New economic phenomena, problems, and concepts have emerged consecutively since the financial crisis. As drivers of macroeconomic research, central banks have been carrying out in-depth analysis on these new concepts and patterns and exploring new policy options. The gap between existing macroeconomic theories and the new issues in the practical policy-making process not only poses challenges, but also provides rare historical opportunities to researchers. Currently, central banks' research around the world include the following three key topics.
   The first is the logic behind negative interest rate policies (NIRPs) and their effects. Since the global financial crisis, some developed economies have implemented NIRPs to stimulate economic recoveries. Strengthened supervision and weakened risk preferences after the crisis provided the possibility for NIRPs, while the credit currency system and the widespread adoption of electronic trading technologies provided the necessary conditions for the implementation of NIRPs. NIRPs may effectively boost confidence, reduce market interest rates, and loosen financial conditions in the short-term. However, in the long-term, the effects will not be as satisfying. NIRPs can easily affect banks' profitability, hamper effective resource allocation, weaken the transmission effect of interest rate policies, create asset bubbles, lead to competitive currency devaluation and financial turmoil, and over-exert central bank's policy control. China should treasure the fact that our monetary policy operates within normal margins, take full advantage of the decisive role that the market plays in optimizing resource allocation through price leverage, deepen reform and opening-up to improve the role of the government, focus on unblocking the monetary policy transmission channels and provide necessary policy preparations for crisis response.
   The second is the macroeconomic policy challenges posed by global stablecoins. Facebook's white paper release of Libra on June 2019 triggered widespread concerns over the potential risks and macroeconomic policy challenges posed by stablecoins. These issues mainly concern four aspects. (1) Stablecoin transactions and payment information are independent of existing systems, thus posing challenges for central banks to provide effective supervision. (2) Stablecoins may weaken the effectiveness of capital control, thereby affecting domestic financial stability. If stablecoins suffer from poorly designed global networks, lack of regulations, or fail to function as intended, they may also introduce new risks to financial stability. (3) Global stablecoins will impact the currency sovereignty of a nation, which may affect the creation and transmission of credit currencies. Stablecoins may also destabilize the demand for currency, which makes policy-setting more difficult. (4) The use of stablecoins on a global scale may further enhance the dominant position of the USD in the international monetary system. In 2014, the People's Bank of China (PBoC) initiated researches on its own digital currency and digital fiat currency (Digital Currency Electronic Payment, DC/EP). It is necessary to adapt fiat currency to future digital economic ecology and meet the challenges posed by global stablecoins.
   The third is the risks to the macroeconomy and financial system caused by climate change. Climate change is one of the major factors leading to structural changes in the economy and financial system. First, climate change may shrink collateral values and tighten credit terms, which in turn send market signals that may magnify the risks of climate change. Second, climate change is highly uncertain, and financial institutions are unprepared to handle extreme anomalies. Third, climate change impacts the financial system and the macroeconomy through “circular feedback”. The PBoC thoroughly implements new development concepts, attaches great importance on green financial system constructions, and will focus on the following three propositions: (1) climate change's heterogeneous impact and policy response on specific segments of the financial industry; (2) how the risks of climate change impact macroprudential and microprudential supervision; (3) the feasibility and framework adjustments required to incorporate climate change risks as parameters into the two-pillar regulatory framework of monetary policy and macroprudential policy.
   The global economy is still teetering on the edge of crisis today. To explore a modern central bank system and establish a highly adaptable, competitive and inclusive modern financial system, we need to mobilize the Chinese academia, the political sphere, and the market together, and cooperate as they participate and explore the theoretical and practical frontiers, so as to better boost academic prosperity, and sustain high-quality economic development in this era of change.

The notion of the Impossible Trinity holds that one country can only fulfill two of the following three conditions: a fixed exchange rate system, the free flow of capital, and independence of monetary policy. However, due to the continuous development of financial globalization, more and more studies have found that US monetary policy can influence peripheral countries' economies through the flow of capital, bank balance sheet, foreign exchange reserves and other channels because of other countries' preference for the dollar. A flexible exchange rate does not ensure the independence of monetary policy. Rey (2013) found increasing global synchronization among capital flows, asset prices, financial leverage, and credit growth.
