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.

Using a difference-in-differences approach, we examine the effect of industry-specific knowledge transfer on audit performance after a merger of two Chinese audit firms with different levels of expertise in an industry. For clients in an industry audited by both merging audit firms, those audited by the audit firm less specialized in that industry belong to the treatment group, while all other clients belong to the control group. We find an economically-significant improvement in audit quality (as reflected in a reduction in financial misstatements) for the treatment group relative to the control group in the same merged audit firm. We show that the treatment effect is not driven by changes in auditor incentives or personnel movement and is more pronounced when we expect stronger communication between the less and more specialized auditors after the merger. We caution that our findings are specific to China and may not generalize to other countries.

Over the past twenty years, especially the past decade, China has taken enormous strides to develop its bond market as an integral step of financial reform. This paper aims to provide the most up-to-date overview of Chinese bond markets, by highlighting two distinct and largely segmented markets: Over-the-Counter based interbank market, and centralized exchange market. We explain various bond instruments traded in these two markets, highlighting their inherent connection with the banking system, and many multi-layer regulatory bodies who are interacting with each other in an intricate way. We also covers the credit ratings and rating agencies in Chinese market, and offer an account of ever-rising default incidents in China starting 2014. Finally, we discuss the recent regulatory tightening of shadow banking since late 2017 and its impact on bond investors, and the forces behind the internalization of Chinese bond markets in the near future.

Using data from 56 nations over 45 years, we find that nations that are more likely to elect left wing governments face higher (and more volatile) sovereign spreads. To explain these facts, we build a sovereign default model in which two policymakers (left and right) alternate in power. The probability of an incumbent staying in power is increasing in the share of government spending. We parametrize the left policymaker as having a higher marginal political gain from increasing government spending than the right does, a feature found in our data. Model economies in which the left is more frequently in power face worse borrowing terms due to higher default risk, a greater reluctance for fiscal austerity in bad times, and a higher share of government spending on average. These features imply large welfare losses for households.

We examine the effect of board members with venture capital experience (i.e., VC directors) on executive incentives at publicly listed firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (i.e., vega) and greater pay-for-performance sensitivity (i.e., delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using Regulation S-K requirements to disclose attributes of nominated directors as an instrument, we show that these results are causal. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms are in part explained by the presence of increased risk-taking incentives of the CEO instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.

Using a proprietary loan data set, we study how a large state-owned bank uses its internal ratings in loan granting decisions around China’s 2008 economic stimulus programme that relies on bank credit for financing. We find that there is little change in the rating process of the bank, and internal ratings remain a valid, albeit weaker, predictor of loan interest rates in the stimulus period. Weakened rating-interest rate relation is concentrated for borrowers from the industries that the stimulus programme focuses on, for state-owned enterprises (SOEs), for bank branches operating in provinces with a low level of credit market marketization, or when the credit rater and loan officer have no collaboration before. We also find that interest rates remain a valid predictor of ex-post loan outcomes in the stimulus period. Overall, there is no evidence that loan decisions of the state-owned bank are severely compromised in the economic stimulus period as speculated by some media. By showing how a state-owned bank maneuvers between supporting government stimulus initiative and maintaining market-based lending, we contribute to the limited literature on the roles of internal ratings in loan contracting decisions, and add to the debate over the roles of state-owned banks.

In a frictionless market where  rms can always raise capital, debtors default only if their total assets cannot cover their total liabilities. However, in the presence of market imperfection, debtors may default even while solvent if the cost of new capital outweighs the legal penalty on contract violation. Using a unique sample of Chinese bank loans over the period 2007-2012, we analyze the repayment decisions of borrowing rms whose cash holdings are high enough to cover the bank debt coming due. We  nd that poor legal enforcement signi cantly increases the likelihood of default. This positive association becomes stronger if  rms face tighter  nancing constraints, or when credit supply becomes more scarce. Our results illustrate the role of legal enforcement in determining  nancial risks and show that market imperfection strengthening the impact of legal enforcement on  nancial risks.

We study credit allocation across  rms and its real e ects during China's economic stimulus plan of 2009-2010. We match con dential loan-level data from the 19 largest Chinese banks with  rm-level data on manufacturing  rms. We document that the stimulus-driven credit expansion disproportionately favored state-owned rms and  rms with lower average product of capital, reversing the process of capital reallocation towards private  rms that characterized China's high growth before 2008. We argue that implicit government guarantees for state-connected  rms become more prominent during recessions and can explain this reversal.

Abstract: Traditional research about the passive investors and index were mainly focus on the tracking error and the performance of mutual funds. However, they ignored that, deceptive by name, the passive investors, such as index-tracking funds and ETFs, may have an active impact on the value of the company through large-scale transactions of these passive investors. Focused on the Chinese stock market, this paper investigates whether specific passive investors, the funds and ETFs that track MSCI China index, will actively influence the market valuation after MSCI Index Rebalance. When the passive shareholders, which are always the mutual funds, exceeds a threshold, I find that firms added to the index will have a significant positive return, about X%, to the index itself. Also, I find the firms eliminated out to the index have a significant negative return, about X%, to the index itself. One potential interpretation of these results is that index-rebalancing will lead the index-trackers to buy those stocks added to the index, and these transactions represent a large buy power that will lead the demanding of those stocks to exceed the selling power and this dynamic of trading plus the following transactions of other investors eventually cause a premium and positive return. The firm size will also have an impact on stock performance when the index get rebalanced, partially in that the weight of the index is calculated according to the market value, a calculate method that leads to the higher weight of large companies. If large companies are added to or removed from the index, the trading volume will be larger, causing more transactions dynamic on those stocks.

We provide nationwide causal estimates of digital financial inclusion’s (DFI) effect on air pollution in the short term for China from 2014 to 2018. Using distance to Xihu District as an instrument, 1% gain of DFI increases air pollution by 0.36%. The baseline result is strongly robust to various checks. The coverage breadth and usage depth of DFI increase pollution, with the elasticity of 0.39 and 0.37 respectively, whereas the digitization level of DFI lowers pollution, with the elasticity of -1.42. The heterogeneous short-run effect of DFI can be attributed to a multitude of channels, including pollution standard, geographical factors, population density, development gaps and international trade.