Epidemics pose important challenges to modern society, and can rapidly lead to information uncertainty and panic throughout the world. Economic and financial scholars mainly discuss the impacts of epidemics on macroeconomics, such as by conducting cost-benefit analyses of various management measures taken during epidemics.Few studies, however, focus on the distinction between epidemics and other types of rare disasters,or investigate the effects on individual behavior and indirect losses. Thus, after examining the research into rare disasters and the characteristics of epidemics, we attempt to assess the impact of epidemics on individuals from the perspective of behavioral finance.
The paper is organized as follows. First, we review the literature on rare disasters and identify how epidemics are distinct, and then investigate the development of the epidemic using a medical infectious disease model. We then use the Bayesian model of incomplete information to analyze the errors in the human cognitive mechanism that occurred during previous epidemics. We apply saliency theory in our analysis of the main emotional errors during previous epidemics and discuss the impact of regional culture on the epidemic. We also distinguish the direct impact of the epidemic on economic and financial activities from the indirect effects through channels such as panic, social trust, risk attitude, and individual beliefs. We then make suggestions for future academic research and policy management, based on the understanding of epidemic infectious diseases and their impacts on the literature.
We suggest that future academic research addresses the following issues. Big data and other emerging technologies provide opportunities for in-depth research on the macro and micro phenomena caused by the epidemic, and using medical-specific models in epidemic-related research can improve reliability. By focusing on social welfare, comprehensively assessing the direct and indirect results of control measures, discussing the effects of geographical characteristics on the epidemic process, and exploring the effects of individualism, family relations, religious beliefs, and other factors, future studies could provide important insights.
Based on the literature, our policy recommendations are as follows. First, the government should consider the accuracy of early conclusions, be aware of the impact of behavioral errors on early judgment, promptly and accurately publish disaster information, and guide individuals to form correct beliefs. Second, in terms of intentional behaviors triggered by information processing, the effects of cognitive errors on individual beliefs and decision-making could be reduced by enhancing information transparency and early information accuracy. Third, in terms of unintentional behaviors caused by emotional factors, reviewing the historical epidemic processes and publicizing the progress of various countries in terms of prevention and control would help people adjust their reference points and distract attention, thereby reducing the impact of emotional bias. Fourth, the government could further consider the impact of emotions or emotional experiences on risk appetite, and thus prevent unreasonable changes in corporate cash flow and residents' financial market participation.
Our study makes three main contributions to the literature. First, we review in detail the irrational factors that characterize an epidemic situation and individuals' behavior mechanisms, and further discuss the indirect economic and financial impacts of the situation in terms of individual rational and irrational reactions. Second, by drawing on the research methods of narrative economics, we build a basic framework for analyzing panic emotions using the SEIR model based on the characteristics of rumors. Third, we analyze the assumption that individual behavior in an epidemic can have a systematic impact on the market.

How financial markets react to public health shocks as dramatic as a global pandemic is an important issue for the well-being of investors and even for the financial stability of a country. The COVID-19 global pandemic that began at the end of 2019 provides an opportunity to examine such reactions. In addition to the significant social changes brought by COVID-19,the normal operation and development of firms has been put under pressure in terms of the dilemma between “fighting the epidemic” and “work resumption.” In this study, we examine the relationship between the capabilities of urban public governance, investor sentiment, and stock price in the context of the COVID-19 outbreak, and address two main issues. The first issue is whether important information related to the outbreak, such as urban public governance capacity, can be perceived by retail investors during an outbreak. The second issue is whether the information above will be priced by the stock market.
We examine the impact of urban public governance capacity on the stock market through investigating the effectiveness of epidemic prevention measures and the resumption of work. The ability to publicly govern in the urban context can affect stock returns by influencing investor sentiment and corporate fundamentals. If a listed firm is located in a region where there is effective epidemic prevention, the anxiety of its investors is likely to be alleviated. The noise trading theory (De Long et al., 1990) suggests that pessimistic investor sentiment will lead to low stock returns in the future. However, in terms of a firm's operation fundamentals, the ability to ensure work resumption directly determines how quickly a firm can restore its normal operations, which in turn affects the stock return. This effect will be stronger for small- and medium-sized and growth-type firms, which are more vulnerable, and for those situated in areas with poor digital financial infrastructure.
