In recent years, studies have focused on the financialization trend among Chinese real sector firms and analyzed the factors driving the financialization of Chinese non-financial firms by establishing investment portfolio models. The relative risks of industrial investment dominate the financialization of Chinese real sector firms. However, the literature does not consider the possible impact of macro-monetary factors on the financialization of micro-firms. The analytical expressions of the theoretical models after including macro-factors would be more complicated and affect the interpretation of the mechanism driving the financialization of micro-enterprises.
This paper first considers the influence of monetary factors on firms' portfolio selection using a theoretical model. It then deduces firms' optimal financial asset ratio based on three factors, namely monetary expansion, profit-seeking capital and risk aversion. Finally, it conducts detailed empirical analysis and statistical testing based on 2007-2018 half-year panel data on non-financial firms listed in the China A-share stock market. The results of the benchmark model show that monetary expansion, profit-seeking capital and risk aversion are the key factors affecting non-financial firms' financialization. The influence of monetary expansion on the proportion of corporate financial assets has a direct suppression effect and an indirect promotion effect. However, the indirect promotion effect cannot offset the direct suppression effect. When using the financial channel profit ratio to measure the level of corporate financialization, risk aversion remains a significant driving factor and the profit-driven nature of capital no longer has a driving role.
This paper further investigates the benchmark regression from two perspectives. The first adds economic policy uncertainty to the benchmark model as a macro-risk factor. The second tests whether the financialization mechanism of firms driven by ownership is different and shows heterogeneity. The results of adding macro-risk factors show that after introducing economic policy uncertainty, the originally significant coefficient of the monetary factor variable is no longer significant or the absolute value decreases. This indicates that the role of macro-monetary factors in the financialization of non-financial firms may indeed realize an indirect impact through the macro-risk channel.
The empirical results of dividing the samples according to the nature of firms' ownership show that the financialization-driving mechanism of non-financial firms does demonstrate heterogeneity due to different ownership attributes. The financialization of state-owned enterprises is mainly affected by the monetary and risk aversion factors; it is also affected by asset size and leverage ratio. The proportion of private enterprises' financial assets is mainly driven by risk aversion and profit-seeking capital. The proportion of profits obtained through financial channels is mainly affected by monetary factors. The financialization of the other types of enterprises is significantly affected by monetary factors and risk aversion, but profit-seeking capital is not a main driving factor. The results of the model that incorporates economic policy uncertainty further show that for all types of enterprise, when the model contains macro-risk factors, the originally significant monetary factors are no longer significant or the absolute value is significantly reduced. This further demonstrates that monetary factors may affect the financialization of enterprises through economic policy uncertainty.
Regardless of whether the financial level of Chinese non-financial firms is measured in terms of financial investment motivation or financial investment results, risk aversion is the most critical driver of firms' financialization. Profit-seeking capital has a significant driving effect on the proportion of private enterprises' financial investment. Simultaneously, neither the benchmark model nor the robustness test results provide statistically significant evidence that monetary expansion drives firms from real to virtual. The results indicate that further research is needed to clarify the transmission channels through which macro-monetary policy can release funds and guide micro-enterprises to make correct investment decisions.

With the accelerating development of market-oriented interest rate reform and financial innovation, quantitative targets have begun to show limitations. Relying only on quantitative targets can no longer meet the needs of China's monetary policy (Yi, 2018). The central banks of major countries have gradually abandoned their quantitative targets and turned to interest rate monetary policy regulation since the mid-1980s, with their interest rate decisions implicitly following the “Taylor rules” (Sun et al., 2018). China's monetary policy targets are mainly based on inflation and simultaneously adhere to multiple targets (Zhou, 2013), leaving the monetary authority to face more complex constraints. In the process of monetary policy transformation, exploring the Taylor rules in line with China's reality and achieving reasonable rule interest rates are very important to facilitate the transition to price-oriented monetary policy regulation.
Many scholars have explored the suitability of different Taylor rules. However, regardless of the Taylor rule used, it cannot be achieved without proper estimations of the potential output and natural interest rate (also referred to as the equilibrium real interest rate). This paper explores the construction of Taylor rules in line with China's reality. It recalculates the potential output embedded with financial cycle factors and the natural interest rate. Furthermore, it estimates rule interest rates to provide useful suggestions for the transformation of monetary policy regulation.
This paper estimates the potential output and shows that the output gap embedded with financial cycle factors may decrease the potential output during financial expansion periods. This can help policymakers effectively cope with economic overheating and provide policy guidance for bubble states. The results also show that adding financial cycle proxy variables, such as credit/housing information, has significant explanatory power.
Furthermore, this paper measures the natural interest rate (with R001 as the nominal interest rate) using the state space model proposed by Cour-Thimann et al. (2006). From 2004 to 2018, the natural interest rate in China ranged from approximately 0.68% to 3.96%, with an average of approximately 2.35%. The natural interest rate directly estimated by the Hodrick-Prescott filter and the commonly used difference between the nominal interest rate and Consumer Price Index were negative on average, inconsistent with China's reality.
This paper verifies the rationality of constructed Taylor rules and estimates the rule interest rates under different circumstances. In addition to the traditional output and inflation factors, it is reasonable to incorporate spreads at home and abroad and the degree of house price deviation from economic growth into Taylor rule construction in China. According to the trends of several calculated rule interest rates, the gap between the money market interest rates and the rule interest rates has significantly narrowed with the rapid progress of market-oriented interest rate reform since 2013. However, their independent trends significantly deviated from the fourth quarter of 2017 to the fourth quarter of 2018.
It is necessary to continue to deepen the reform of interest rate liberalization, firmly push the transformation of monetary policy regulation toward price orientation, strengthen policy coordination to provide the necessary policy space for interest rate control, smooth the interest rate transmission channel, improve the effectiveness of interest rate policy transmission, pay more attention to financial cycle factors and strengthen the estimation of natural rate indicators.
This paper makes three contributions. First, it includes financial cycle factors in its estimation of China's potential output, which is rare in domestic studies. Second, it uses a method based on the potential output to estimate the natural interest rate, reducing the impacts of setting the model incorrectly. Third, it constructs Taylor rules in line with China's reality and measures the rule interest rates under different circumstances, thereby providing a useful exploration of the transformation of monetary policy regulation.

