This study examines whether broad national accounting-system classifications, used as institutional proxies, moderate the relationship between financial leverage and cash holdings in Europe. Although the sampled countries have adopted International Financial Reporting Standards (IFRS), institutional differences may persist in financial reporting traditions, investor protection, creditor rights, legal environments, and characteristics. Using a sample of 7046 listed firms from 2010 to 2019, the study applies system generalized method of moments (SYS-GMM), fixed-effects, and Fama-MacBeth regressions. The findings show that the Anglo-Saxon classification positively moderates the negative relationship between leverage and cash holdings, whereas the Continental European classification strengthens this negative relationship. Financial leverage is positively associated with cash holdings under stronger shareholder protection, while creditor rights negatively influence this association. These findings support the precautionary motive theory and indicate that firms’ financial structures remain shaped by local, institutional, and industry-specific conditions despite the widespread adoption of IFRS. Policy implications are discussed.
This paper examines the impact of China’s green factory policy on corporate outward foreign direct investment. Using a multi-period difference-in-differences approach, we find that green factory certification significantly increases both the likelihood and scale of overseas investment. The effect operates through two channels: an environmental signaling mechanism that reduces information asymmetry and a financing mechanism that alleviates external financing constraints. The effect is stronger for greenfield investments than for cross-border mergers and acquisitions and is more pronounced among non-state-owned firms and those in heavy-polluting industries. These findings suggest that government-led voluntary environmental certification serves as an external institutional resource that enhances firm credibility, reduces information frictions, and improves access to financing, thereby facilitating international expansion. This study provides quasi-experimental evidence from an emerging economy, contributing to the literature on corporate finance and sustainable investment.
As the digital economy has developed rapidly and government digital transformation has continued to deepen, government demand for digital products and services has expanded substantially. Yet whether digital public procurement, as a domestic demand-side policy instrument, affects firms' performance in international markets remains unclear. Using officially disclosed Chinese public procurement contract notices matched with A-share listed firms from 2015 to 2023, this study finds that digital public procurement significantly promotes corporate international competitiveness, as evidenced by higher overseas operating revenues and more foreign subsidiaries. Mechanism analyses show that this competitiveness-enhancing effect is mainly realized by strengthening corporate digital innovation persistence. Specifically, government procurement provides firms with an experimental market in which they can continuously accumulate digital knowledge, technologies, and solutions, thereby better satisfying the diverse digital demands of global customers. Further investigations indicate that this mechanism works through reduced debt financing cost and mitigated sales revenue uncertainty, and is stronger among firms with lower rent-seeking intensity and political embeddedness depth. Our findings deepen theoretical understanding of the drivers of corporate international competitiveness in an increasingly digitalized and globalized business environment. They also provide valuable policy implications for governments seeking to improve public procurement frameworks, support domestic firms' global expansion, and secure strategic advantages in the global digital economy.
This paper examines how ESG reputational risk affects firms' use of convertible debt financing. Using firm-level measures of ESG reputational risk derived from controversy-related news, we document that firms exposed to higher ESG risk rely significantly more on convertible debt. This relation is concentrated among firms facing higher borrowing costs and operating in environments characterized by limited corporate reputational capital, weaker institutional quality, and lower public awareness, consistent with a cost-of-debt substitution mechanism. Instrumental variable evidence based on press freedom and a quasi-natural experiment exploiting the Deep-water Horizon oil spill supports a causal interpretation. Our findings highlight security design as a key channel through which ESG reputational risk shapes corporate financing decisions.
This study examines the association between country-level unexpected exchange rate volatility and firms' Environmental, Social, and Governance (ESG) engagement, emphasizing heterogeneity across firms with different levels of international exposure. Panel-data evidence from firms across 23 countries shows that country-level unexpected exchange rate volatility is positively associated with subsequent ESG scores, especially among internationally exposed firms. This association varies across ESG dimensions and is more pronounced in the environmental and social pillars than in governance.
We document that Indian firms with foreign promoters (individuals and/or corporations who have been involved since the time of firms' incorporation) experience lower idiosyncratic volatility (IVOL). This effect is more evident in firms which are prone to more agency problems (that is, firms with poor information environment and freely available cash). Foreign promoters play an important role in reducing IVOL when they own at least 26% equity in a firm so as to be able to influence corporate decision-making. Relative to no-foreign-promoter firms, foreign-promoter firms observe higher stock volatility during periods of high macroeconomic uncertainty. Lastly, we find that foreign-promoter firms are valued higher than no-foreign-promoter firms. Overall, our findings indicate beneficial role of foreign promoters in reducing firm risk and creating firm value.
This paper examines how Economic Policy Uncertainty (EPU) originating in the United States, China, and the Euro Area affects U.S. equity sectors and the channels through which these spillovers operate. Using a Bayesian Global Vector Autoregression (GVAR), I decompose EPU shocks by geographic source and estimate their effects across nine U.S. equity sectors. The results show pronounced heterogeneity in sectoral responses that depends critically on the origin of uncertainty. U.S. EPU shocks generate broad-based declines in returns, while shocks from China and the Euro Area have more targeted effects. Transmission mechanisms also differ by source: U.S. and Euro Area uncertainty operates through cashflow and discount-rate channels, whereas Chinese uncertainty propagates via global energy commodity markets. The paper contributes by disaggregating EPU by origin and applying a Bayesian GVAR to capture international, sector-level spillovers, with implications for macroprudential policy, risk management, and asset allocation.
