We show that government deleveraging causes corporate distress in a distorted financial market. Our difference-in-differences analysis exploits China’s top-down deleveraging policy in 2017, which reduces local governments’ borrowing capacity through shadow bank financing. Private firms with government procurement contracts experience larger accounts receivable increases, larger cash holdings reductions, and higher external financing costs. These firms also experienced greater likelihoods of ownership changes and deteriorated performance. Effects are muted for state-owned enterprises, which enjoy funding privileges in China’s financial system. Our paper thus reveals a novel channel of allocation inefficiencies where government deleveraging amplifies adverse impacts of financial distortions.

We examine an important yet understudied form of reputational sanction in China, namely public criticisms imposed on culpable firms by the Chinese stock exchanges from 2013 to 2018. We find significantly negative cumulative abnormal returns around the announcement date, and they were affected by several factors, including financing propensity, governance mechanism, and equity nature. However, the market reaction is significantly negative only for firms relying on external financing and non-state enterprises, and importantly, becomes insignificant in cases where the firm had self-exposed misconduct before the official announcement of public criticism. Further, we examine other effects of public criticism, finding that public criticism does not improve firms’ long-term values, nor produce strong deterrence to change their behaviour. Overall, the evidence of the effects of public criticism on culpable firms is mixed, suggesting that reputational sanction is a weak, if not ineffective, instrument of market regulation in China.

The conflict of interest between controlling and minority shareholders is an important issue in firms with concentrated ownership. We document that expropriation behavior by controlling shareholders through tunneling or self-dealing is far more severe in politically connected firms than in nonpolitically connected firms. This severity results more from the formers’ lower concern with capital market punishment than from the possibility that such firms tend to establish political connections for protection. Consistent with the view that a firm’s financing condition influences its corporate governance, we show that such severe expropriation occurs only in firms whose political connection helps them secure bank loan access.

The Chinese market is characterized by state-controlled and closely held firms as well as significant differences in economic development and legal structures at the provincial level and corporate regulations that require firms seeking external financing to show a history of dividend payment. Using a sample of listed Chinese firms, we investigate the firm’s choice of cash or stock dividends and market reactions to the announcement of these dividend choices. We find that profitable, low leverage, high cash holding, stronger shareholder protection firms, and those firms with state ownership prior to listing and undertaking subsequent equity offerings are more likely to pay dividends and cash dividends, in particular. In addition, we find that growing firms with high levels of retained earnings and investing more in fixed assets pay stock dividends. Firms appear to cater to investor demands in setting dividend policy; hence firms with a large proportion of non-tradable shares are more likely to pay cash dividends. Consistent with the use of stock dividends to attract the attention of analysts, we find that the announcement of a stock dividend initiation is associated with significant positive market reactions and increased analyst following.

This study examines the effect of transaction costs and information asymmetry on firms’ capital-structure decisions in 40 countries. The findings indicate that transaction costs affect both capital-market timing and capital-structure rebalancing. Past market-timing activity has a significantly negative impact on the current debt ratio, and this impact is stronger for firms facing lower transaction costs of external financing, as defined by legal origin, capital-market development, and securities rules in their home countries. Further analysis indicates that firms in countries with lower transaction costs also rebalance their capital structure more quickly after a deviation from the target, but the rebalancing does not eliminate the market timing effect on capital structure completely.

In this paper we show that the volatility of risk is an important factor in explaining capital structure choices of firms. This effect is over and above the traditional determinants of capital structure such as the current level of risk, size, market-to-book ratio, tangibility of assets and profitability. We show that both (1) the fraction of debt in total new external financing raised by the firm, and (2) the long term debt as a fraction of the assets of the firm, are decreasing in the volatility of risk of the firm. Moreover this negative relationship is significantly stronger for firms that do not have a credit rating. These results are consistent with the theoretical reasons that we provide to explain the negative relationship between leverage and volatility of risk.

Multiunit structure can internalize the managerial market to promote competition among subsidiary managers, and create an internal capital market within firms to alleviate external financing constrains, and it also may lead to diversification to lower the operation risk and regulation. While it brings in more agency problem created by subsidiary managers, causing the efficiency of internal capital market and diversification confusing. Using the data of listed firms in China, an emerging market, this paper examines the efficiency of multiunit structure within the firm, investigating the influence on capital allocation and firm performance. We find that multiunit structure is better in emerging market since it is efficient in capital allocation, reducing the inefficient investment by reducing the overinvestment and alleviating the underinvestment, and the bright side of multiunit structure dominates the agency problem associated, thus beneficial for firm performance, both short-term and long-term accounting returns. In less developed capital market under current situation, multiunit structure is better.

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.

The Chinese market is characterized by state-controlled and closely held firms as well as significant differences in economic development and legal structures at the provincial level and corporate regulations that require firms seeking external financing to show a history of dividend payment. Using a sample of listed Chinese firms, we investigate the likelihood of paying dividends, different forms of dividends and market reactions to various dividend announcements. We find that profitable, low leverage, high cash holding, stronger shareholder protection firms, and those firms with state ownership prior to listing and undertaking subsequent equity offerings are more likely to pay dividends and cash dividends, in particular. Firms appear to cater to investor demands in setting dividend policy; hence firms with a large proportion of non-tradable shares are more likely to pay cash dividends. Consistent with the use of stock dividends to attract the attention of analysts, we also find that growing firms with high levels of retained earnings and greater investment in fixed assets pay stock dividends and these firms’ dividend announcements are associated with significant positive market reactions and increased analyst following.

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.