We document a striking anomaly in international capital flows that we term "sanction arbitrage": U.S. investors exploited the 2014 sanctions on Russia by significantly increasing holdings in Russian equities while Rest-of-World (ROW) investors fled. We rationalize this behavior through a simple game-theoretic model where the sanctioning government faces a trade-off between geopolitical objectives and domestic welfare, effectively creating a protective shield for domestic investors and driving out ROW investors. Empirically, we confirm that pre-sanction U.S flows negatively predicted subsequent sanction designations. Consequently, U.S. investors internalized this protection to act as opportunistic buyers, absorbing fire-sale assets from exiting foreign investors and capturing significant excess returns from Russian stock holdings. These findings reveal that "smart" sanctions designed to preserve market access can inadvertently generate wealth transfers from foreign to domestic agents.

China's SMIC and Taiwan's TSMC are caught on opposite sides of the "Global Chip War." TSMC, despite having extensive commercial ties and fabs in the Mainland, is a beneficiary of U.S. efforts to stifle competition from Mainland competitors like SMIC. Geopolitical considerations, therefore, are increasingly influencing TSMC’s business decisions, as shown by TSMC’s construction of fabs in Japan and the United States despite founder Morris Chang’s longstanding opposition to overseas fabs due to their high costs. SMIC, meanwhile, is the Mainland’s best hope for creating a “red chip supply chain” and achieving 70% semiconductor self-sufficiency via domestic suppliers, which has taken on even more importance due to U.S. sanctions on advanced chips for AI model development. This article analyzes SMIC founder Richard Chang’s dream of building a red chip giant on the Mainland that can rival or even replace TSMC, which will directly conflict with Chang's former co-worker and fellow Taiwanese Morris Chang’s dream of solidifying TSMC and Taiwan’s position as the irreplaceable center of the semiconductor industry well into the 21st century.

Direct experience of a peer’s punishment might have a sobering effect above and beyond deterrence (information about punishments). We test this mechanism in China studying the reactions to listed state-owned enterprises’ (SOEs) punishments for fraudulent loan guarantees by firms in the same location or industry (peers) and non-peer firms, across SOEs and non-SOEs. After experiencing SOEs’ punishments, peer SOEs cut their loan guarantees by more than non-peer SOEs and peer non-SOEs, even if information is common to all firms. The reaction is stronger for peer SOEs whose CEOs have higher career concerns or face lower costs of cutting guarantees.

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.

This paper documents different timeliness in disseminating sanction and enforcement information (SEI) by two types of regulatory agencies in China and the different consequences that flow from them. The China Securities Regulatory Commission (CSRC) does not make timely public disclosures of SEI and, instead, leave it up to the firms to make a public announcement under their general obligation to disclose price-sensitive information. The firms therefore have considerable discretion in deciding whether and when to disclose SEI. In contrast, the stock exchanges in Shenzhen and Shanghai make SEI public promptly through the media and the exchanges’ official websites. Using Chinese SEI data during the period 1999 to 2005, we find that the CSRC approach is associated with significantly lagged corporate disclosure (compared with the timely stock exchange approach) and a significantly negative (but delayed) stock price reaction. We also show that the sanctioned firm may take advantage of the less timely CSRC approach to delay its disclosure of SEI for opportunistic reasons such as completing material transactions. We conclude that the CSRC should make immediate public announcements of SEI as these contain price-sensitive information. Furthermore, the immediate dissemination of SEI will bring the CSRC into line with the disclosure practices of China’s stock exchanges and international market regulators.