Climate risk is increasingly affecting financial stability and has become a major concern in the global financial system. This study uses a quasi-natural experiment based on China’s carbon emissions trading system (ETS) and employs a staggered difference-in-differences model to assess its impact. Our findings reveal that firms experience significantly higher stock returns following ETS implementation, indicating a transition risk premium in the capital market. Mechanism analysis confirms that this premium is driven by cash flow and equity capital cost effects. Heterogeneity analysis reveals that the premium is more pronounced for firms in the paid carbon allowance group, those lacking green investors, and those in sectors with high energy consumption. Furthermore, institutional investors exert a positive moderating effect on the transition risk premium. This study enhances our understanding of climate transition risks in carbon governance, providing insights to advance carbon markets and promote sustainability.
This paper examines whether and how capital market liberalization affects bond market liquidity in China. Using a quasi-natural experiment provided by the 2017 launch of Bond Connect and bond-level data from China’s interbank and exchange markets, we find that foreign investor entry significantly improves liquidity, as reflected in a pronounced decline in effective bid-ask spreads. Mechanism analyses indicate that these liquidity gains operate through lower inventory costs, reduced adverse selection costs, and diminished order-processing costs. The main results are robust to alternative liquidity measures and additional controls for return and price volatility. Our findings contribute to a better understanding of the economic consequences of China’s bond market internationalization and offer policy implications for other emerging markets.
We examine volatility spillovers in global real estate investment trust (REIT) markets using the Garman-Klass estimator to capture risk transmission dynamics. We identify key risk factors-such as risk aversion and bond yields-that are statistically associated with higher volatility spillovers, particularly during periods of market stress. Our findings reveal significant market integration, with Japan and Australia acting as major risk transmitters during crises, while Hong Kong serves as a net transmitter under normal conditions. Unlike previous studies that have emphasized sentiment and uncertainty shocks in return spillovers, we find their impact on volatility transmission to be limited. These results underscore the dominant role of risk aversion and bond yields in driving systemic risk across REIT markets. Our findings offer insights for investors, asset managers, and policymakers, emphasizing the importance of monitoring market dynamics and long-term risk factors influencing global REIT stability.
This study explores the effect of climate change and environmental, social and governance (ESG) performance on the forward-looking probability of default using a textual analysis. Using a default predictability model, it investigates the connection between climate risk and firms' ESG performance and financial distress across different horizons. The sample consists of 56 economies covering the period 2003-2023. The results indicate that companies with greater exposure to climate change have higher default probabilities, especially in the long term, pointing to increasing financial vulnerability with environmental risk. Additional analysis indicates that law and regulation matter, suggesting that a strong legal system complements the effectiveness of ESG policies in mitigating financial stress. Several robustness checks are performed to validate the results. A two-stage least squares regression and propensity score matching are employed to tackle endogeneity-biased issues while weighted least squares is employed to address the overrepresentation issue.
Exchange rate volatility is intensifying international turbulence where emerging-market firms expand globally via outward foreign direct investment (OFDI). Utilising Chinese case, this paper investigates how exchange rate volatility shapes emerging-market OFDI and identifies the underlying coping strategies. Empirical results indicate that exchange rate volatility significantly hinders Chinese OFDI. Specially, a 1% rise in volatility reduces flows by 10.8%. The adverse impact is stronger in host countries with flexible exchange rate regimes and in high-sunk-cost, non-resource industries, whereas host countries with fixed exchange rate regime and the resource and financial sectors are less affected. Moreover, exporting can supplant OFDI as exchange rate volatility rises, and larger renminbi swap lines under bilateral currency swap agreements can markedly attenuate the adverse impact of exchange rate volatility on OFDI. These findings advance the extant literature by clarifying firms’ dynamic adjustments and the institutional function of currency swap. They also urge firms to adopt rigorous risk-management and policymakers to widen swap lines so as to safeguard investment stability.
This study investigates whether and how physical climate risk affects the investment decisions of Qualified Foreign Institutional Investors (QFIIs). Using data from Chinese A-share listed firms between 2007 and 2022, we find that QFIIs' investment reacts negatively to climate risk. This effect is more pronounced among firms with weaker governance, less geographic diversification, and among QFIIs with longer investment horizons or from common law countries. Mechanism analyses indicate that elevated operational and financial risks partly explain this tendency. In contrast to the main effect, domestic institutional investors show little response to climate risk, and QFIIs seem to be indifferent to climate policy risk. Our findings highlight the importance of climate risk in shaping cross-border investments and provide new insights into the role of foreign institutional investors in promoting sustainability in emerging markets.
