Recent studies suggest that greater exposure to the market for corporate control matters for managers and shareholders since it affects firms' ex-post risk of experiencing a stock price crash. The findings though question the direction of the effect. In contrast, in this study, we are the first to examine the effects of firms' ex-ante risk of experiencing a stock price crash, a likely antecedent of which is managers' concealment of news on aspects of the market for corporate control. We find that higher crash risk leads to greater takeover target likelihood. This relationship, which is robust to duly circumventing reverse causality, depends to a significant extent on inferior managerial quality and greater managerial discretion around financial accruals, affording richer insight into the notion that correction of managerial behaviour is a stimulus for the market for corporate control, but one that depends on the likely extent of managers' concealment of news. We also concurrently find that actual takeover targets with higher crash risk generate a lower bid premium and receive more payment with stock. Overall, our findings strongly suggest that decision-making in the market for corporate control is at least partially explained by incentives linked to opportunistic prices and takeovers of lemons.

Research Question/Issue We examine the role of corporate executives in dividend tunneling activity by controlling shareholders and whether the correlation between executive ownership and dividend tunneling is influenced by internal and external governance mechanisms. Research Findings/Insights We find increased executive ownership may lead to a higher level of dividend tunneling. This is further strengthened by our finding that the positive effect of executive ownership on dividend tunneling is more pronounced for firms with weaker minority shareholder protection. In addition, our results show that higher degrees of state ownership may further intensify this positive association. Finally, we find that analyst coverage has a moderating effect and constrains the collusion between controlling shareholders and executives in dividend tunneling activity. Theoretical/Academic Implications Our study contributes to the literature on the role of managerial ownership in controlling shareholders' dividend tunneling activity. We fill a gap in the literature on the corporate agency problem by providing evidence that dividends have been employed by controlling shareholders as a means of tunneling and that executives with higher ownership are more likely to collude with controlling shareholders in dividend tunneling activities. Practitioner/Policy Implications This study contributes to the debates around the promotion of the cash dividend policy in China, as our findings show that cash dividends are used as a tunneling vehicle. Providing important evidence to regulators, our findings support the argument that external monitoring by financial analysts can effectively constrain dividend tunneling by dominant shareholders, especially in the context of emerging stock markets with high ownership concentration, weak minority shareholder protection, and an underdeveloped legal system.

This study investigates the impact of managerial risk-reducing incentives on the firm's social and exchange capital. Using CEO inside debt holdings to proxy for the incentives of risk-averse managers, we find that CEOs with more inside debt holdings are likely to invest more in building social capital, which targets broader society and potentially offers anti-risk protection advantages, to shield the value of their inside debt. However, our results further show that managerial risk-reducing incentives have no impact on firms' exchange capital, suggesting the need to recognize the difference between social and exchange capital. These findings corroborate the view that CEOs invest in social capital as a risk management strategy. Furthermore, this paper presents an understanding of the role that institutional investors play in moderating the impact of managerial risk-reducing incentives on social capital. Our results suggest that institutional investors constrain CEOs that have greater inside debt incentives from investing in social capital. However, they are still willing to increase the investment in social capital for risk management purposes when firm risk is high.

We emphasize the relevance of the management team's local knowledge in the presence of business uncertainty. Exploiting a hand-collected dataset covering CEOs' birthplace, we provide robust evidence that firms with local CEOs are more likely to have higher credit ratings and preserve their debt ratings in the presence of high business uncertainty. Firms with local CEOs are significantly more likely to neutralize the exogenous uncertainty shocks, partly through a more efficient use of social capital. The effects are notably relevant in the case of small and undiversified firms as well as those firms with more financial constraints or in the industries with higher market competition. Overall, our result highlight the usefulness of local knowledge.

In this paper, we explore the relations between liquidity, stock returns, and investor risk aversion as captured by the variance risk premium (VRP). This is motivated by theoretical and empirical evidence in the literature which suggests that investor risk aversion negatively correlates with asset liquidity, and ample empirical evidence documenting liquidity risk premium. We use monthly US data from January 1999 to December 2018 and show that innovations in the VRP Granger-cause stock returns, which in turn drive liquidity. Our findings are consistent with predictions of prior theories and highlight the predictability of the VRP. They also contribute to the on-going debate on the causal relation between stock returns and liquidity. Finally, we explore the channels through which the VRP impacts liquidity and find that the VRP influences market and momentum factors, and that movements in these factors lead to changes in liquidity.

In contrast to US companies, Chinese firms have concentrated ownership with the effect that the central agency problem emanates from controlling shareholders expropriating minority shareholders, a phenomenon referred to as ‘tunneling’. This study examines the monitoring effect of mutual funds on the tunneling behavior of controlling shareholders. Due to the distinctive institutional settings in China, including a high level of ownership concentration, underdeveloped legal system in the stock markets and weak governance mechanisms in the mutual fund industry, we find that an increase in mutual fund ownership effectively mitigates the tunneling behavior of controlling shareholders thus improving firm performance. Nonetheless, after the mutual fund ownership reaches a certain threshold, an increase in concentrated mutual fund ownership is associated with heavier tunneling and lower firm performance. This may suggest that concentrated mutual funds collude with controlling shareholders in order to preserve their private interests. Moreover, the above effects are found to be more pronounced for firms with heavier tunneling activities. Our finding of the non-monotonic monitoring role of mutual funds brings attention to the private interest theory for mutual funds, an aspect that has been largely ignored in previous studies on mutual funds.

This paper investigates the impact of legal institutions on the external governance role of equity analysts in enhancing the corporate information environment. By analysing a sample of Chinese listed firms between 2003 and 2013, we find that analyst coverage is positively related to stock price informativeness. Firms located in provinces where legal institutions are stronger, as indicated by better development of market intermediaries and lower levies and charges on firms, are less likely to withhold value-relevant information. Financial analysts play a more effective role in improving stock informativeness in provinces with less developed legal institutions.

