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Combining novel data on analyst employment history and mutual fund commission payments, we show that client funds generate higher returns on stocks for which they have access to research by industry expert analysts. The outperformance is greater when funds are more important clients, and it cannot be attributed to tipping. Client funds place modestly higher weights on stocks covered by industry expert analysts and allocate more commissions to brokers providing such coverage. For identification, we exploit exogenous analyst coverage disruptions. Our findings contribute to the debate concerning the unbundling of commissions under MiFID II and its implications for the U.S.

Samuelson’s Dictum refers to the conjecture that there is more informational inefficiency at the aggregate stock market level than at the individual stock level. Our paper recasts it in a global setup: there should be more informational inefficiency at the global level than at the country level. We find that sovereign CDS spreads can predict future stock market index returns, GDP, and PMI of their underlying countries. Consistent with the global version of Samuelson’s Dictum, the predictive power for both stock returns and macro variables is almost entirely from the global, rather than country-specific, information from the sovereign CDS market.

This paper analyzes the background information of business and political leaders born around China’s 1959-1961 famine, including the CEOs and board chairman of China’s public firms and the mayors and CPC secretaries of cities. We find that the likelihood of becoming business (political) leaders for people born in 1962 and 1963 jumps to 2-3 times as high as those born before the famine. The upsurge gradually declines for the following birth cohorts. This phenomenon exists not only at the country level, but also across the provinces. In a difference-in-differences test, we find evidence indicating that the 1962-63 phenomenon is caused by the close to 40 percent birth loss during the 1959-1961 famine. Our findings not only shed light on the unexpected long-run social impact of the famine, but also lend support to the prevalence of meritocracy in both business and politics in China.

A puzzle of China’s shadow banking system is its stark growth since the 2008 Subprime Crisis, which is in sharp contrast to most of countries. We present a model to explain why the shadow banking activities have been allowed to expand with the full awareness of regulators in China. In the presence of local government intervention, which tends to distort the banks’ portfolio choices towards inefficient low-quality projects, the policy combination of formal banking sector credit tightening and shadow banking sector loosening forces banks to improve credit quality. This is because shadow banking assets are less diversified than commercial bank assets, thereby subject to higher bank run risk, which forces banks to improve the quality of shadow banking assets. Negative shocks to project quality may trigger information production in the shadow banking sector and prevent banks from providing funding to efficient projects, which creates additional welfare losses. This result provides a rationale for China's new regulations on shadow banking sector since 2018 in the background of increasing risks.

We propose a behavioral dividend clientele view to explain a unique “ex-dividend day” anomaly on the Chinese stock market. In particular, we find that on the ex-dividend day, the average CAPM-adjusted stock return is significantly below zero and the average trading volume significantly shrinks, which are different from the theoretical predictions and existing findings drawn from other stock markets. Such patterns tend to be driven by small retail investors who are net buyers of dividend paying stocks prior to the ex-dividend day and switch to net sellers of on and after the ex-dividend day. Furthermore, we find “dividend price”, the negative deviations of ex-dividend day stock return from zero, is positively associated with dividend yields and the idiosyncratic risks of the underlying stocks. These findings suggest that investors with strong non-monetary and psychologically driven dividend preferences can result in a unique “ex-dividend day” anomaly.

By analyzing a hand-collected transaction-level dataset on the finance leases of China’s public firms for the period 2007-2019, this paper sheds light on China’s leasing market, the second largest in the world. We find that banks use their affiliated leasing firms to provide credit to clients in order to circumvent the government’s targeted credit policy. In contrast to conventional view of regulatory arbitrage, our evidence indicates that, instead of hiding risk and gambling for profit, banks mainly use their affiliated leasing firms to support high-quality clients. The bank affiliated institutions can play strategic role in relationship banking.

This paper examines the effects of public news releases on the market liquidity in one of the most important OTC derivatives markets — the CDS market. We document that, at the time of news releases, the bid-ask spread is wider, the number of quotes is larger, and the number of dealers is greater. Earnings announcements have particularly strong effects on liquidity while news related to credit ratings has no significant effects. Moreover, the bid-ask spread only increases on news release days and reverts to normal levels several days after news releases. Finally, the effect of news on liquidity is stronger for negative, fundamental, and unscheduled news, and is more pronounced among firms with higher information asymmetry. Our findings are consistent with models of rational trade in Kim and Verrecchia (1994).

We find that the 2013 Chinese anti-corruption campaign remarkably reduced charitable donations from listed companies with strong political connections, and lessened government subsidies to these companies, implying a reciprocal relationship between companies and the government prior to the campaign. The campaign also improved the productivity of companies with strong connections. The results are consistent with a model in which favor exchanges between firms and the government divert resources away from production in a corrupt environment. These findings highlight a self-serving, and sometimes corrupt, motive of corporate donation, and imply that the centrally-led anti-corruption campaign is highly effective in curbing corrupt collusion between companies and government officials. Moreover, they give empirical support to the negative efficiency implications of corruption.

This study examines the effect of economic and political uncertainty on sovereign CDS spreads using a novel panel index of world uncertainty. We document that sovereign CDS spreads widen with uncertainty. A 1% increase in uncertainty leads to a 0.86% increase in sovereign CDS spreads. Furthermore, the effect of uncertainty on sovereign CDS spreads is stronger for developed countries, countries with investment-grade credit ratings, and during non-crisis periods. The banking sector is a potential channel through which uncertainty increases sovereign risk. Overall, our results suggest that economic and political uncertainty contributes to both local and global components of sovereign CDS spreads.