   Rgy(2013) defines this synchronization as the “Global Financial Cycle,” which is negatively related to VIX. The Global Financial Cycle has been widely discussed. Many studies acknowledge its existence, and use VIX as the proxy variable to study the relationship between the Global Financial Cycle and the independence of monetary policy. The research methods of these studies are SVAR or panel regression; few discuss the theoretical causes of the Global Financial Cycle. Therefore, this paper constructs a two-country DSGE model including bank and financial frictions to theoretically analyze the causes of the Global Financial Cycle and discuss whether the monetary policies of peripheral countries with flexible exchange rates are independent.
   A partial equilibrium analysis based on the theoretical derivation finds that the policy interest rate affects the balance sheets and decision-making behavior of banks. As a result, the equity asset ratio, market interest rate, and bank survival rate change with the policy interest rate. Therefore, the cause of the Global Financial Cycle is the synchronization of the policy interest rates of various countries. Through impulse response analysis, it is found that even countries with flexible exchange rates need to change their monetary policy rate in the same direction as the Federal Funds Rate to maintain domestic financial and economic stability.
   Counterfactual simulation of flexible exchange rate countries with different degrees of capital liberalization shows that the spillover effect of US monetary policy through the Business Cycle is opposite of the spillover effect through the Global Financial Cycle. The impact and transmission speed of the Global Financial Cycle is far greater than that of the Business Cycle. Take the loose monetary policy of the United States as an example. The rapid availability of domestic credit in peripheral countries leads to overinvestment, overcapacity, and oversupply of commodities. The economy shifts from the real to the fictitious, and the real economy declines because of poor return on investment. The real economy is asynchronous with the financial cycle. To deal with this asynchrony, peripheral countries must also loosen monetary policy to restrain capital inflow. The synchronization of monetary policies in different countries leads to the synchronization of financial markets, which is to say the Global Financial Cycle.
   Further research finds that as international investment increases, the impact of the valuation effect is so large that the exchange rate cannot completely offset the central country's spillover effect. The valuation effect is one reason why a flexible exchange rate country without capital control has no monetary policy independence. The depth of the financial market and the independence of monetary policy are complementary. US monetary policy spillover has a greater impact on countries with less developed financial markets.
   The conclusions of this study lead to the following suggestions. First, it is necessary to strengthen macro prudential supervision to restrain the excessive risk-taking behavior of financial institutions. Second, moderate capital control is workable, especially when the global financial market is in a boom period.

Central bank communication occurs when a monetary authority releases information about future policy to the public to change economic agents' policy expectations. These explanations of future policy can even affect the psychology and behavior of economic agents more than the actual operation of the policy itself (Hansen and McMahon, 2016), and central bank communication has become an important tool for implementing monetary policy (Blinder et al., 2008).
   The literature on central bank communication research in China mainly uses the China Monetary Policy Report (hereafter referred to as the Report) as research material, neglecting the communication information in the minutes of the quarterly meeting of the Monetary Policy Committee (hereafter referred to as the Minutes), which is more timely and forward-looking. In addition, existing researches mainly use the GARCH model, which is more suitable for the analysis of high-frequency data, but the data from Minutes and Report are quarterly. To resolve these shortcomings, we use both the Minutes and Report to identify written central bank communication, and we use Internet search materials to identify oral central bank communication. The event study method is then used to analyze how central bank communication affects stock prices in a relatively short time window.
   Our study produced the following conclusions based on theoretical analysis. First, different types of central bank communication have different impacts on stock prices. Written communication has a significant impact on stock prices, but oral communication has no obvious effect. The reason may be that written communication is more formal and authoritative than oral communication, and its frequency of publication is more regular, so it more strongly affects economic agents' expectations and actions.
   Second, written communication has the following effects. (1) Loose information communication increases stock prices, and tight information communication decreases stock prices. (2) Written communication shows strong short-term effects, clearly demonstrating the sensitivity of the Chinese stock market to information.
   Third, communication based on the Report has three types of effects on stock prices: immediate effect, predictive effect, and lag effect. However, communication based on the Minutes only shows a predictive effect. The reason for this difference is that information based on the Report is more unambiguous, and agents pay more attention to the Report.
