This study explores the relationship between board chairs' early-life experience in the Great Chinese Famine and the debt maturity choices made by Chinese listed firms between 2000 and 2017. Our findings indicate that board chairs with famine experience exhibit a propensity towards long-term debt usage. We argue that this finding can be attributed to a risk-averse rather than altruistic orientation among board chairs who have experienced famine. Our results are particularly salient for firms with lower asset redeployability, higher distress risk, no political affiliations, and those that are not stateowned enterprises. Furthermore, this study provides three analyses to support the risk aversion traits: (1) board chairs with disaster experience underestimate their company's profit potential, (2) board chairs located in areas with higher mortality rates exhibit more obvious risk aversion behavior, and (3) extending the debt maturity date, board chairs can effectively increase company investment and mitigate the underinvestment problem.

This study empirically investigates the impact of dialect diversity on corporate investment efficiency under different levels of economic policy uncertainty. Our findings reveal that local dialect diversity enhances investment efficiency during stable periods, but this advantage significantly diminishes under high economic policy uncertainty. This reduction primarily arises from underinvestment and overly cautious decision-making by fragmented management during periods of turmoil. Further analysis reveals that this reduction is exacerbated by stronger internal governance, which emphasizes checks and balances, and mitigated by stronger external governance, which focuses on supervisory power. Our results remain robust when using alternative measures of main variables and employing topography as an instrumental variable.

This paper investigates the varying impact of government subsidies on corporate investment efficiency using micro-level data from Chinese listed firms. Through meticulous compilation of information on government subsidies revealed in financial statements, and the implementation of an innovative categorization methodology based on the nature and timing of funds (ex-ante versus ex-post), we shed light on the divergent effects of these subsidies. Our findings are as follows: (1) Government subsidies enhance corporate investment efficiency, yet their effects exhibit asymmetry by alleviating underinvestment while exacerbating overinvestment. (2) Functional subsidies exert a stronger influence on investment efficiency compared to selective subsidies. Specifically, functional subsidies prove more effective in addressing underinvestment, but also possess a higher likelihood of exacerbating overinvestment. (3) State ownership, firm size and dividend payments lead to heterogeneity in the effects of subsidies. (4) Corporate financial constraints serve as one of the mechanisms through which subsidies affect investment efficiency. This suggests that firms with easier access to financing may not effectively utilize subsidies, while those facing severe financial constraints are less prone to misusing them.

This study examines the impact of Shenzhen Stock Exchange’s (SZSE) information disclosure ratings on investment efficiency in China. Based on a sample of Chinese A-share listed companies on the SZSE from 2001 to 2018, we discover that superior information disclosure ratings improve investment efficiency after controlling for various firm- and industry-level variables. Our findings remain valid after various robustness tests and using instrumental variables to address the endogeneity problem. Specifically, we find that improving information disclosure ratings help firms attract more investor attention, which leads to higher investment efficiency. In addition, this information disclosure effect is more pronounced for underinvestment firms and firms on the main board than for smaller firms on SEM (small- and medium-sized enterprise) and GEM (growth enterprise market) boards. Our evidence supports the idea that regulatory activities for information disclosure ratings of companies listed on China’s stock exchanges improve investment efficiency.

In geographically segmented credit markets, local real estate booms can divert capital away from manufacturing firms, create capital scarcity, increase local real interest rates, lower real wages, and cause underinvestment and relative decline in the industrial sector. Using exogenous variation in the administrative land supply across 172 Chinese cities, we show that the predicted variation in real estate prices does indeed cause substantially higher capital costs for manufacturing firms, reduce their bank lending, lower their capital intensity and labor productivity, weaken firms' financial performance, and reduce their TFP growth by economically significant magnitudes. This evidence highlights macroeconomic stability concerns associated with real estate booms.

We develop a model of a financial institution to study how shareholder—debt holder conflicts interact with prudential capital regulation and accounting measurement rules. Our analysis highlights the result that, for highly leveraged financial institutions—when prudential regulation play an important role—debt overhang and asset substitution inefficiencies work in opposing directions. We demonstrate that, relative to the “historical cost” regime in which assets and liabilities on an institution’s balance sheet are measured at their origination values, fair value could alleviate the inefficiencies arising from asset substitution, but exacerbate those arising from underinvestment due to debt overhang. The optimal choices of accounting regime and prudential solvency constraint balance the conflicts between shareholders and debt holders. Under fair value accounting, the optimal solvency constraint declines with the institution’s marginal cost of investment in project quality and the excess cost of equity capital relative to debt capital. Fair value accounting dominates historical cost accounting provided the solvency constraints in the respective regimes take their optimal values. If the solvency constraints are sub-optimally chosen, however, historical cost accounting could dominate fair value accounting.

Using a sample of Chinese family firms from 2000 to 2007, we investigate whether the political connection of the family firms will help them to reduce the frictions they face in external financing in a relationship-based economy. We find that political connectedness of family firms could reduce their investment-cash flow sensitivity. More interestingly, this political connectedness effect exists only in financially constrained family firms. However, from governance dimension, we cannot find any significant variation of the political connection effect on the sensitivity of investment to cash flow. We argue that these evidences are consistent with the firm’s underinvestment arising from the asymmetric information problems, and are inconsistent with the firm’s overinvestment arising from the free-cash-flow problems.

Using a sample of Chinese family firms from 2000 to 2007, we investigate whether the political connection of the family firms will help them to reduce the frictions they face in external financing in a relationship-based economy. We find that political connectedness of family firms could reduce their investment-cash flow sensitivity. More interestingly, this political connectedness effect exists only in financially constrained family firms. However, from governance dimension, we cannot find any significant variation of the political connection effect on the sensitivity of investment to cash flow. We argue that these evidences are consistent with the firm’s underinvestment arising from the asymmetric information problems, and are inconsistent with the firm’s overinvestment arising from the free-cash-flow problems.

This paper generalizes the Myers and Majluf (1984) model by introducing an agency cost structure based on private benefits of control. This new model predicts that many corporate finance variables each have opposing effects on under- and overinvestment. Private benefits exacerbate overinvestment but, interestingly, a small amount of private benefits can enhance firm value by alleviating underinvestment. Likewise, an increase in insider ownership alleviates overinvestment but aggravates underinvestment. When private benefits are small, the adverse effect of insider ownership on underinvestment tends to dominate. When there are considerable private benefits, the incentive-alignment effect of insider ownership is pronounced. Additionally, this model reconciles existing equity financing theories on announcement effects. It helps resolve the puzzle that small-growth firms do not seem to have an asymmetric information disadvantage when they issue new equity.

How corporate growth affects the choice between relationship-based debt and public debt remains an unsettled issue in the literature. For high-growth firms, the banking relationship mitigates asset-substitution and underinvestment problems due to debt financing. Close relationships, however, work against funding competition and facilitate holdup behavior by banks. This paper suggests an effective mechanism for high-growth firms, namely competition from equity, to curb banks’ rent extraction when public debt becomes more costly. According to the generalized Myers-Majluf view in the recent literature, new equity issues by high-growth firms actually reduce or even reverse the adverse-selection discount because asymmetric information about these firms’ valuations arise largely from growth rather than from assets-in-place. Our evidence from Japanese data for 1983 to 1997 shows that the relation between loan-to-debt ratio and growth, initially significantly negative, is indeed reversed toward the high end of growth spectrum and turns significantly positive. Consistent with our explanation, fast-growing high-flyers raise more new equity than do other firms. These results not only confirm the existence of both costs and benefits of monitored debt, but also explain why high-growth firms enjoy the benefits without fearing holdup behavior by banks.