This paper examines whether reserve prices impact the discount on private equity placements (PEPs). Using a sample of auction-based PEPs in China, we find that reserve price discounts are positively associated with bid (offer) price discounts. This inference holds after executing several robustness checks. As extra analyses reveal, the documented impact is ascribed to bidders anchoring on reserve prices. The positive association also depends on bidder identity and anchor-target compatibility. Our evidence ultimately shows that investor wealth benefits from such anchoring biases. Altogether, these findings demonstrate that reserve prices induce bidder undervaluation, thereby resulting in lower offer prices.

SYNOPSIS: To prevent firms from hiding losses and risks in unconsolidated subsidiaries, standard setters have progressively broadened the scope of consolidation, which results in greater managerial discretion in adding entities for consolidation. We examine whether state-owned enterprises (SOEs) with higher state ownership, hence stronger empire-building incentives, are more inclined to exploit this discretion to consolidate additional investees. China's mixed-ownership reform, which introduces nonstate blockholders and reduces state ownership, provides an ideal setting. We find that SOEs are less likely to exploit the discretion to consolidate their investees after the reform. The decline is sharper when accounting standards allow greater discretion, when consolidation yields larger asset increases, and when the government places greater emphasis on expansion. Further analyses reveal that consolidation accounting generates real benefits, which diminish after the reform. Our study provides novel evidence on aggressive consolidation under principle-based accounting standards and offers insights for standard setters refining the consolidation boundary.

Using a survey-based measure of trustworthiness in the emerging market, we find that firm trustworthiness contributes to analysts' information acquisition and, ultimately, their performance. Additionally, we find that female analysts, experienced analysts, and star analysts benefit more from firm trustworthiness. Further tests suggest that the potential mechanisms through which firm trustworthiness improves analyst forecast accuracy are reducing information risk and lowering information acquisition cost. Cross-sectional analyses reveal that the effect is more pronounced for firms located in regions with weaker investor protection and firms with less media coverage. Reinforcing our main evidence, we also find that firm trustworthiness is linked to decreased analyst forecast dispersion. Overall, our findings highlight the important role of firm trustworthiness in analysts' information acquisition.

Related-party transactions, once a major expropriation channel in Chinese business groups, have declined under tighter regulation, but controlling shareholders circumvent the rules. We show they tunnel resources from listed parent firms to “dual-identity subsidiaries” (DISs): non-wholly-owned subsidiaries in which controllers also hold minority stakes, using unregulated transactions. Among China’s top 300 listed firms, DISs have ROA 3.1 percentage points higher than non-DISs. DIS performance responds more to industry shocks affecting their parents and less to their own shocks, while parents do not respond to DIS shocks. Stock market reactions to DIS formation support this tunneling interpretation.

This paper examines how individual auditors’ selection of specific key audit matter (KAM) subjects reveals their audit quality. Specifically, we find that auditors reporting more auditor-specific or less entity-specific KAMs offer lower audit quality. Moreover, we find that auditors who report more KAMs involving high measurement uncertainty, including the valuation and impairment of goodwill and long-lived operating assets, contingencies, and the capitalization of certain expenditures, fail to offer high audit quality. Our study leverages KAM reports to open up the black box of the audit process and examines how auditors’ focus on different KAM subjects signals varying levels of audit quality. This provides new insight into the information conveyed by KAM disclosure and responds to the call of prior research to go beyond demographic data to explain the variation in individual auditors’ audit quality.

In 2016, the China Securities Regulatory Commission authorized the China Securities Investor Services Center (CSISC), a not-for-profit institution, to buy and hold 100 shares of listed firms in pilot regions. Exploiting CSISC shareholding as an exogenous shock, we employ a difference-in-differences analysis of a sample of listed firms from to 2013-2017 to investigate whether CSISC shareholding can promote corporate green innovation. Our results show that CSISC shareholding play a significant role in promoting corporate green innovation. Channel tests indicate that CSISC shareholding can promote corporate green innovation by mitigating information asymmetry and alleviating agency conflicts. Our additional analyses reveal that corporate governance can moderate the impact of CSISC shareholding on green innovation, and CSISC shareholding has different impacts on green invention patents and green utility model patents. Our additional analyses also report that the difference in corporate green innovation between the treatment and control groups diminishes after implementing CSISC shareholding nationwide. Our findings contribute to the literature on the economic consequences of CSISC shareholding and extend the literature on the determinants of corporate green innovation in investor protection.

