We provide a novel explanation for the geographic dispersion of borrower-lender relationships based on information frictions rather than competition. Firms may strategically select distant banks to increase lenders’ information production costs, securing larger loans under information-insensitive contracts. Our model predicts that higher-quality firms prefer distant lenders for information-insensitive contracts, while lower-quality firms use local lenders with information-sensitive terms. Using transaction-level data from a major Chinese bank, we find strong empirical support: higher-rated firms exhibit greater propensity for distant borrowing; local loans show stronger negative correlation between amounts and interest rates; and distant loan pricing demonstrates weaker sensitivity to defaults.

Behavioral theories predict that firm valuation dispersion in the cross-section (‘‘dispersion’’) measures aggregate overpricing caused by investor overconfidence and should be negatively related to expected aggregate returns. This paper develops and tests these hypotheses. Consistent with the model predic- tions, I find that measures of dispersion are positively related to aggregate valuations, trading volume, idiosyncratic volatility, past market returns, and current and future investor sentiment indexes. Disper- sion is a strong negative predictor of subsequent short- and long-term market excess returns. Market beta is positively related to stock returns when the beginning-of-period dispersion is low and this rela- tionship reverses when initial dispersion is high. A simple forecast model based on dispersion signifi- cantly outperforms a naive model based on historical equity premium in out-of-sample tests and the predictability is stronger in economic downturns.

This study examines the effects of the robotic subsidy policy in China’s manufacturing sector. The demand-side subsidy policy aims at encouraging manufacturing firms to invest in robotics by lowering the cost of purchase. Our difference-in-difference analysis reveals distributional impacts of municipality-level robot subsidies on manufacturing firms of different scales. Although the subsidy brings a 14.2% increase in the application of robot patents, the facilitated access to robotics has not transformed into new firm entries. Strikingly, new firm entry decreases by 23.5% after the policy implementation. On the other hand, robot subsidies have increased the revenue, total asset, and employment of larger manufacturing firms by 9.8%, 6.9%, and 6.7%, respectively. To interpret the mechanism, we develop a simplified framework incorporating financial frictions into a task-based model. The model reveals that idiosyncratic borrowing costs lead to an inefficient equilibrium by generally depressing automation adoption and creating automation dispersion across firms. Such ex-ante distortion results in a uniform subsidy disproportionately benefiting firms with better capital access, thus creating a trade-off in terms of efficiency: while the subsidy can enhance overall automation, it simultaneously exacerbates automation dispersion. To quantify the efficiency implications, we embed this simplified model into a dynamic heterogeneous-agent framework, calibrated to the 2010 productivity distribution, financial frictions, and robot density in the industrial sector in China. Our dynamic model reveals that a 20% robot subsidy narrows the gap between mean and optimal automation level by 22% percentage points, while raises automation dispersion by 49%. This results in a 1.23% increase in aggregate output at the cost of a 2.40% decline in TFP. This dynamic model proposes a novel mechanism that automation exacerbates capital misallocation by enlarging asset accumulation dispersion between workers and entrepreneurs. Controlling for this dynamic feedback could enhance the subsidy-induced output gain by an additional 26%

This study explores how Chinese mutual fund managers’ degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel textbased measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss ffnancial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.

This paper investigates how domestic policy uncertainty stemming from discretionary fiscal policy disrupts the efficient capital allocation across firms. While fiscal policy represents the government’s reaction to economic conditions, its volatility presents firms with considerable uncertainty about conditions affecting their future profitability and consequently disrupts firms’ decisions on investment in the presence of capital adjustment costs. Using firm-level data from Chinese manufacturing industries spanning from 1998 to 2007, we find that reducing fiscal policy volatility leads to a decrease in the dispersion of marginal revenue product of capital, accounting for 8.9 percent of the observed improvement in capital allocation during the sample period. In addition to various fiscal reforms to curb fiscal policy volatility directly, policies contributing to lower capital adjustment costs and lower reliance of firms on government expenditure can alleviate the adverse effects caused by fiscal policy volatility.

As many ESG rating agencies have flourished to meet rising interests in ESG investing, we examine the information provider role of these rating agencies. We hypothesize that new ratings can add information useful to investors about rated firms besides any changes to the average level and dispersion in ratings. We exploited the empirical setting where the introduction of various ESG ratings in China is staggered over time and across firms. We show that an increase in the number of ratings by different agencies for a given firm will induce more mutual funds’ investments towards that firm. This is unexplained by rating inflation or rating shopping channels. We further show that such effect is more pronounced when incumbent and entrant agents provide complementary information. For different types of funds, we find different sensitivities to the arrival of new agents in accordance with their explicit requirements for ESG mandate. And interestingly ESG funds that track ESG indices are not responsive to new ratings as ESG indices are sticky in choosing the reference rating. We also provide evidence that the documented effects are not due to endogenous actions taken by incumbent agencies or the firms. Our paper provides interesting and causal evidence of the incremental information from additional ESG ratings which have important implications for the market competition and regulations of ESG rating agencies.

This study examines the relationship between analyst forecast dispersion or accuracy and supplier concentration of listed firms in China from 2008 to 2019. Our findings suggest that higher supplier concentration is associated with lower analyst forecast dispersion, which can be attributed to the increased attention it receives from analysts. Moreover, this effect is more pronounced when firms have less bargaining power and higher institutional ownership, indicating a greater reliance on the supply chain. Our study highlights the importance of disclosing supply chain information, which provides insight beyond traditional financial information.

This paper provides a first systematic analysis of urban vibrancy in human capital supply in explaining persistent geographic firm valuation dispersion in China. We find persistent, significant city-to-city differences in Tobin’s q, especially among large, mature, or high labor-intensive firms. To explain such geographic differences in firm valuations, we identify several factors of the endowed city competitive advantages in creating human capital that play important roles in explaining the persistent geographic firm valuation premia. Our evidence suggests that city geographic location and initial cumulated human capital supply have created long-lasting, and growing, shareholder wealth by attracting and retaining talents and human resources in local firms.

Fluctuations in investor demand dramatically affect firms' valuation and access to capital. To quantify its real impact, we develop a dynamic investment model that endogenizes both the demand- and supply-side of capital. Strong investor demand elevates equity prices and dampens price impacts of issuance, facilitating investment and financing, while weak investor demand instead incentivizes firms to optimally repurchase shares at favorable prices, which can crowd out investment, especially among firms with liquidity constraints. We estimate the model using indirect inference by matching the endogenous relationship between investors' portfolio holdings and firm characteristics. Our estimation suggests that investor demand substantially distorts firms' real investment decisions and impedes the efficient capital allocation across firms. Eliminating excess demand reduces dispersion in the marginal product of capital by 10.74% and TFP losses by 16.20%. Investor demand also influence firm size distributions and generates a heavy right tail---large excess demand provides firms with market power and opportunities to profit from their financial market activities, contributing to the emergence of superstar firms.

This paper investigates pay dispersion and its effects on firm performance in China’s listed firms. Due to weak investor protection and an inefficient legal system, China is expected to have a lower level of corporate governance. In this weak institutional environment, we argue that awarding sufficient power and high pay to CEOs is helpful to increase firm performance. Using data from 2002 to 2007, we find that pay dispersion is related to tournament incentives and agency factors. Importantly, we find evidence that pay dispersion is positively related to firm performance which is consistent with our primary hypothesis. In addition, the relation is more positive when the firm is controlled by the state. Our results are robust to corrections for endogeneity between pay dispersion and firm performance and to several alternative measures of pay dispersion and firm performance.