Motivated by the proposition that CEO inside debt holdings expose CEOs to similar default risk as experienced by outside creditors, this study investigates the impact of CEO risk aversion on corporate social responsibility (CSR) activities using firm observations in the US between 2006 and 2014. Our results show that risk-averse CEOs are likely to invest more in CSR activities, and higher firm idiosyncratic risk leads to more involvement in CSR activities. It is of interest to find that the influence of CEO risk aversion on CSR investment is weaker when the level of firm risk is higher. Furthermore, this paper presents a novel and comprehensive investigation regarding the role of institutional investors in CSR investment. Our empirical evidence suggests that institutional investors constrain risk-averse CEOs’ investment in CSR activities while they are still willing to increase CSR investment for risk management purposes when firm risk is high. Our findings are robust to alternative measures and model specifications and have regulatory implications. JEL classification: M41; M12; M14; G23; G32; G34

We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks' profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.

We explore whether the disappearance of stock dividends and the fluctuation in the popularity of cash dividends in China are driven by internal corporate governance or external market forces, including stock liquidity, risks or investor preferences (catering theory), measured by the dividend premium. This study is of particular interest given the weak minority investor protection and poor enforcement of regulation in the Chinese market. Our results suggest that, while CEO duality and board independence do not affect dividend decisions, larger boards, lower board meeting frequency and higher board ownership are consistently positively related to cash dividends and negatively related to stock dividends. Moreover, we find that among external market forces, systematic and idiosyncratic risks and liquidity play a determinant role in corporate cash dividend policies, while decisions about stock dividends are driven only by systematic risk. More importantly, our results show that investor preferences persistent even after adjusting for board ownership and characteristics, but it disappears when controlling for risks. We further examine whether investor preferences influence dividend substitution, and find that investor preferences for cash dividends do not influence firms’ stock dividend decision and vice versa. Our study provide insights into the determinants of both cash and stock dividend choice and raise potential policy implications in the emerging market context. JEL classification: G15; G30; G34; G35

This paper extends Sentana and Wadhwani (SW 1992) model to study the presence of feedback trading in emissions and energy markets and the extent to which such behaviour is linked to the level of arbitrage opportunities. Applying our augmented model to the carbon emission and four major energy markets in Europe, we find evidence of feedback trading in coal and electricity markets, but not in carbon market where institutional investors dominate. This finding is consistent with the notion that institutional investors are less susceptible to pursuing feedback-style investment strategies. In further analysis, our results show that the intensity of feedback trading is significantly related to the level of arbitrage opportunities, and that the significance of such relationship depends on the market regimes.

This paper investigates parametric pricing kernels for interest rate options within the intertemporal CAPM framework. The usual GMM estimation produces problematic pricing kernels that either fail statistical robustness tests or are inconsistent with economic theory in terms of being hump-shaped and having negative segments. Adopting the second Hansen-Jagannathan (HJ) distance, the four-term polynomial pricing kernels clearly dominate the nonlinear iso-elastic pricing kernels. The preferred pricing kernel has two significant state variables,the real interest rate and maximum Sharpe ratio. It is always strictly positive and everywhere monotonically decreasing in market returns in conformity with economic theory.

This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002–2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms' quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms' use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms' earnings behaviors in developed countries where the investor protection environment is strong. We suggest that firms' shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.

This paper investigates the impact of geographic difference on the external governance role of equity analysts in enhancing the information environment. By analyzing a sample of Chinese listed firms between 2003 and 2008, we find that analyst coverage significantly improves stock price informativeness. We further show that analyst coverage plays a more significant role in enhancing the corporate information environment in less developed regions where firms have limited financing channels and are more reliant on the equity market. Finally, we show that the positive effect of analyst coverage on informativeness is more pronounced in private firms (non-state-owned enterprises), and especially those located in inland provinces. The results are robust to the control of selection bias.

In this study, we examine the market efficiency of both the European and the U.S. carbon markets. Athreshold vector error correction model (TVECM) is adopted, which makes our paper the first to allow for the threshold effect and asymmetric price adjustments in market efficiency analysis. The results indicate that the market efficiency is strongly violated in both the European and the U.S. carbon markets in the short term. This generates the interest to examine information flows between the European and the U.S. market, and the results from a bivariate AR-GARCH model indicate that there is evidence for volatility spillover between the two markets. Finally, we examine the performance of several hedging strategies in carbon markets. We find that the European carbon futures market cannot provide effective risk management function to carbon market participants due to its market inefficiency in the long run, while the U.S. carbon market provides much better hedging performance due to its long term market efficiency.

How do international investors react to announcements of cross-border mergers and acquisitions (CM&As) by emerging market multinational enterprises (EMNEs)? Using a unique and manually-constructed firm-level dataset, this paper examines the stock price reactions to CM&A announcements made over the period 1991–2010 by Chinese MNEs listed on the Hong Kong Stock Exchange and the wealth impacts of their corporate governance. Our empirical findings confirm a positive stock price reaction on average, and suggest that international investors react positively to the presence of large shareholders, but negatively to the presence of institutional shareholders. There is a negative impact if the largest shareholder is either the State or the corporate founder. We suggest that this is because the international investors perceive potential principal–principal conflicts in such ownership/control constellations and discount equity prices accordingly. We also find that Board size and independence have positive effects on the price reaction, but that large supervisory boards engender negative reactions.

This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002-2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms’ quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms’ use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms’ earnings behaviours in developed countries where the investor protection environment is strong. We suggest firms’ shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.