   Fourth, written communication has asymmetric effects on stock prices against different market backgrounds. (1) The magnitude of the positive role of loose information communication in a bear market is less than that of tight information communication's negative role, while the magnitude of the positive role of loose information communication in a bull market is greater than that of tight information communication's negative role. (2) The magnitude of the negative role of tight information communication on stock prices is greater than that in a bull market; the magnitude of the positive role of loose information communication in a bear market is less than that in a bull market in a short period of time, while the magnitude of the positive role of loose information communication in a bear market is greater than that in a bull market in a longer period of time.
   The policy implications of this study are as follows. (1) Written communication is an effective method of guiding the behaviors of participants in the stock market. (2) The central bank should be aware of the different functions of the Report and Minutes, to ensure the flexible dissemination of information.

There is emerging evidence that debt finance is an important source of capital for firms engaged in innovation. In recent years, with the deregulation of bank entry, China's banking system has witnessed rapid changes in market competition. This paper provides a detailed analysis and establishes causal links between bank competition and innovation in the Chinese context.
   Our first analysis concerns how bank competition has changed in China. We capture commercial city bank branch data and construct the Herfindahl-Hirschman Index (HHI) to measure competition levels. We find that the banking market structure has witnessed rapid changes with large variations across cities and time. This provides a good opportunity to test the interaction of firm innovation and changes in bank competition. We then match patent information from the State Intellectual Property Office (SIPO) to firm-level data from the China Industry Census (CIC). This allows us to trace the level of bank competition firms face and how firms respond in terms of new patent applications. We expect firm innovation to increase following increased bank competition because firms can take advantage of the greater supply of finance.
   Second, we examine two possible channels to explain this result. We test whether entry to innovation and the innovation input of incumbent firms responds to increased bank competition. We expect that bank competition relaxes entry barriers for new firms and spurs greater innovation among incumbents. Moreover, we look at the differences in these two possible channels across different types of firms. We expect small and medium-sized non-state owned firms to take advantage of the improved credit conditions to finance innovative projects.
   Third, to clarify whether bank competition affects the allocation of firm innovation investment, we test the relationship between bank competition and the distribution of firm innovation output and input. We expect that the distribution of innovation input and output will tighten.
   Our paper advances two strands of the literature. First, it extends the literature on the real effects of financial structure on innovation in China by focusing on the impact of bank competition on firm innovation. Second, our paper contributes to the emerging literature on innovation by showing that bank competition allows firms entry to bank credit and encourages incumbent firms to invest more in innovation.
   We utilize and compile three datasets for our empirical analysis, including all Chinese bank branch information, CIC firm-level data on R&D expenditure and other firm-level control variables, and SIPO patent data for firms.
   This paper has three main findings. First, we find that the overall positive effects of bank competition on innovation output are strong and robust. Second, we explore the possible underlying mechanisms and show that bank competition expands access to credit for firms, which allow entrant firms to begin innovative projects and incumbent firms to invest more in innovation. Third, we find these mechanisms more prominent for non-state-owned enterprises and for small and medium enterprises. These results indicate that the growth in overall innovation output is partly due to the allocation in the supply of credit to small and medium-sized and non-state-owned enterprises. All of these results suggest that a reduction in the regulation of bank entry is can promote firm innovation in China. Bank competition improves the distribution of innovation resources among firms, thus more firms are able to secure bank financing for innovative projects.
   Our paper adds to the literature on financial development and economic growth in the following ways. First, we find that bank competition expands access to credit for potential firms, which relaxes their financial constraints, allowing firms entry and access to innovative projects and incumbent firms to invest more in innovation. Second, we extend the literature by examining the heterogeneous effects of bank competition on different types of firms, and find that the growth in overall innovation output is mainly due to the output of small and medium-sized non-state owned firms. Third, this paper provides a microeconomic foundation for the literature on the finance-innovation nexus in China.
   In future research, it will be important to understand how this rapid change in the banking sector affects technological progress in China, such as in the relationship between the banking system and disruptive innovation. This will be of great value in understanding the transformation of China's economic structure.

In this paper, we theoretically analyze the mechanism through which China's market-oriented reform has affected the development of industrial technology.The two-step SYS-GMM method is used to test the influence of marketization on the industrial technological progress in China based on the industrial marketization index and 1995-2014 panel data on the high-tech industry. A recursive model is also used to explore the transmission mechanism of how marketization affects the development of industrial technology. On this basis, this paper explores the impact of five features of marketization, and uses the product-term method to examine whether marketization has different effects on industries with different technological characteristics.
