Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the politi- cal contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and envi- ronmental protection. However, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon lit- igation filing, both types of firms experience similar announcement reaction, which suggests that the observed relationship between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.

With China being a large developing economy, the trading in China’s stock market is dominated by retail investors, and its government actively participates in this market. These features are quite different from those of typical developed markets, and This review focuses on two important questions: how do retail and institutional investors trade in China and why? We have three main findings after reviewing 100+ previous studies. First, small retail investors have low financial literacy, exhibit behavioral biases, and not surprisingly, negatively predict future returns; whereas large retail investors and institutions are capable of process information, and they positively predict future returns. Second, the macro- and firm-level information environment in China is slowly but gradually improving. Finally, the Chinese government actively adjusts their regulations of the stock market to serve the dual goals of growth and stability, with many of them being effective, while some may not generate intended consequences.

How does labor risk affect corporate’s bond financing? Using the unique institutional feature of government regulations in China, we provide robust evidence that firms with a larger employment size have significantly better access to bond credit. This effect is more pronounced in times of local labor market deterioration or economic slowdown, for low-skill intensive industries, or in places with career-driven government officials. Our results are not driven by differential financial constraints or information frictions. We further show that the employment bias allocates bond credit towards under-performing large employers and the performance-enhancing benefits from bond issuance diminishes with employment size.

Comprehensive data on corporate announcements of Chinese firms allows us to examine the preference for, and determinants of, cash and stock dividends. The results indicate that Chinese public investors prefer stock dividends over cash dividends, which are preferred by large state and legal person shareholders generally. Stock dividends, which do not require an explicit cash outflow from a firm, are found to be positively related to higher earnings, supporting the signalling hypothesis of dividend policy. In an imperfect market, these results have some implications for government regulation of financial markets.

The Chinese stock market has grown very rapidly, but is often distorted by government regulation, and this is especially true for the initial public offering market. The average underpricing of Chinese IPOs is 247 percent, the highest of any major world market. We model this extreme underpricing with a demand-supply analytical framework that captures critical institutional features of China’s primary market, and then empirically test this model using a sample of 1,397 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1991 and 2004. The pricing of IPO shares is subject to a cap set by the government, and the supply of IPO shares allowed on the market is also set by the government through the Chinese quota system. The government regulator even controls the timing of flotation of shares onto the stock exchange--after the initial public offering is executed--and there is usually a long time lag between the IPO and the actual listing of shares for trading. A special feature of the Chinese IPO market is that the government is by far the largest issuer. In our sample, 66 percent of the IPOs in our sample are pure share issue privatizations (SIPs), in which the government sells part of its ownership in state-owned enterprises (SOEs) to the public; fully 88 percent would be considered privatizations under a more expansive definition that included state-connected owners. Insider theft of corporate assets is also a big concern of IPO subscribers in China, and IPO shares must also be discounted for significant tunneling risks. We find that insider shareholdings are a negative determinant of initial returns. We suggest that investment risks in China's primary markets are greater than in other new issues markets, and these risks partly explains the extreme levels of Chinese IPO underpricing. However, the principal cause of the this underpricing is government regulation. The supply restricting measures traditionally adopted by the Chinese regulatory authorities turn IPO shares into hot commodities, which are fiercely bid for, and this leads to corruption and a reallocation of wealth from firms and investors to politically connected individuals and groups.

We try to explain the severe under-pricing of 523 A-share IPOs in the Chinese markets from 1997 to 2001 using institutional characteristics, absolute value, and relative value of IPO. We find that relative values of IPO are critical determinants of the severe under-pricing of A-share IPOs in China. We also find that relaxing government regulation of offering price increases under-pricing, and thus conclude that the severe under-pricing of A-share IPOs in China is not caused by the government regulation of offering price. We propose a relative value theory to explain why relaxing government regulation of offering price results in higher under-pricing and find some support for the theory.

We try to explain the severe under-pricing of 523 A-share IPOs in the Chinese markets from 1997 to 2001 using institutional characteristics, absolute value, and relative value of IPO. We find that relative values of IPO are critical determinants of the severe under-pricing of A-share IPOs in China. We also find that relaxing government regulation of offering price increases under-pricing, and thus conclude that the severe under-pricing of A-share IPOs in China is not caused by the government regulation of offering price. We propose a relative value theory to explain why relaxing government regulation of offering price results in higher under-pricing and find some support for the theory.

This paper examines both the time series and cross-country patterns in the development of stock markets around the world. It adopts a flexible modeling framework that allows for the breakdown of changes in equity market capitalization into changes in macroeconomic and financial fundamentals, shifts in valuation technology and market sentiment, and improvement in valuation efficiency. Using panel data on 32 countries, I show that for developed countries, the size of their equity markets is positively related to the correlation of these markets with the global portfolio, and is negatively related to government consumption. For developing countries, the level of financial intermediary development and openness to trade are found to be conducive to the development of local equity markets. For given levels of market fundamentals, developed countries with greater economic freedom and stronger shareholder protections are associated with more highly valued equity markets, while the French or German civil law countries and countries with insider trading legislation tend to have relatively poorly valued equity markets. For developing countries, ceteris paribus, high quality of accounting standards is found to be associated with higher valuation of their equity markets. I find that only equities in emerging markets become more highly valued, indicating an improvement in valuation efficiency over time. Australia, Canada, the United States, Hong Kong, and Singapore have the most highly valued equity markets in the developed world, while Malaysia has the mostly highly valued equity market in the developing world. It appears that favorable shifts in valuation technology and market sentiment contribute the lion’s share of the growth of global equity markets.