The sovereign CDS market has developed rapidly for two decades and currently has a gross notional amount of more than a trillion dollars. We document a strong momentum effect in this market, which cannot be explained by a large set of risk factors. These momentum returns are positively skewed and higher during recessions. Consistent with the interpretation that this momentum effect is due to investors’ initial underreaction to sovereign credit information followed by corrections, our evidence shows that the momentum returns tend to be higher during the months surrounding announcements of credit rating or outlook changes of the underlying countries.

We document issuance overpricing of corporate debt securities in China, which contrasts with underpricing of equity and debt securities in Western countries. The phenomenon in China is robust across subsamples of issuances with different credit ratings, maturities, issuer types, and issuing history, reflecting the distinct institutional environment and issuance process in China’s market for corporate debt securities. The average overpricing dropped from 7.44 basis points to 2.41 basis points after the government prohibited underwriters from using rebates in issuances in October 2017. By analyzing overpricing before and after the rebate ban and across different issuers and underwriters, we uncover two channels for underwriters, who compete for future underwriting business, to drive up overpricing: rebates and self-purchases.

This paper examines the relation between share pledging and corporate risk-taking in an environment featured by strong government intervention and high information opacity. We find that during the years 2005 through 2015, the level of share pledging is associated with less volatile earnings and tightened R&D expenditures for Chinese listed firms. We establish causality through a variety of econometric techniques, including a difference-in-differences approach based on a regulatory change that permits security companies to lend money to borrowers pledging their shares as collaterals. In addition, we find that share pledging is associated with enhanced innovation efficiency. Overall, our results highlight that share pledging constrains excessive risk-taking and improves the efficiency of risky investments through facilitating creditor monitoring.

Sovereign CDS spreads have unique predictive power for future stock market index returns, sovereign bond yields, as well as real macroeconomic variables such as GDP and PMI. The predictive power comes almost entirely from the global, rather than country-specific, component of sovereign CDS spreads. This is consistent with the interpretation that the information advantage of the sovereign CDS market is from its “global perspective” rather than local knowledge about individual countries. Stock and sovereign bond market indices gradually “catch up” with sovereign CDS spreads, mostly during the days surrounding credit rating or outlook changes, and especially for downgrades.

This paper examines the rationality of the residential housing market. We adopt a proprietary dataset covering China’s first-tier cities from 2009 to 2016 that consists of project-level rents and repeated selling prices and identify investors’ “underreaction” phenomenon to the cash flow news. With the benefit of this project-level dataset, we demonstrate that research in this field suffers serious aggregation bias for omitting the heterogeneity in dynamic interactions among micro- and macro-level variables. Aggregation leads to a wrong conclusion that investors’ reaction to cash flow news is nearly rational or they slightly overreact. We therefore argue that research on the pricing behavior in the residential housing market has to be conducted at a disaggregated level.

We investigate the effect of stock market on firm innovation via the len of initial public offering (IPO) using a uniquely matched Chinese firm-level data. Using the difference-in-difference approach, together with the propensity score matching algorithm to construct the treatment and control group, we find that the IPO leads to an increase in both quantity and quality of firm innovation activity. In addition, IPO expands a firm’s scope of innovation beyond its core business. The impact of IPO on firm innovation varies across corporate governance structure. We find that the increase in innovation can be attributed to the fact that the IPO helps to relax the credit constraint that a firm faces before the IPO. Therefore a firm can allocate more resource to innovation through retaining internal inventors and hiring more inventors after the IPO. Finally, we show that the enhanced innovation activity helps a firm create value, indicated by an increase in Tobin’s Q.

Using novel data on financial analyst biographical information and mutual fund broker commission payments, we examine the impact of sell-side analyst industry knowledge on buy-side institutions’ commission allocation decisions and investment performance. We find that mutual funds allocate higher equity trading commissions to brokers providing industry expert analyst coverage for a larger proportion of fund holding firms. Client funds generate higher abnormal holding returns and execute more profitable trades on stocks with access industry expert analysts compared to stocks with no such analyst coverage. Exploiting shocks to research coverage emanating from analyst departures for identification, we find that client funds reduce commission allocations to brokers losing industry expert analysts and suffer declines in investment performance on stocks affected by the loss of industry expert analysts. Overall, our results are consistent with the view that brokerage houses as well as their buy-side clients benefit from the industry knowledge of sell-side analysts.

This paper examines how anticipated and frequently repeated shocks are absorbed in liquid financial markets. We show that Treasury security prices in the secondary market decrease significantly in the few days leading up to Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. The issuance cost to the Treasury Department is estimated to be between 9 and 18 basis points of the auction size, or over half a billion dollars for note issuance alone in 2007, most of which can be attributed to the price pressure effect around auction days. These results are linked to dealers’ limited risk-bearing capacity and the imperfect capital mobility of end-investors, highlighting the important role of market frictions even in very liquid financial markets.

We show that Treasury security prices in the secondary market decrease significantly in the few days before Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. These results are linked to dealers' limited risk-bearing capacity and end-investors' imperfect capital mobility, highlighting the important role of frictions even in very liquid financial markets. Our results imply a hidden issuance cost to the U.S. Department of the Treasury, estimated to be 9 to 18 bps of the auction size, or over half a billion dollars for the issuance size in 2007. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.