   This paper makes three important findings. First, marketization is found to greatly promote the development of China's high-tech industry, and the promotion effect is enhanced after China's accession to the WTO. Marketization is also found to promote technical progress through the mechanisms of improving the efficiency of capital allocation, increasing investment in R&D, and promoting the diffusion of technologies. Second, the five features of industrial marketization are found to have different effects on technological development, with institutional improvement having the most significant impact, followed by the development of the non-state-owned economy, the development of product markets and factor market, and finally the relationship between the government and the market. Third, marketization has heterogeneous effects on industries with different technological characteristics, with the greatest effect being on industries with high technological intensity.
   This paper makes the following contributions. First, this paper is the first to explore the effects of marketization on the development of China's high-tech industries using the industry market-oriented index. Second, using a recursive model, this paper explores the ways in which marketization affects the development of industrial technology, such as by improving the efficiency of capital allocation, increasing the investment in R&D, and enhancing the diffusion of technology. The findings in this area deepen our understanding of the basic laws of how marketization affects industrial technological progress. Third, the five features of marketization are found to have different effects on technological progress, and marketization is found to have different effects on industries with different technological characteristics. Thus, this paper enriches the research on the relationship between marketization and technological progress.
   To a certain extent, this paper clarifies the important role that marketization plays in driving the development of industrial technology. In addition, the results of this paper can serve as a reference for policy makers seeking to promote China's ongoing marketization and the development of the high-tech industries.
   The findings of this paper have the following policy implications. First, to promote the development of high-tech industry, it is necessary to coordinate marketization with the policies on industrial-science-and-technology and industrial development. Moreover, as the marketization process advances, greater focus should be placed on industries with a lower degree of marketization. Second, to effectively promote the development of industrial technology, the marketization process needs to be coordinated with policies on improving the capital efficiency, R&D, and technology trading. Third, the government needs to promote the reform of the five features of marketization according to their degree of influence and progress, place greater emphasis on the factor market, and improve the relationship between the government and the market.

How to allocate cash reasonably between the main bodies of an enterprise group is a difficult problem. The parent and subsidiary companies must deal with serious bureaucratic agency problems and information asymmetry. Subsidiary managers have a strong temptation to engage in rent-seeking and land-enclosure. If too much cash is placed in subsidiary companies, this can result in overinvestment. However, because of the fear of the loss of cash allocation efficiency due to subsidiary managers' personal projects, over-withdrawal of funds by parent companies may lead to underinvestment.
   From the perspective of the parent company, based on Bureaucratic Agency Theory and Information Asymmetry Theory, this paper studies the impact of cash distribution changes on capital allocation efficiency and the moderating effect of the parent company's management incentive in different life cycle stages. The results show that in the growth period, the high cash-holding ratio of subsidiaries under the “autonomous” financial control of the parent company is beneficial for grasping investment opportunities, but it leads to overinvestment. Salary incentives and equity incentives restrain overinvestment. At this time, incentives to parent company management are manifested as restraining the enclosure of subsidiary managers. In the mature stage, “balanced” financial control of the parent company moderately reduces the cash holding ratio of subsidiaries and alleviates overinvestment. Equity incentives can further restrain overinvestment, but salary incentives are ineffective. In periods of recession, excessive withdrawal of funds under the parent company's financial control results in underinvestment. Equity incentive can restrain underinvestment. In this period, the parent company management uses equity incentive to drive subsidiary managers to invest.
   This paper makes the following contributions. First, research on the impact of cash distribution on capital allocation efficiency based on agency cost theory has mostly focused on the overall level of enterprise groups. Based on the Bureaucratic Agency perspective, this paper studies the agency problem of subsidiary sub-managers and reveals the enclosure behavior of subsidiary managers at different stages of enterprise group development. The results contribute to Agency Cost Theory, enhance our understanding of the Hierarchical Agency Theory under an enterprise group pyramid structure, and help explain the “agglomeration but not agglomeration, large but not strong” philosophy of enterprise groups in China. Second, Chinese enterprise groups function differently from parent and subsidiary companies in Germany and Japan, which are connected by a coordination and communication mechanism. Under information asymmetry, parent companies in China can excessively interfere with subsidiary companies, which may inhibit those companies' investment autonomy. This study provides evidence of excessive interference by Chinese parent companies in subsidiary companies, provides empirical support for the phenomenon of underinvestment among Chinese enterprise groups, and reveals the dynamic governance of financial centralization and decentralization of parent and subsidiary companies from the perspective of information asymmetry. Lastly, the literature has focused on the governance effect of management incentives on investment efficiency from the perspective of single enterprises. By focusing on the group level, this paper studies the governance effect of parent company managers' incentives on subsidiary managers' investment behavior. It thus provides a useful exploration of how group headquarters management incentives can influence group governance. The paper's results show how the enterprise group can adjust the headquarters management incentive scheme at different stages of development to optimize capital allocation.

