This study investigates the pricing of convertible bonds by focusing on the underlying stock price limits, a market structural feature overlooked in conventional models, and provides a comprehensive framework integrating price limits with embedded options (including conversion, call, put and reset clauses) based on Monte Carlo simulation. Numerical analysis reveals that convertible bond prices across varying moneyness states are insensitive to price limits at low underlying stock volatility, while higher volatility amplifies the pronounced impact of price limits on in-the-money bonds. Empirical tests based on data on the Chinese convertible bond market spanning the period from 2018 to 2024 indicate an average overvaluation in the market. The result identifies that there are negative pricing errors for deep-out-of-the-money bonds and positive errors for in-the-money bonds. A trading strategy based on pricing errors yields positive returns, demonstrating the model's practical applicability.

Salience theory posits that investors’ attention is disproportionately drawn to returns that stand out relative to a reference point. Building on this insight, we empirically examine how a stock’s salience theory value (ST) affects its future price crash risk. Using a comprehensive sample of Chinese A-share listed firms from 2005 to 2024, we find that stocks with higher ST are significantly more prone to subsequent price crashes. Mechanism analysis suggests that this relation operates through transient retail speculation and impaired pricing efficiency. High-ST stocks attract retail speculative demand and experience temporary overvaluation, which delays the incorporation of negative information into prices and amplifies the likelihood of abrupt price corrections. We further show that the effect is more pronounced during high-sentiment market conditions and is largely driven by stocks exhibiting salient upside return realizations. Overall, our findings highlight stock salience as a novel behavioral driver of crash risk and offer cautionary insights for investors and regulators.

We study the role of Chinese government guidance funds (GGFs) in value creation for investee firms. Using a sample of 2,855 firms that went public during the period of 2010-2021, we show that GGF-backed IPO firms had higher initial returns than non-VC-backed IPO firms and nonGGF VC-backed IPO firms. After decomposing the initial return into IPO underpricing and market overvaluation, we find that GGF-backed firms enjoyed higher overvaluation and lower underpricing than other firms. Consistent with investor sentiment and information asymmetry hypothesis, our results indicate that public investors value the benefits of political resources more than the costs of government interference associated with GGF sponsoring. However, GGF-backed firms did not outperform other-VC-backed firms when post-IPO long-term stock, operating and innovation performance is assessed. The divergence in the effects of GGFs observed in the financial and product markets reveals the complexity in evaluating the role of GGFs in value creation.

Prior studies have demonstrated that market timing is an important factor in determining firm investments and financing policies. We provide empirical evidence on the effects of market timing on equity-based compensation and stock dividend decisions. To avoid endogeneity, we exploit the setting of overvaluation resulting from the 2015 Chinese government’s open-market purchases of common stocks of public firms. We test whether the over-valued firms cater to managers’ and investors’ preferences of not receiving over-valued shares. Consistent with this catering hypotheses, we find that firms purchased by the government are less likely to issue equity-based compensation and stock dividends after government’s stock market intervention relative to other firms whose shares were not purchased by the government. These results are more pronounced when the over-valuation is likely driven by retail investors.

China?s recent removal of short selling and margin trading bans on selected stocks enables testing of the relative effect of margin trading and short selling. We find the prices of the shortable stocks decrease, on average, relative to peer A-shares and cross-listed H-shares, suggesting that short selling dominates margin trading effects. However, there is negligible short sales activity and contrary to the regulators? intention, and recent empirical evidence, liquidity declines and bid-ask spreads increase in these shortable stocks. Consistent with Ausubel (1990), together these results imply uninformed-investors avoid these stocks to reduce the risk of trading with informed-investors.

China began allowing short selling and margin trading in 90 stocks in March 2010. This event provides an opportunity to test the relative effect of margin trading and short selling. We find the prices of these 90 stocks decrease, on average, relative to peer stocks in China and cross-listed H-shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators? intention, and recent empirical evidence, liquidity declines in the shortable stocks. This may imply avoidance of these stocks by uninformed investors. There is also evidence of higher bid-ask spreads following the regulation change.

Is the demand curve for stocks downward-sloping? The index-inclusion literature tries to answer this question by looking at price reactions to stocks added or deleted from major stock indices. We look for new evidence using another well-established event: the negative price reaction to the seasoned equity offerings. While this can be caused by asymmetric information, another plausible explanation might be a downward-sloping demand curve for stocks. We argue that we can disentangle the two factors using a natural experiment in China's stock market, where companies' equity offering plans need to be approved by the regulator. We find strong negative price reactions to the announcement of such approval. Since all information on the overvaluation of the firm is released when the firm announces its equity offering plan, the negative reaction to the approval of the plan cannot be explained by changes in the valuation of the firm. Furthermore, we find different price reactions in China's segmented stock market when the firm only issues new shares in one of the two domestic markets (A- and B-share markets). The evidence suggests that a significant part of the negative price reaction of equity offerings is related to a supply shock to a downward sloping demand curve.