from privatization in the Chinese context, as in the former case, the state remains as a large shareholder, and in the latter case, the state has little or no ownership. Using a panel of provincial statistics, we show that the larger the local employment pressure, the less likely we see privatization; the smaller the local fiscal pressure, the less likely we see privatization; the more corrupted the local business environment, the less likely we see privatization. Privatization is found to yield consistent efficiency gains over corporatization measured in terms of both employment and firm profitability. Our evidences are supportive of the theoretical framework of Boycko and Shleifer and Vishny (1996) where they model privatization as politicians’ endogenous decision trading off employment pressure against public fiscal interest.

Dynamic allocation of control rights between managers and investors affects policy of the dividend and value of enterprise. The paper studied the relevant factors that affect optimal debt ratio and allocation of control right. We suggest that the enterprise decrease the debt ratio with the increase of moral hazard, liquidity risk and investors’ absolute risk aversion. With the increase of shareholder’s control right, the relationship between shareholder’s control right and managers’ moral hazard is reversed from positive to negative. The implication of the paper is moderate debt ratio may achieve the tough constraint on the managers’ decision.

An asset manager trades o? the bene?ts of higher leverage against the costs of adjusting leverage in order to mitigate expected insolvency losses. We explicitly calculate optimal dynamic incentive-compatible leverage policies in simple versions of this problem.

This article provides a survey on term structure models designed for pricing fixed income securities and their derivatives

Using the daily data of Chinese 7-day repo rates from January 1, 1997 to December 31, 2008, this paper tests a variety of popular spot rate models, including single-factor diffusion, GARCH, Markov regime-switching and jump-diffusion models. We document that Chinese spot rates are subject to both market forces and administrative forces. GARCH, regime-switching and jump-diffusion models capture some important features of the dynamics of Chinese spot rates, but all models under study are overwhelmingly rejected. We further explore possible sources of model misspecification using diagnostic tests.