Since 2009, the Securities Regulatory Commission has required more than 260 listed companies in the three categories of the Shanghai Stock Exchange to disclose their social responsibility reports together with their annual reports. However, corporate hypocrisy, political rent-seeking, and misuses of corporate social responsibility frequently occur, and corporate social responsibility has become a tool for managers' self-interest. This paper focuses on the role of corporate social responsibility in resource exchange. Corporate social responsibility can help enterprises strategically obtain key resources, such as funds, and reduce capital constraints. In the context of increasingly fierce financialization, this paper argues that profit-seeking will drive enterprises to allocate more funds to financial assets through corporate social responsibility. This will diversify the resources for the development of the main business, squeeze and compress the funds invested by entities, damage the value of enterprises, and cause harm to China's economy. This paper confirms this hypothesis through empirical research and proves that CSR has the adverse consequence of increasing the degree of enterprise financialization by alleviating the financial constraints on enterprises. This conclusion supplements studies of the adverse economic consequences of corporate social responsibility from the perspective of shareholder value doctrine and provides empirical evidence for countries in transition.
   Based on panel data of A-share non-financial listed companies on the Shanghai and Shenzhen Stock Exchanges from 2010 to 2017, this paper empirically tests the relationship between corporate social responsibility and corporate financialization through a mixed OLS model and PSM-DID model. The main conclusions are as follows. (1) Corporate social responsibility provides a source of funds for financial investment by easing the financial constraints of enterprises, leading to greater enterprise financialization. (2) The effect of corporate social responsibility on financialization only exists in non-state-owned enterprises with weak external supervision and enterprises with low levels of internal governance and equity concentration. Administrative external supervision and the internal supervision of large shareholders can play a governance role in restraining managerial speculation. (3) The financialization of China's enterprises is mainly motivated by the “investment substitution” of profit maximization, rather than the “reservoir”. The main policy recommendations from this paper are as follows. (1) Policymakers should encourage listed companies to improve their corporate social responsibility disclosure. In addition to disclosing relevant non-financial information, they should also disclose important financial information, such as investment decisions, to provide a reference for investors to identify the real motivation of corporate social responsibility. (2) Governments should formulate appropriate policies to prevent enterprises from over-financialization. They should strengthen the supervision of enterprises' investments in financial assets and financial institutions, and should standardize the investment direction of enterprises. In addition, it is important to reduce the operating costs of enterprises and improve operating profit margins by cutting taxes and fees. Governments should also strengthen the flow of capital to industry by revitalizing the high-quality assets of enterprises.
   The main contributions of this paper are as follows. (1) There are two opposite hypotheses about the impact of corporate social responsibility on corporate value: the shareholder value doctrine and management self-interest doctrine. From the perspective of the shareholder value doctrine, CSR can help enterprises obtain key resources and improve their value. From the perspective of the managerial self-interest doctrine, CSR can easily lead to adverse economic consequences. However, the literature based on shareholder value has largely ignored the potential negative impact of corporate social responsibility. The conclusion of this paper reconciles the two opposing views and provides a new path for explaining the impact of corporate social responsibility on corporate value. (2) Most studies explore the motivation of enterprise financialization under the economic or financial framework without considering the impact of non-financial factors on the allocation of financial assets. This paper avoids these limitations and identifies the motivation of corporate financialization from the unique perspective of corporate social responsibility.

Controlling shareholders in China frequently pledge their stock, and some studies have explored the impact of such stock pledging on corporate innovation inputs and outputs. They find that stock pledging by controlling shareholders can lower the intensity of firm R&D and the amount of patent applications. However, corporate innovation ability is a joint function of innovation efficiency and scale. The literature focuses on the impact of stock pledging on corporate innovation scale while ignoring its effect on innovation efficiency or the dynamic relations between innovation inputs and outputs.