This study investigates the relationship between short-horizon volatility and two distinct sources of microstructural information: executed order flow, measured by VPIN, and the latent order book structure, proxied by its SLOPE. While VPIN captures the realized trade imbalances, SLOPE acts as a proxy for aggregated "belief consensus." The objective is to systematically compare the relative importance of these mechanisms—realized flow versus latent consensus—as drivers and predictors of market volatility.Using tick-by-tick data and the full limit order book for 32 IBEX-35 constituents during the 2019–2020 period, we employ a multifaceted econometric approach in event-time (volume clock), combining stock-level regressions with random-effects meta-analysis, robust fixed-effects panels (Driscoll–Kraay), conditional-probability tables (CPTs), and stock-level VARs with Granger tests and meta-IRFs.Three main results emerge. First, we find that informed trading has a dual role: it helps build belief consensus in the book (H1a) while simultaneously consuming internal liquidity (depth) (H1b). Second, and most critically, belief consensus is a markedly superior predictor of subsequent volatility than VPIN; Conditional Probability Tables confirm that a high degree of consensus sharply increases the probability of the lowest-volatility state (H2). Third, VAR analysis reveals a unanimous, bidirectional, yet asymmetric loop: belief consensus robustly reduces volatility, while volatility, in turn, erodes consensus (H3). The causal links for VPIN, in contrast, are sporadic and size-dependent.Our results establish a new informational channel, demonstrating that the market's latent belief structure is a more potent and reliable determinant of short-term risk than the realized toxicity of order flow.
We present the first integrated VARX model for analyzing the flight-to-quality behaviour of stock, bond and currency in crises. Exogenous shocks to the system are stock market volatility and sovereign risk. We find that the impacts of two risk variables on stock and currency returns are negative and significant, due to an international flight-to-quality effect. The effects on the bond return are neutral due to the offsetting flight-to-quality within and between countries. In advanced economies, bond is a safe asset in stressed stock markets (e.g., Connolly et al., 2005). In emerging markets, a bond is not necessarily a safe asset. The effects of sovereign risk on currency are accelerated through its interaction with the stock risk. The currency market is more closely linked to the stock market than to the bond market in an emerging economy like Korea. Our integrated approach complements the prior dichotomised (single-equation) flight-to-quality literature (e.g., Connolly et al., 2005; Baur and Lucey, 2009; Corte et al., 2021).
This paper examines how institutional democracy influences corporate carbon emissions using data from 10,427 firms across 53 countries between 2002 and 2021. The findings indicate that higher levels of democracy are associated with lower emissions, particularly in developed countries and after the Paris Agreement. Environmental, social, and governance (ESG) reputational risk may serve as a mechanism underlying this relationship. Moreover, the effect is more pronounced in countries with stronger regulatory enforcement, captured by environmental policy stringency and rule of law, or in those with more developed capital markets. The results are robust to endogeneity concerns, holding under alternative measures of carbon emissions, two-stage generalized method of moments (GMM) estimation, and an instrumental variable approach. Overall, the study provides valuable insights for policymakers and businesses, offering practical implications and contributing to a broader understanding of the institutional determinants of corporate environmental performance.
This study investigates the impact of the China Securities Investor Services Center (CSISC)—a non-profit minority shareholder organization innovatively established by Chinese regulatory authorities—on corporate external guarantees, assessing its effectiveness in protecting minority shareholders. The results show that CSISC shareholding significantly reduces guarantees to non-subsidiaries, while its effect on guarantees to subsidiaries is not significant. The reduction is stronger in firms with higher leverage and lower profitability and is concentrated in related-party guarantees, indicating that CSISC shareholding mitigates riskier external guarantee practices. Channel tests reveal that this effect operates through both governance effect and a demonstration-guided effect. Further analysis indicates that the impact is more pronounced in firms audited by top-ten accounting firms and in regions with stronger legal standards.
This paper examines the influence of a firm’s ESG reputation risk on its cost of equity capital around the world. Employing a comprehensive sample of firms across 45 markets, it documents strong evidence that ESG reputation risk leads to a higher cost of equity capital. This result remains unchanged in various robustness checks, including use of alternative variable measures, different model specifications, alternative subsamples, and potential endogeneity concerns. Further analyses show that firms with less severe information asymmetry and lower levels of financial risk experience a more pronounced impact of ESG reputation risk on the cost of equity capital, thereby suggesting that information asymmetry and financial risk are two mechanisms through which ESG reputation risk affects the cost of equity capital. It also finds that the positive effect of ESG reputation risk on the cost of equity capital is stronger in markets with better financial development and higher governance quality.
This study examines how geopolitical risk in the acquirer country affects the ownership sought in the outbound cross-border acquisitions. Using data from G7 countries over a period from 1991 to 2020, we find strong evidence that higher geopolitical risk in the acquirer country leads firms to seek higher ownership in cross-border acquisitions. This effect becomes stronger when the acquirer countries have better institutional quality. Furthermore, geopolitical uncertainty possesses a distinct nature from economic and political uncertainty (Cao et al., 2019). Finally, our findings survive a wide range of robustness tests.