We first collect data from several channels to measure investor sentiment, regional epidemic prevention ability, and capacity for work resumption during the COVID-19 outbreak. Investor sentiment is then measured by examining the text of around 2.6 million Internet forum posts, and regional epidemic prevention ability using real-time data of the number of hospital buildings per capita, obtained from AutoNavi Map. We measure the capacity for work resumption using real-time data of the movement of the population in and out of each location examined, which is obtained from the Baidu Migration Index.To assess the sensitivity of investors to information about public governance capacity, we estimate whether the capacity of a region in which a listed company is located can predict investor sentiment. Finally, we estimate the impact of investor sentiment and the ability for epidemic prevention and work to resume on stock returns during the first week after the Spring Festival. Additional analyses of the mechanisms are conducted by examining the dimensions of firm size, firm type (growth-type or value-type), and the strength of the local digital infrastructure.
Our main findings are as follows. First, investor sentiment is affected by a region's ability to prevent epidemics but is not sensitive to a region's ability of work resumption. Second, during the epidemic higher levels of investor sentiment and a greater ability to ensure work resumes both predict higher stock returns. However, regional epidemic prevention ability has no significant effect on firms' stock returns. Third, the effect of the ability of work resumption on stock returns is greater for small firms, growth-type firms, and those with poor digital financial infrastructure.
Our study makes three main contributions to the literature. First, we are probably the first to examine the relationship between urban public governance capacity and the reactions of the Chinese stock market during the COVID-19 outbreak. Second, we directly test whether investors can evaluate the capacity of urban public governance during major public events. Third, most studies on the impact of digital finance on the economy and investment focus on non-disaster periods. Our study extends this research by examining the role of digital finance during a disaster period. Our findings suggest that digital finance has a stabilizing role and we highlight the importance of its further development.

The Covid-19 pandemic of 2019 is significantly affecting the development of the Chinese economy. Against this background, we study how various historical events that led to supply and demand shocks affected firm investment and the global value chain.
We find that the demand shock associated with the 2008 economic crisis had a significant but short-lived impact on the investment of firms listed in China, with the effects mainly limited to the first half of 2008. Investment reverted to normal after the Chinese government rolled out stimulus policies, but in 2009 the crisis significantly dampened trade and the global value chain (GVC). Although the level of GVC participation recovered quickly in most countries, different trends in the weight in global output were evidentin three core regions of manufacturing GVC. The shares of key countries in the European Union and North America declined after 2008, and in ASEAN+3 countries (ASEAN plus China, Japan, and Korea) the shares rose significantly, with much of the rise attributed to domestic stimulus in China.
We investigate supply shocks by first comparing the investment behavior of listed firms from Beijing and Guangdong, two regions at the center of the SARS outbreak in 2003, to those in other provinces at and after the outbreak. We observe weaker investment by firms in Beijing and Guangdong but no difference was evident after three quarters, presumably because of the effective control of the SARS epidemic. We also find the 2011 Japanese earthquake significantly affected Japan's position in the manufacturing GVC. In particular, the manufacturing value added lost its positive long-term trend. In the short-term, Japan's clout in the GVC was also diminished.
The above findings provide insights about how China should react to the Covid-19 pandemic. First, when faced with external shocks, policies aimed at shoring up domestic demand not only stabilize firm investment but also strengthen China's position in the GVC and hence form the basis for further growth in the manufacturing sector. Second, long-lasting supply shocks, such as the 2011 Japanese earthquake, can significantly impact a country's manufacturing output, and hence require serious responses. While China achieved control over the Covid-19 pandemic and promptly restarted the economy, the multiple risks associated with the worldwide impact of the pandemic should be recognized. In addition to affecting the supply chain of China, the continued spread of Covid-19 will increase tension in international economic relations and may even lead to a significant reversal of globalization. China should continue to open its economy to the world, but it also needs to consider its potential responses to substantial change in the international economic landscape.
In light of the current economic situation, our findings lead to various implications about economic policies.First, the policy responses to the 2003 SARS epidemic and the 2008 economic crisis demonstrate that a sound domestic economy is the key to economic stability. Thus, fiscal and monetary policies should be used to effectively boost domestic demand. While maintaining control over the pandemic, local governments should be encouraged to tailor and differentiate their policies to restart the economy, revive daily life, and restore normal societal order.Second, the threat to the GVC and the supply chain posed by the pandemic in other economies indicates that China should adjust, consolidate, and optimize its industrial capacity. To address risks in the upstream supply, domestic firms should be encouraged to source from domestic suppliers, building up the resilience of the supply chain. In an uncertain international economic environment, some firms may delay moving their capacity overseas. Local governments should help these firms to stabilize their output, thus minimizing their operation risk and supporting employment. In addition to stabilizing key firms along the supply chain, China should consolidate its industrial capacity and speed up the transformation of technologically backward capacity. During the process of economic stabilization, China should not protect firms that would have been forced out by market competition. Third, China should uphold the principle of opening up and international economic cooperation when faced with an uncertain international economic and political environment. Given that the GVC may become more concentrated in specific regions, China may consider strengthening its cooperation with neighboring countries and those engaged in the Belt-and-Road initiative in terms of the GVC and supply chains. By avoiding protectionism and achieving mutual economic development, countries can significantly contribute to the reform and improvement of governance mechanisms in the international economic community post Covid-19.