   Theoretically, there are two competing hypotheses that are potentially related to the impact of controlling shareholders' stock pledging on corporate innovation efficiency. On one hand, such stock pledging may reduce corporate innovation efficiency. First, it increases the deviation of controlling shareholders' control rights and cash flow rights, and it mitigates the monitoring effect of large shareholders, leading managers to engage in more innovative activities. Further, it aggravates the extent of tunneling by controlling shareholders, leading to expropriation of economic resources that could have been used for corporate innovation. Second, due to the risk of control rights transfer arising from stock pledging, it can easily cause controlling shareholders' focus to shift from long-term strategic activity to short-term performance and market capitalization management. As a result, controlling shareholders may ignore innovation activities that play a critical role in establishing companies' long-term competitiveness. The tunneling and myopia effects caused by controlling shareholders' stock pledging may reduce firms' innovation inputs, lead to technological lock-in effects or R&D interruptions, and ultimately reduce corporate innovation efficiency.
   On the other hand, controlling shareholders' stock pledging may enhance corporate innovation efficiency. Controlling shareholders who pledge stock may prefer higher risk. This kind of shareholder may have greater tolerance for failure and pay more attention to innovation activities, potentially increasing innovation efficiency. The literature notes that controlling shareholders reduce control rights transfer risks not only by boosting short-term stock returns but also by enhancing long-term firm value. Innovation ability, which is determined by both innovation efficiency and scale, is the key driver of firms' long-term value. The literature finds that controlling shareholders' stock pledging reduces R&D intensity. Thus, controlling shareholders can mitigate control rights transfer risks by promoting short-term performance through innovation scale reductions and maintaining long-term competitiveness through innovation efficiency enhancements. Because improving innovation efficiency can mitigate the negative effect of stock pledging on innovation scale, firms' overall innovation ability can be maintained.
   In this study, we investigate the relation between controlling shareholders' stock pledging and corporate innovation efficiency by using Chinese A-share listed firms over the period 2006-2015. Our findings are as follows. (1) Stock pledging by controlling shareholders significantly decreases firms' innovation efficiency. (2) The negative relation between pledging by controlling shareholders and innovation efficiency is more pronounced for firms with higher agency costs between controlling and minority shareholders, or higher risks of stock pledging. This finding indicates that tunneling and myopia are important channels through which controlling shareholders' stock pledging hinders innovation efficiency. (3) The effects of tunneling and myopia have significant substitution effects on the relation between controlling shareholders' stock pledging and corporate innovation efficiency. (4) The negative impact of pledging on innovation efficiency is stronger when a firm's R&D intensity is reduced.
   We contribute to the literature in the following two ways. First, unlike earlier studies that focus on firm size, market competition, corporate property rights, the marketization process, government support, factor market distortion, and margin trading systems, we provide new evidence on whether and how controlling shareholders' stock pledging affects corporate innovation efficiency. This paper offers a new research perspective on the determinants of corporate innovation efficiency. Second, our study provides new evidence linking controlling shareholders' stock pledging to corporate innovation efficiency and therefore extends the literature on the economic consequences of such stock pledging.

The disposition effect refers to a robust trading phenomenon in which both individual and institutional investors are more likely to sell an asset when it is at a gain than when it is at a loss. The disposition effect is common in the stock market, the futures market, the real estate market, and other financial markets. However, as widespread as the disposition effect is, the literature has not reached consensus on its mechanism. We extend the literature by showing the significant impact of investor sentiment on the disposition effect both theoretically and empirically.
   The theory of investor preference and the theory of rational belief are the two main explanations for the disposition effect. Kahneman and Tversky's (1979) prospect theory attributes the disposition effect to the features of investors' preferences, as described by the S-shaped value function. Investors are more risk averse when facing profits and more risk seeking when facing a loss. Therefore, investors prefer to sell profitable stocks to realize gains and hold loss stocks to wait for recovery. One basic assumption of present prospect theory models and relevant modified models is that investors' expectations regarding the probability of stock price change are equal to the real probability (Barberis and Huang, 2008; Barberis and Xiong, 2009). As this assumption fails to describe the fact that investors usually have irrational expectations, the present prospect theory model does not include the documented impact of investor sentiment on trading behavior and asset pricing (Antoniou et al., 2013; Da et al., 2015). To fill this gap, we introduce investor sentiment into the prospect theory model and study the potential impact of investor sentiment on the disposition effect.