Faced with the increasing risk of supply chain disruption, more firms are using mergers and acquisitions or investments to expand their core business's upstream and downstream supply chain and improve their vertical integration. In this vertical integration trend, the cost of capital for core firms is crucial to coordinating the entire supply chain. We manually collected input-output matrix data of segmented departments and supply chain value-added data to explore how vertical integration impacts the cost of equity. Using A-share listed firms from 2008 to 2021 as our sample, the results of our regression analyses show that vertical integration plays a significant role in reducing the cost of equity. These results remain consistent throughout a series of robustness tests. The channel tests indicate that vertical integration can reduce the cost of equity by reducing operating risk and mitigating information asymmetry. Additional analyses show that vertical integration's impact on the cost of equity is more pronounced for firms with more intense industry competition, lower product market positions, lower supply chain concentration, weaker corporate governance, and more aggressive strategies, as well as firms in regions with lower marketization processes and weaker trust environment. Our findings contribute to the literature on the economic consequences of vertical integration from the perspective of corporate financing behavior and extend the literature on cost of equity determinants to the field of supply chains.

Using a reform to relax the exclusion rate of highest bids in the book-building process as an exogenous shock, we find that IPO underpricing decreases, which indicates that excluding a certain percentage of the highest bids impairs IPO pricing efficiency. Further tests reveal that relaxing the mandate increases investors’ valuation of an IPO, thereby decreasing IPO underpricing. Our results also suggest that the relaxation of the stipulation motivates investors to provide more information, as revealed by fewer anchoring bids and reduced herding behavior, as well as higher opinion divergence and better predictive power for investor bids on post-IPO prices.

Initial public offering (IPO) underpricing, driven by information asymmetry, is a prevalent and serious global phenomenon. In addition to the influence of information providers such as IPO firms, investors' ability to acquire information may also significantly affect IPO underpricing. We investigate the impact of investors' information-acquisition ability on IPO underpricing, using Google's withdrawal as an exogenous shock. On 23 March 2010, Google unexpectedly announced the withdrawal of its search business from mainland China. As Google was the primary search engine used by investors in mainland China to access foreign information, its withdrawal significantly impaired investors' ability to search for and acquire such information. Our findings show that firms engaged in foreign trade experience a significant increase in IPO underpricing following Google's withdrawal, compared to firms not engaged in foreign trade. This effect is more pronounced for firms with lower information-disclosure quality in their IPO prospectuses, those exhibiting higher complexity, those hiring lower-reputation intermediaries, those with lower institutional ownership, those with a greater need for investors to acquire foreign information, and those where investors have less alternative access to foreign information. Our findings suggest that investors' information-acquisition ability significantly affects IPO underpricing, thus contributing to the literature on the determinants of IPO underpricing and extending the literature on the economic consequences of internet information acquisition to the IPO field.