The degree of leverage of China's non-financial corporate sector has risen rapidly since the international financial crisis in 2008. China has the highest leverage level among major global economies, and has the structural characteristic that large and state-owned enterprises have a more significant process of leverage increase than private SMEs. The reasons are complex, but we observe that when the financial structure is dominated by indirect financing, the non-market-oriented interest rate factor weakens the pricing function of financial resources, combined with rigid redemption due to implicit government guarantees, insufficient competition, and serious homogeneity in the financial industry. This results in a credit bias in terms of the property rights and scale discrimination of enterprises during the allocation of credit resources, which leads to a structural mismatch of financial resources and exacerbates the structural leverage problem.
The traditional monetary policy is the monetary aggregate adjustment policy, but this faces a dilemma in dealing with structural leverage. An expansionary monetary policy helps to reduce the interest burden and may stimulate the real sector to obtain more loans. However, a tight monetary policy can restrain the overall leverage level, and thus further exacerbate structural leverage problems. The People's Bank of China recently implemented various structural monetary policy instruments, such as the targeted medium-term lending facility, and monetary policy thus began to show structural features. Thus, making the optimal choice between tradition-oriented and structure-oriented monetary policy instruments, and exerting the structural adjustment effect of the structural monetary policy, have become important variables that must be considered when resolving the policy of structural leverage.
Existing studies analyze the leverage problem and monetary policy responses from various perspectives, and many ideas and methods are proposed. However, the assumptions, leverage characteristics, and policy operation modes of foreign markets are quite different from those of China. Most Chinese studies focus on quantitative descriptive and qualitative analyses, while policy analysis is limited to the responses of the traditional monetary policy. To accurately identify the causes of structural leverage and to understand the effects and mechanisms of different choices of monetary policy instruments on resolving structural leverage, we systematically study this issue from two perspectives: empirical analysis and theoretical analysis.
In our empirical analysis, we identify the relationship among different economic cycles, credit allocation bias, and changes in the leverage structure of enterprises, and examine the effect of traditional monetary policy using a panel regression model based on the annual data of China's 34 industrial sectors. The results indicate that the existence of credit allocation bias leads to heterogeneity in the leverage of enterprises with different property rights, which causes the structural leverage phenomenon to vary in the different stages of the economic cycle, and traditional monetary policy tools cannot easily solve the structural leverage problem. In the theoretical analysis, we combine the asymmetric investment and leverage change effects due to credit allocation bias in our DSGE model to identify the generation mechanism of these effects, and the optimal selection of monetary policy instruments in structural deleveraging. We find that tradition-quantity instrument is a better choice when addressing the structural leverage problem under the shock of technology, and that an appropriate combination of tradition-oriented and structure-oriented instruments is a better choice when addressing structural leverage under a price shock. In addition, if the economy is faced with the co-existence of structural leverage and an economic downturn under the shock of economic risk, structure quantity instruments are necessary to reduce the loans of state-owned enterprises, and structure price instruments are necessary to reduce the loan costs for private enterprises.

As the United States is still the world’s largest economy, many foreign exchange traders believe that the dollar index is an important factor affecting the short-term volatility of RMB exchange rate. The power of the dollar index has a great impact on the stability of global financial markets. Since the 1990s, multiple financial crises have been accompanied by the rapid rise of dollar index. The dollar index tendency will affect the market participants’ expectation of capital flow, thus affecting traders’ choice of asset portfolio. However, in comparison with the dollar index, the dollar and carry factor can summarize and reflect variation among global currencies better.
In recent years, China has gradually developed offshore RMB markets and liberalized exchange rate determination of the onshore RMB market. While the onshore RMB market faces the restrictions of the People’s Bank of China, the offshore markets can reflect market sentiment and expectations more sensitively. The rapid development of the offshore market also provides a new perspective for studying changes in the RMB exchange rate. After the 8·11 exchange rate reform in 2015, the trend of exchange rates in onshore and offshore markets tends similar obviously. Under the turbulent global macro environment, studying the linkage mechanism between the onshore and offshore RMB exchange rate can provide important reference and theoretical basis in for further opening of China’s financial market, while promoting the internationalization of RMB and preventing financial risks.