   Irrational investors usually fail to properly estimate the price expectation of a risky financial asset (normally a stock). Therefore, we describe investor sentiment by using investor expectation bias on the probability of stock price change for different cases (Barberis et al., 1998) and modify the prospect theory model based on the binomial tree model in Barberis and Xiong (2009). We define investors' irrational expectations regarding the probability of stock price increase as π_s and the actual probability of stock price increase as π_o. The difference (Δ) between π_s and π_o represents the extent to which an investor overestimates the probability of stock price increase (Dumas et al., 2009; Shefrin and Statman, 1994). When market sentiment is high, investors are often more overconfident and more optimistic, such that Δ>0. We construct a discrete-time portfolio decision-making model derived from investors' irrational expectations and obtain a series of simulation results for investors' optimal portfolio choices under limited capital based on the parameters in Barberis and Xiong (2009) and the PGR/PLR measures of the disposition effect used in Odean (1998). The results indicate that investors' disposition effect decreases as Δ increases, showing the essential role of investor sentiment in the disposition effect.
   We base this study on a transaction-level dataset of approximately 1.77 million individual investors from a large anonymous national Chinese broker from 2007 to 2009. We also include investors' daily positions so that we can match and calculate the PGR and PLR indexes. The sample covers a striking bull and bear period for China's stock market, which offers a natural environment in which to study the impact of investor sentiment on the disposition effect. Consistent with previous studies, our results show strong evidence of the disposition effect in China's stock market. On average, the likelihood of a sale for Chinese stock investors is 20% higher when a gain is realized than when a loss is realized. We regress the monthly measure of the disposition effect on monthly market investor sentiment after controlling the market momentum variable. The results verify our hypothesis that investors' disposition effect decreases when market sentiment is higher. Specifically, the disposition effect is 0.1% lower when market sentiment increases by 1%. Additionally, the disposition effect is even weaker in stocks that are more difficult to evaluate (e.g., stocks with a low book-to-market ratio and lower capitalization) due to the mechanism of investor sentiment. Our results are robust when controlling the potential endogeneity using the dummy variable of the 2008 financial crisis as the instrumental variable.
   We contribute to the literature by studying the impact of investor sentiment on the disposition effect both theoretically and empirically. Affected by sentiment, investors hold biased expectations about future stock prices, thus changing their selling decisions toward profits and losses. Our results also shed light on the optimization of investors' decision-making processes.

The recent discovery of the MAX anomaly poses a challenge to the effectiveness of the factor pricing model. In-depth analysis of the MAX anomaly and clarification of the reasons for its formation are of great importance for improving the factor model and increasing market efficiency. From a review of the literature, this paper finds that studies of the causes of MAX anomaly have approached the problem from a variety of perspectives, but few have given a systematic theoretical explanation of its formation and persistence. This paper argues that the MAX anomaly occurs due to the speculative trading of investors and is subject to arbitrage restrictions in the stock market. First, investors' gambling preference drives them to buy winners and sell losers. The pursuit of a small probability of abnormal returns leads to large fluctuations in stock prices in the short term. Second, mispricing breeds market anomalies, but arbitrage trading among investors causes asset prices to return to equilibrium and eliminates market anomalies. Therefore, when investors face tight restrictions on arbitrage, stock mispricing will be ongoing and ultimately strengthen the market anomaly.
   Based on this analysis, this paper empirically examines the MAX anomaly in the A-share market by using the public data of Chinese A-share listed companies from year 1995 to 2017, and analyzes the impact of investors' gambling speculation on the MAX anomaly. To prove that the MAX anomaly originates from the gambling trading behavior of investors rather than value investment behavior, this paper further examines the impact of firm value on the anomaly. By constructing an index of arbitrage restriction, this paper further analyzes the strengthening effect of arbitrage restriction on the MAX anomaly.