Research Question/Issue To strengthen the protection of minority shareholders, in 2016, the China Securities Regulatory Commission authorized the China Securities Investor Services Center (CSISC), a non-profit institution with official backing, to buy and hold 100 shares of listed firms in pilot regions. By exercising shareholder rights, the CSISC plays a governance role as a regulatory minority shareholder. This study examines whether CSISC shareholding has a spillover effect in the bond market and whether this effect varies across firms with different levels of information asymmetry, insider expropriation, shareholder-creditor agency conflicts, and trustee reputation.Research Findings/Insights Employing a difference-in-differences analysis on bonds issued by listed firms between 2015 and 2017, we find that CSISC shareholding is associated with lower bond yield spreads. Cross-sectional tests suggest that CSISC shareholding reduces bond yield spreads by mitigating information asymmetry, curbing insider expropriation, and alleviating shareholder-creditor agency conflicts. We also find that trustee reputation moderates the relationship between CSISC shareholding and bond yield spreads. Furthermore, CSISC shareholding influences the nonpricing terms of bonds, and the difference in bond yield spreads between the treatment and control groups diminishes following the nationwide implementation of CSISC shareholding.Theoretical/Academic Implications This study contributes to the growing literature on the economic consequences of CSISC shareholding by uncovering its spillover governance effect on bondholder protection. It also extends the research on the role of government regulation in safeguarding bondholder interests.Practitioner/Policy Implications Our study has important policy implications for investor protection in other emerging markets. Given the unique characteristics of China's bond market, directly replicating this mechanism may not yield similarly favorable outcomes elsewhere. Nevertheless, regulators in other emerging markets could draw on China's experience and consider implementing novel investor protection mechanisms tailored to their specific market conditions.

We examine the impact of supply chain vertical integration on corporate debt financing costs using a sample of Chinese firms from 2007 to 2021. By leveraging the Chinese Input-Output Table, we apply Python software to identify a focal firm's supply chain upstream and downstream investment activities. Our findings suggest that when a focal firm invests in or acquires its upstream companies, the debt financing costs are less. Channel analysis demonstrates that supply chain vertical integration can reduce corporate debt financing costs by improving operational efficiency and alleviating information asymmetry. Additional analysis shows that the effect of supply chain vertical integration on corporate debt financing costs is more pronounced for non-state-owned companies, firms operating in competitive industries, firms located in regions with lower levels of marketization, firms in low-concentration supply chains, and firms with low financing constraints. The vertical integration of the whole supply chain can also effectively reduce the cost of corporate debt financing. We expand the boundaries of research on supply chain characteristics and factors influencing debt financing costs, providing empirical evidence for companies to optimize their supply chain allocation and break through debt financing constraints.

Based on the quasi-natural experiment of the shareholding pilot program of China Securities Investor Services Center (CSISC), we construct a difference-in-differences model and find that CSISC shareholding reduces the cost of equity. Channel analyses confirm that CSISC shareholding reduces the cost of equity through optimizing information environment and enhancing stock liquidity. This positive effect is more salient in firms with weaker internal and external governance supervision. Our study has important implications for policy makers to improve investor protection, especially in emerging markets with weak institutional environment.

We use a unique setting of the Dividend Tax Reform in China to investigate the impact of differential dividends taxation on managerial myopia. We find that firms prefer to mitigate managerial myopia when the dividends taxes imposed on their individual investors decrease. Moreover, additional analysis presents that the negative effect is more salient for firms with higher investor preference, larger proportions of individual investors, and greater myopic pressures. The results indicate that differential dividends taxation induced lock-in adversely affects managerial myopia.

This study investigates the impact of internal control on firms' use of derivatives. We find that firms with strong internal controls are more likely to use derivatives than firms with weak internal controls. In cross-sectional analyses, we find that this relationship is more pronounced for subsamples with lower executive pay-performance sensitivity, lower executive ownership, smaller board size, and higher proportion of busy directors. Additional analyses suggest that among the five components of internal control, control environment, risk assessment, information & communication, and monitoring exhibit stronger impacts on derivatives use than that of control activities. We contribute to the literature on the determinants of firms' use of derivatives and highlight some components of internal control are more critical than the others in guiding a firm's derivatives usage.