This paper analyzes the co-movements of onshore and offshore RMB exchange rates. We study the mean and volatility spillover effects of the exchange rates with global risk factors by using VECM-GARCH-BEKK model. By doing so, we can analyze the correlation features of the two markets in terms of mean and volatility while controlling the common share of global systematic variation.
The sample period of this paper is from January 1, 2012 to the end of 2018, covering the 8·11 exchange rate reform. The exchange rate reform is used as the breakpoint for further analysis of the impact of the dollar and carry factor on the co-movements between onshore and offshore RMB exchange rates. The onshore data are from the China Foreign Exchange Trade Center (CFETS), while the offshore data are from Bloomberg.
In terms of daily frequency, there is a long-term equilibrium relationship between the onshore RMB and the offshore RMB exchange rates. Before the 8·11 exchange rate reform, in response to increasing spread,the more market-based offshore exchange rate adjusted spontaneously to rebuild the equilibrium relationship between two markets. However, after the 8·11 exchange rate reform, once the spread between two markets becomes larger, both markets actively adjust the price level to reach equilibrium. This shows that the marketization of the onshore RMB market has been increased significantly after the exchange reform. The impact of the dollar factor on the onshore RMB exchange rate is always significant. The carry factor before the reform was not significant in explaining the onshore exchange rate, however it becomes significant after the reform.
The joint test shows that before the 8·11 reform, there is little evidence of a spillover effect between two markets. After the 8·11 reform, the onshore-market power to transmit volatility to the offshore market improves significantly,and the degree of integration between the two markets is also greatly improved. When the dollar factor and carry factor are under control, the ARCH spillover effect from the offshore market to the onshore market and the GARCH spillover effect from the onshore market to the offshore market disappear, which indicate that the dollar factor and carry factor absorb the shock transmission from the offshore to the onshore market and volatility transmission from the onshore to the offshore market.
The following suggestions are thus put forward based on the findings of this papar. First, to reduce the volatility risks of the exchange rate, more RMB derivative products with lower entry barriers should be devised as soon as possible. Second, to increase the number of investors, regulators should consider relaxing the principle of real demand requirement. Finally, more consideration of the impact of global risks should be given by the regulatory authorities in managing the exchange rates.

The slope of the yield curve is an important predictor of future economic activity. A flatter or inverted term spread often predicts low future output growth and a high probability of a recession. As an important economic signal and pricing benchmark for financial markets, the term structure of interest rates also affects investment decisions. We use demographics to study the dynamics of the yield curve. First, we discuss theoretically the channel of influence of the demographic structure. Next, we build a life-cycle model by introducing the consumption-capital asset pricing model (C-CAPM) to capture the dynamics of the yield curve. The life-cycle model allows us to capture the demographic structure and provides a general equilibrium basis for our analysis.
Our model reveals that the population structure affects the term structure of interest rates because of changes in savings over the life cycle, making demographics an important determinant of the yield curve. By influencing bond yields, the population structure has an impact on the yield curve. A young population prefers short-term bonds, which has a positive impact on the term structure of interest rates. Both middle-aged and elderly populations prefer long-term bonds, pushing down the long-term yields. Consequently, the slope of the term structure flattens with the age of the population.
The empirical evidence supports the predictions of our model. We obtain demographic data from the Health Nutrition and Population Statistics database of the World Bank and yield rate data from the International Financial Statistics database of the International Monetary Fund and the Wind database. Data on GDP, inflation and other economic variables come from the World Development Indicators dataset of the World Bank. Our sample includes 58 years of annual data from 194 countries or regions. We find that the term spread increases with the proportion of youth in an economy and that the proportions of middle-aged and elderly individuals have the opposite effect. The term spread is smaller and the yield curve is flatter in an older economy. These findings are robust to alternative population structure variables, term spread variables, estimation methods and sample weights.
The contributions of this paper are as follows. First, our theoretical model combines the life-cycle model and C-CAPM to examine how demographics relate to interest rates. Numerous studies focus on the impact of macroeconomic variables such as output and prices on the term structure of interest rates. We extend the literature by focusing on demographics as the driving force of the yield curve. In addition, we provide empirical evidence of the relationship between the population structure and the yield curve using various age structure variables, multi-dimensional yield curves (level and slope) and empirical models.
The second contribution is an interesting finding regarding the relationship between demographics and the yield curve. The theoretical and empirical evidence suggests that older economies may have higher short-term interest rates and lower long-term interest rates, leading to a relatively flat yield curve. A common concern is that an inverted yield curve might forecast an economic recession. However, a flat yield curve can stimulate long-term investment. In this sense, an increase in the age of the population can have a positive effect on long-term economic development.