   The main conclusions of this paper are as follows. First, there is a significant MAX anomaly in China's A-share market, which is statistically significant after controlling different MAX construction periods and company characteristics. Through a combined long-short strategy, investors can achieve an annualized return of 15.72%. Second, due to investors' gambling psychology, MAX has the characteristics of inertia transmission in the short term. However, the positive transfer probability of MAX decreases gradually and tends to become equal with the passage of time. There is no alternation change between high MAX and low MAX, which means that the MAX anomaly is different from the volatile aggregation anomaly.
   In addition, there is a positive correlation between speculative characteristics and the MAX anomaly. The MAX anomaly of stocks with low value, high gambling risk, and high retail shareholding ratio is significantly stronger than that of high value, low gambling risk, and low retail shareholding stocks. Lastly, due to arbitrage constraints, the stock price deviation caused by investors' irrational speculation cannot return to equilibrium in the short term, which significantly strengthens the MAX anomaly. However, in terms of the excess portfolio returns generated by short selling, the impact of arbitrage restrictions is limited.
   This paper makes three major contributions. First, it confirms the existence of the MAX anomaly, which is robust to many factors. In terms of the construction period for MAX, this paper finds that the best construction term in the Chinese A-share market is five days. The construction criterion for the MAX period is based on the marginal return of portfolios, which gives a quantitative basis for the construction of the MAX index, and can effectively avoid the need for data mining. Second, from the perspective of probability transfer and a nonlinear probability model, this paper proves that the transfer of extreme returns has the characteristic of time-varying attenuation, and the probable transfer of the MAX index cannot be observed in the long run. Overall, the stronger the degree of gambling speculation is, the more significant the MAX anomaly becomes, while the higher the investment value is, the less evident the MAX anomaly is. This paper also confirms that the gambling trading behavior of retail investors is significantly stronger than that of large investors and institutional investors. Finally, this paper expands the explanation of the MAX anomaly from the perspective of limited arbitrage.

Institutional investors in China rely on professional teams, information, and capital advantage to actively participate in corporate governance, and they accordingly play an important role in the healthy development of the capital market.However, due to differences in trading styles, trading objectives, and information processing abilities, heterogeneous institutional investors may have different governance effects, and the relationship between their governance effects and internal corporate governance mechanisms may be different. Although a number of studies offer in-depth research on the governance effect of institutional investors, it is still rare to see studies of how the governance effect of heterogeneous institutional investors is affected by internal control, part of firms' internal governance mechanism. It is necessary to clarify the relationship between internal control and the governance effect of heterogeneous institutional investors to improve their governance effect and promote the healthy development of capital markets.
   Based on China's capital market data, we examine the governance effect of heterogeneous institutional investors on earnings management under different internal control qualities. The results show that compared to non-local or short-term institutional investors, local or long-term institutional investors are more conducive to improving accruals quality and reducing earnings noise. When firms have material internal control weaknesses, the governance effect of local or long-term institutional investors in improving accrual quality and decreasing earnings noise is significantly weakened. The governance effect of heterogeneous institutional investors is more affected by internal control weakness in non-state-owned firms than in state-owned firms. When firms have material internal control weakness over financial reporting, the governance effect of heterogeneous institutional investors is significantly weaker. These findings imply that the relationship between institutional investors' governance and internal control is complementary rather than substitutional. This complementary relationship is primarily driven by internal control weakness over financial reporting.
   In addition, this paper explores the impact of heterogeneous institutional investors on corporate governance. The results indicate that although local and long-term institutional investors have different governance effects on earnings management, there are some commonalities. In particular, the governance effects of local, long-term and local long-term heterogeneous institutional investors in suppressing earnings manipulation are complementary to internal control, and information is likely to be the cause of complementarity.
   Our study contributes to the literature in three ways. First, in contrast to the literature, we consider the shareholding period and geographical location when distinguishing between heterogeneous institutional investors, and we divide them into local, long-term, and local long-term institutional investors. We investigate heterogeneous institutional investors' performance in governing earnings management under different internal control levels and different types of internal control deficiencies. Second, by demonstrating the relationship between internal control and the governance effect of heterogeneous institutional investors, this paper improves our understanding of the mechanism of the influence of heterogeneous institutional investors' shareholdings on corporate governance. It thus provides empirical evidence and guidelines for external regulators who aim to strengthen institutional investor management from the micro perspective of internal control and enriches the literature on the governance effect of institutional investors. Lastly, this paper explores the governance effect of heterogeneous institutional investors under different property rights and its relationship with internal control.