It remains a puzzle as to why firms pay cash dividends to initial investors prior to their initial public offerings (IPOs) while at the same time raising capital through the IPOs. Leveraging mandatory disclosure from three years of pre-IPO data in China, we examine two possible explanations for this puzzle: strategic reactions to IPO underpricing and post-IPO lockup. Our findings suggest that (1) when an IPO firm expects a large IPO underpricing, it pays more cash dividends pre-IPO, suggesting that initial shareholders view large IPO underpricing as undervaluing the market value of the firm's cash pre-IPO. (2) When an IPO firm pays more cash dividends pre-IPO, its initial shareholders unload fewer shares post-IPO after lockup expiration, suggesting that the initial shareholders receive “compensation” via cash dividends to ease their liquidity concern from post-IPO lockup. Both results support the proposed explanations. Additional analyses show that high cash dividend payouts pre-IPO are associated with fewer fixed assets, less investment in research and development, and poor performance post-IPO. These results indicate that cash dividends pre-IPO are not consistent with shareholder value maximization. Overall, pre-IPO cash dividends reflect a type II agency conflict in which initial shareholders seek private benefits at the expense of future shareholders.

Using a sample of Chinese high-tech firms from 2007 to 2020, this study investigates the impact of U.S. export control regulations (ECRs) on Chinese high-tech firms' innovation. The results reveal that U.S. ECRs force Chinese firms to increase their R&D inputs and outputs. Moreover, the findings illustrate that technology dependence and import competition act as mechanisms to mediate such trade effects. Our cross-sectional analyses indicate that the positive relationship between U.S. ECRs and Chinese firms' innovation strengthens in firms importing more high-tech products, with better innovation accumulation, with fewer financial constraints, or with more financial subsidies. Fundamentally, this study complements the literature on the U.S.-China trade war and offers policy implications for the Chinese government.

This study investigates the marketing effect of financial analyst in seasoned equity offering (SEO) auctions and how this influences the price elasticity and sales of stocks. Analyzing detailed investor bids in China, we find that a greater marketing effort of financial analysts leads to increased investor demand, higher demand elasticities, and lower discounts in SEO auctions. These results are validated by utilizing estimated residual analyst reports, 2SLS estimation and alternative measures of analyst marketing effort. Further, we adopt a causal steps approach, confirming that a financial analyst increases investor demand by broadening the investor base and demand elasticity by reducing differences of opinion among investors. Our findings demonstrate that financial analysts play a marketing role in financial markets in addition to information gathering and monitoring. Our study provides novel evidence of an underlying mechanism driving the negative relationship between financial analysts and SEO discounts and offers practical insights into market regulation and monitoring.

We examine sunshine-induced mood and its impacts on investors' bidding decisions in the primary market where seasoned equities are offered. Analyzing a unique database that records seasoned equity offerings (SEOs) investors' locations, identities, and bidding information, we examine the degree to which sunshine exerts an influence on investors' bidding behaviors (and subsequently SEO discounts) from two dimensions: sunshine intensity and duration. We find that investors exposed to stronger sunshine intensity or longer sunshine duration submit a higher bid price for SEOs, thus leading to lower offer discounts. We also find that mood misattribution and risk-taking act as channels to rationalize such a sunshine effect. Our moderating analyses indicate that the documented impact strengthens in the case of greater uncertainty, less-frequent bidders, retail investors, and lower levels of investment. These sunshine effects impact failed bids, SEO participation and SEOs' long-term performance. Our study provides original evidence that investors in the primary market can be influenced by a sunshine-induced mood, which, in turn, determines the cost of equity financing.

We investigate whether share pledging by controlling shareholders affects firms' use of derivatives. Our findings suggest that share-pledging firms are more likely to use derivatives than non-share-pledging firms. In cross-section analyses, we observe that the relationship is more pronounced when the margin call risk is higher, for example, if controlling shareholders own fewer shares, firms are located in regions with higher levels of marketization, or firms have a higher stock price crash risk. Our findings indicate that shares pledged by controlling shareholders steer firms toward the use of derivatives to hedge firm activities and alleviate the margin call risk.

Based on the official online interactive question and answer (Q&A) platform in China, we examine whether firms strategically change their response characteristics according to the tone of retail investors' questions and how firms' response choices affect stock market reactions to investors' questions. Our findings show that firms respond less directly but more optimistically when the sentiment embedded in investors' questions is more negative, consistent with the notions that firms are strategically responding to retail investors in the process of online interactive information disclosure. Additional analysis suggests that both the information embedded in the response and the textual characteristics of the response play an important role in stock valuation.