The world's population is aging. Financial markets will respond to this change accordingly. Understanding the dynamic relationship between the yield curve and macroeconomic variables is of great importance. Our study provides investors with advice on how to judge market price distortions in the future. China's central bank, the People's Bank of China (PBOC), has recently lowered thereserve ratio. The new loan prime rate (LPR) is linked to interest rates set during open market operations, namely the PBOC’s medium-term lending facility. This change is meant to improve financial support and reduce the capital cost of the real economy. To further reduce interest rates, especially the long-term interest rate, the LPR interest rate mechanism should be used to increase the difference in interest rate policies, crack down on short-term speculation, encourage long-term investment and guide the development of the financial sector to coordinate with economic and social development. The population is always an important factor in economic development. Increasing the fertility rate and reducing the average age can revert the term structure of interest rates to a normal shape in the long run, improve the vitality of the economy and reduce the probability of an economic recession.

Small and micro enterprises (SMEs) play an important role in China's economic development, and their financing problems are thus of great concern to Chinese society. However, the lack of banks' supply of credit to SMEs has never been fundamentally resolved. In recent years, financial technology (Fintech) has deeply affected the financial sector. Fintech is expected to drive the supply of credit to SMEs in commercial banks.
Only by understanding the influence of Fintech on the banks' supply of credit to SMEs can we guarantee that it best serves both SMEs and the banks' credit business. Such an analysis can be carried out based on the well-established credit theory of SMEs. This theory emphasizes two perspectives: lending technology and banking market structure. The application of Fintech is likely to have a major impact on these two perspectives.
This paper accordingly distinguishes between traditional and Fintech lending technology, constructs a theoretical model of banking market structure, and analyzes the relationships between Fintech, banking market structure, and banks' supply of credit to SMEs. It creates a provincial Fintech development level index by manually collecting Baidu search index data and uses provincial panel data from 2011 to 2018 to conduct empirical tests of its theoretical hypotheses.
The results are as follows. (1) Fintech has changed lending technology, and it promotes banks' supply of credit to SMEs from the perspective of the entire banking system. (2) There is an inverted U-shaped relationship between banking market structure and banks' supply of credit to SMEs, which proves that there exists an optimal banking market structure that can promote the maximum credit supply to SMEs. (3) The development level of Fintech regulates the optimal banking market structure. That is, the higher the level of Fintech development, the higher the optimal degree of competition in the banking industry, which promotes credit supply to SMEs.
These results have three consequences for banks' supply of credit to SMEs. First, Fintech is important for promoting the entire banking system's supply of credit to SMEs. To increase the application of Fintech in the future, banks of all sizes should pay attention to the micro basis for the effectiveness of Fintech. Second, as the development of Fintech accelerates, we need to pay attention to the banking market structure, as the two must work together. Third, the effectiveness of Fintech depends on the credit environment for commercial banks and SMEs. Government departments, banking institutions, and SMEs should work together to improve the external market environment.
The contributions of this paper are threefold. First, the literature on Fintech and banks' supply of credit to SMEs focuses on theoretical and normative analysis, and the measurement of Fintech remains difficult. This paper establishes the Fintech development level index using the Baidu search index, which is more relevant to the banks' supply of credit to SMEs. The empirical test supplements the evidence on the current state of affairs in China.
Second, prior research rarely integrates the two perspectives of lending technology and banking market structure and does not consider whether there is a correlation between the impact of changes in lending technology driven by Fintech and of changes in banking market structure. This paper studies the impact of Fintech on the optimal banking market structure and thus enriches theories about banks' supply of credit to SMEs.
Third, in the past, the impact of banking market structure was mainly tested at the individual level of SMEs. This paper analyzes the entire banking system's supply of credit to SMEs using provincial panel data. It complements research based on micro-level data and is more conducive to analyzing the impact of banking market structure.
This paper has some shortcomings. Risk management is an important element of banks' supply of credit to SMEs. However, it cannot be directly quantified and analyzed due to limitations of theoretical analysis and data availability. Future research should explore this area.

An initial coin offering (ICO) is a novel way for start-ups to fund projects by issuing blockchain-based tokens via the Internet. ICOs can provide an influx of external capital more quickly than traditional equity financing. By bringing more individual investors into funding start-ups, ICOs also change the funding landscape: previously, the equity financing market was ruled by institutional investors such as venture capital (VC)investors and private equity (PE) investors. ICOs are thus considered a revolution disrupting traditional sources of venture capital.
Theoretically, the tokens issued by ICOs can be regarded as special securities that offer the right to receive income in the absence of voting power. Thus, ICOs may have diametrically opposed effects on firms. On the one hand, an ICO will increase the separation of ownership and control, which gives the actual controllers a tunneling incentive. Moreover, ICO investors cannot provide intensive monitoring services like venture capitalists, so opportunistic behaviors by management are loosely constrained. In addition, the large number of ICO investors scattered around the world are more likely to enjoy benefits as free riders rather than actively providing firms with better access to scarce resources; this would negatively affect the development of start-ups and significantly shorten their lifespan.ICOs also have advantages that help firms to increase their lifespan. First, an ICO is a fast track for raising money, so start-ups can quickly invest in valuable projects and seize market opportunities. Second, ICO investors can use the tokens to purchase start-ups' future products and services; in this way, firms can establish their consumer base at an early stage. Third, because ICO issuers do not suffer from dilution, which reduces their control over the firm, they can engage in more independent, innovative decision making and pursue long-term strategies, instead of engaging in short-sighted behaviors under pressure from investors.
Will ICOs shorten firms' lifespans owing to poor corporate governance, or increase firms' lifespans due to their advantages？ To answer this question, we collect data on firms in mainland China that raised capital through ICOs from January 1, 2016, to June 30, 2018. We use propensity score matching to match each ICO firm with a VC-backed firm in the same industry and year, ensuring that they have similar ownership structures and sizes.Based on the matched sample, we find that ICOs significantly shorten the lifespans of start-ups compared with equity financing. The results remain robust after adding more control variables and after applying the impacts of the opening of treaty ports as an instrumental variable. Furthermore, the results indicate that ICOs shorten firm lifespan because they hinder firms from deepening their human capital. Regarding the macroeconomic consequences, the adverse impacts caused by ICOs have worsened the regional credit environment, which notably drives the increase in regional financing costs. Further research suggests a more significant negative effect of ICOs on start-ups with poorer information disclosure, less attention from government officials,and less media supervision.
Our study offers important implications in two areas. First, because ICOs as an emerging financing method have significant adverse effects on firm lifespan, managers should weigh the pros and cons when adopting this method. Second, China's ban on ICOs is suited to the current institutional environment. In countries with imperfect legal systems, a disruptive technology will have negative impacts if not properly applied. Thus, it is necessary for the government to regulate financial innovations given the institutional environment.
Our paper makes three contributions to the literature. First, there has been little empirical research on the influence of ICOs on corporate financial behaviors. We collect data on all ICO projects in mainland China and are the first to reveal the adverse effects of this emerging financing method on firm lifespan, which supports the ban on ICOs by the People's Bank of China and provides empirical evidence for the need to regulate financial innovations in China. Second, our paper contributes to the literature on corporate capital structure. Because firms in mainland China follow the “one-share-one-vote” principle, no research has examined the impacts of dual-class shares on Chinese start-ups. Using a novel sample of ICO firms, our paper studies how dual-class shares harm corporate governance mechanisms and the development of firms under imperfect legal systems. Third, our paper extends the literature on the lifespans of start-ups. This study not only addresses the gap in understanding firms' financing methods and lifespans but also gives insights into the factors that influence the long-term development of start-ups.

Online peer-to-peer lending in China has rapidly developed in recent years. The emergence of the online lending marketplace should in theory meet the financing needs of individuals and small and micro enterprises and has created a new type of risky asset. This newly developed financial market is complementary to the traditional financial system and contributes to inclusive finance. However, in practice, inadequate regulation means that many platforms have experienced defaults and failures. These industry anomalies have led to the necessity of such an online lending market being questioned. Thus, we address two important questions: 1) whether the rapid development of the online lending market is economically reasonable; and 2) if the introduction of regulatory measures can promote the healthy development of the industry.
The emergence of online lending reflects both the development of Internet technology and the demands of consumers for microloan services. Rapid growth in the online lending market is therefore reasonable if these macro factors have an effect, but excessive development will lead to greater default risks for high-growth platforms. We use daily transaction data from 651 nationwide online lending platforms in our empirical analysis.
First, we find that the higher the growth rate of the platform, the lower the future risk of default or shutdown. Second, we further examine the factors influencing the growth of online lending platforms. We find that technology supply and inclusive finance demand have a significant impact on growth. Using the Internet penetration rate as a measure of technology supply, we find that the growth rate is higher in provinces with greater Internet penetration. Technological progress has lowered the barriers to entry in the online lending industry, thereby intensifying competition. Platforms in provinces with more dispersed transaction volume exhibit a faster growth rate. Using the number of microfinance institutions per capita to measure financial accessibility, we find that poorer access to finance leads to higher online lending growth, and that if the platform offers more short-term and small loans, its growth rate will be higher.
We divide the growth rate into expected growth and abnormal growth, based on the above influencing factors. The results show that when the actual growth rate is lower than the expected value, the risk of the platform going out of business will increase. These findings imply that platforms depend on continually high growth. Once growth slows, the risk of failure will increase.
On December 28, 2015, the China Banking Regulatory Commission and several government ministries jointly drafted the “Interim Measures for the Management of Online Lending Information Intermediaries (Draft for Comment).” We regard this as an external institutional shock and find that the risk of platform failure and growth rate are reduced after the release of the regulatory policy, after controlling for changes in technology supply, inclusive financial demand, and other variables. The regulation also alleviates the need for the platform to depend on continuing high growth. Further, we divide the provinces into high- and low-risk, according to the platform shutdown rate before the release of the regulation, to examine the heterogeneous effects of regulatory policies. The results show that the effect of regulation in high-risk provinces is weaker or not significantly different from that in low-risk provinces, indicating that the regulations should be strengthened.
Our study makes three main contributions to the literature. First, few studies have analyzed the impact of macro-institutional background on the development and risks of the digital economy industry. This study explores the macro factors driving the development of the online lending market. Second, regulatory measures have struggled to keep pace with the rapid growth of the online lending market, while the effectiveness of these regulations have not been fully assessed. In this study we examine the heterogeneous effects of regulation, and thus provide a useful reference to industry participants and regulatory authorities. Third, the empirical designs of most studies focusing on the development of the digital economy involve qualitative analysis methods or only use aggregated data. We extend the literature by using numerous daily transaction data samples from online loan platforms.

The CSI 300 index regularly adjusts its member stocks. Stocks deleted from the CSI 300 index may not enter the CSI 500 index, but they usually do. Such stocks switching from the CSI 300 to the CSI 500 index, therefore, should be affected by the CSI 300 index deletion effect and the CSI 500 index addition effect. Literatures have focused on the overall CSI 300 index deletion effect but ignored the CSI 500 index addition effect in the switching group. An old Chinese saying goes, “Better to be the head of a dog than the tail of a lion.” When small-cap stocks in the CSI 300 become relatively large ones in the CSI 500, that is, when the “tail of the lion” becomes the “head of the dog”, there will be more money tracking them.
Since the establishment of the CSI 500 index in January 15, 2007, more and more assets have been tracking it. In 2009, when the first mutual fund tracking the CSI 500 index was established, there were no fewer than nine funds tracking the CSI 300 index, all of them large in scale. By the end of 2015, there was 36.5 billion yuan tracking the CSI 500 index and 124.8 billion yuan tracking the CSI 300 index—the former was close to one third of the latter. There was more money tracking the CSI 300 index, but the weights of the switching stocks in the CSI 500 index were much larger than in the CSI 300 index. The effect of addition to the CSI 500 index has probably exceeded the effect of deletion from the CSI 300 index.
In this paper, we use fuzzy regression discontinuity design to study the price effects of switching between groups. Stocks that switched from the CSI 300 index to the CSI 500 index showed a significant addition effect in the three trading days after the announcement. The addition effect is about 6% and is robust to different bandwidths. However, stocks that switched from the CSI 500 index to the CSI 300 index had no significant price effect. The asymmetric price effect seems to be the result of investor awareness or short sale restrictions.
The price effects of the switching group have an obvious time trend. Before 2015, when there was less money tracking the CSI 500 index, the price effects of the switching group were only slightly influenced by the CSI 500 index. After 2015, as the tracking assets increased, the price effects of the switching group were heavily influenced by the CSI 500 index. Specifically, for stocks that switched from the CSI 300 index to the CSI 500 index, the price effect was non-significant before 2015 but significant after 2015. For stocks that switched from the CSI 500 index to the CSI 300 index, the CSI 300 deletion effect was dominant before 2015, but the price effect became non-significant after 2015. It seems the CSI 500 index deletion effect offset most of the CSI 300 addition effect.
To compare the price effects of the switching group with other deleted stocks, we study these two groups with a Fama-French five factor model. The results indicate that these two groups differ significantly. The addition effect plays a dominant role in the switching group, while other deleted stocks show a significant deletion effect. The switching group has a 6% higher abnormal return than the latter group. The results remain robust when controlling for fundamentals and liquidity of the stocks. For stocks that are added to the CSI 300 index, it does not seem to matter whether they come from the CSI 500 index or not. This implies that investors, or more precisely arbitragers, pay little attention to the deletion of stocks.
Overall, our results support the price pressure hypothesis (PPH). The price effects result from short-term price pressure and nearly fully reverse soon after the execution day. As more and more assets track the CSI 500 index, the CSI 500 addition effect of the switching group dominates its CSI 300 addition effect. Ignoring this addition effect may lead to a non-significant or even positive deletion effect.
The contributions of this paper are as follows. (1) The domestic literature has neglected the CSI 500 addition effect of stocks that switched from the CSI 300 index to the CSI 500 index. We prove that the switching group has a significant addition effect. The price effect is caused by short-term buying pressure, and this conclusion supports the price pressure hypothesis. (2) When practitioners try to take advantage of the index effect, they should not only pay attention to one index but also to other related indexes. (3) The addition effect and deletion effect are asymmetrical, and exploring the original causes of this asymmetry can provide insights into investor behavior and market efficiency. (4) Regular index adjustment also provides a good sample for other studies. Future studies based on this sample should not ignore the case of indexes exchanging their component stocks.

The important influence of institutional investors, especially financial institutions, on corporate governance is attracting more and more attention from researchers. Previous studies focus on the supervisory effect of bank loans, the active intervention of hedge funds, and the activities of institutional investors, such as mutual funds and pension funds, that may obtain board seats or even threaten to withdraw investments. However, unlike the above-mentioned institutions, which have economic incentives for holding equity and creditor’s rights, insurance institutions directly address the governance risks associated with corporate governance deficiencies by providing directors’ and officers’ insurance (“D&O insurance” hereinafter) to listed companies. Therefore, insurance institutions may have more direct incentives to play a corporate governance role.
Corporate fraud has severely damaged investor confidence and reduces the efficiency of capital markets. Therefore, preventing and deterring corporate fraud are very important to protect the interests of investors and the healthy development of capital markets. Both internal and external governance mechanisms are considered to be important factors in preventing corporate fraud because they directly affect the cost of corporate fraud. However, although D&O insurance is an important corporate governance mechanism, its effect on corporate fraud has not been fully studied. Existing theories show that D&O insurance can not only increase the cost of corporate fraud through active and effective external supervision by insurance institutions, but also stimulate the moral hazard and opportunistic behavior of directors and executives by transferring potential litigation risks to insurance companies, thereby increasing the likelihood of corporate fraud. Therefore, the actual role of D&O insurance in corporate fraud is an important empirical research topic.
Using a sample of A-share firms listed on the Shanghai and Shenzhen exchanges in the 2000 to 2016 period, we find that D&O insurance significantly reduces the probability of corporate fraud, which conforms the supervisory effect hypothesis. These conclusions remain valid after robustness tests based on the instrumental variable method, Heckman two-stage model, and propensity score matching method. We then discriminate between the supervisory hypothesis and collusion hypothesis to identify the impact mechanism. The collusion hypothesis holds that insurance institutions tend to help insured companies hide corporate fraud to protect their own interests. Therefore, D&O insurance may reduce the probability of corporate fraud's being revealed but not really affect the corporate fraud tendencies of insured companies. The supervisory hypothesis holds that external supervision by insurance institutions can effectively reduce corporate fraud and increase the probability of inspection. The regression results of a bivariate probit model with partial observability show that D&O insurance is negatively correlated with corporate fraud tendencies and positively correlated with the probability of inspection. We also find that D&O insurance reduces agency costs, which significantly inhibits managerial opportunism. The above results support the supervisory hypothesis and suggest that the collusion hypothesis is not valid.
We also do further research in the following three areas.(1) After differentiating between types of corporate fraud, we find that the supervisory effect of D&O insurance on fraud committed by businesses is the most significant.(2) By examining the combined effects of D&O insurance and other governance variables on corporate fraud, we find that D&O insurance has a better governance effect on corporate fraud for state-owned enterprises, when chairmen and CEO positions are separated, and when auditors come from the “Big Four” accountancy firms. However, when insurance institution are shareholders, the marginal governance effect of D&O insurance on corporate fraud is weaker. (3) Grouping the regressions shows that the supervisory effect of D&O insurance on corporate fraud is more significant in poor external supervisory environments or when there is high transparency of internal information.
This study not only provides evidence that insurance contracts affect corporate fraud through corporate governance channels, but also shows that insurance institutions provide a more effective corporate governance mechanism for China's capital market through D&O insurance. Finally, this study may prompt theorists, legislators, and regulators to rethink how decisions about D&O insurance affect corporate governance and corporate fraud. They could provide a reference for decision makers to promote the development of the D&O insurance market.