China's economy has faced greater risks in recent years due to factors such as high debt levels, an aging population,and increasingly trade disputes. These developments have made the risk preferences of households an important issue when analyzing China's economy. This paper aims to investigate whether risk preference is an important transmission channel for China's monetary policies. When risk aversion increases, households tend to hold more money and induce price adjustments on financial and real assets, thereby altering aggregate demand. The interest rate alone is thus insufficient to explain the impact of monetary policy. However, in the New Keynesian dynamic stochastic general equilibrium (DSGE) framework, the roles of risk preference and of monetary aggregates are generally neglected.
To address these questions, this paper introduces an explicit role for money balances by incorporating non-separability of preferences into a classical Keynesian DSGE framework, as based on the work of Ireland (2004), Andres et al. (2006), and Benchimol and Fourcans (2012). In addition, we use a Taylor rule with a real money gap, nominal money growth, and real money growth, as a tool to investigate the mixed monetary policy rule used in China. We estimate our model by applying Bayesian techniques to China's quarterly macroeconomic data, such as GDP deflator, nominal GDP, interest rate, and money supply, as collected from the People's Bank of China, the National Bureau of Statistics of China, and the Wind database. Then we investigate the macroeconomic effects of China's monetary policies under different levels of households' risk preferences.
This paper presents several findings. (1) The mixed Taylor rule with nominal money growth is the best suited to China's monetary policy at this stage of economic transition. Therefore, the growth rate of the money supply is still an important policy target. (2) A model that assumes non-separability between consumption and money fits China's macroeconomic characteristics better than models with separable utility functions. (3) With a non-separable utility function, the real money balance directly affects the economy's output gap and its rate of inflation, which means that risk preference has an important impact on the macroeconomic situation. When households are less risk-averse, the impact of monetary policy becomes stronger. Therefore, it is important for central banks to create a neutral financial environment, and to fully consider households' risk preferences during their policy-making process.
The paper makes four main contributions to the literature. First, it is one of the first papers to investigate the relationship between risk preference and the effects of monetary policies in China. The findings demonstrate an important new transmission channel for China's monetary policies, which has notable policy implications.
Second, unlike most studies on China's monetary policies, this paper introduces a money-in-the-utility function with an assumption of non-separability between consumption and money, and it incorporates this function into a classical DSGE model framework. This approach enriches previous research on model structures in the domestic DSGE literature, and suggests a model that is more in line with China's realistic macroeconomic characteristics.
Third, this paper conducts an in-depth study on the rules of monetary policy, and attempts to construct a variety of mixed policy rules. It seeks to identify the optimal rule that best aligns with the characteristics of China's current monetary policy. To some extent, this effort improves the state of theoretical research on China's monetary policy reform.

In recent years, international institutions have successively warned of the risks of global sovereign debt, arousing great concern among international investors and regulatory authorities. On one hand, monetary and fiscal easing has been conducted to promote economic recovery around the world since the financial crisis of 2008, which has resulted in the expansion of sovereign debt and a heavier debt burden. On the other hand, uncertainties over the global economy, the costs of financing, and the pressures for debt-repayment have all increased in the complex and volatile international environment.
In this context, the sovereign debt risk faced by each country rises not only on its own, but also due to the spillovers from other countries. Existing studies have demonstrated that economic fundamentals and market factors are the main determinants of sovereign debt risk, and while the former mainly affects the long-term sovereign debt risk, the latter mostly influences the short-term risk. Therefore, the cross-country spillover of sovereign debt risk which arises due to the connectedness of economic fundamentals and market factors between nations should also show different short-term and long-term effects.
Therefore, in considering the duration of sovereign debt risk spillover among countries, this study investigates both the short-term and long-term cross-country spillover effects of sovereign debt risk in terms of the frequency domain. The analysis uses the BK spillover index approach, which is based on the spectral representation of generalized forecast error variance decomposition (Baruník and Krehlík, 2018). Our study is based on a sample of 14 countries whose GDP rank among the top 20 in the world from November of 2008 to June of 2019. The sovereign debt risk of these countries is measured by the sovereign CDS spreads.
We find several significant patterns. First, the cross-country spillover effects of sovereign debt risk are significant in both short and long terms, and total spillover in the time domain is mainly driven by short-term risk spillover. Second, we find a linear relationship between short-term and long-term risk output levels, but concerning risk input, different types of countries present different relationships and form two main clusters. The short-term risk input is higher than the long-term risk input for emerging market countries that have strong short-term vulnerability. Third, the greater the debt risk of the risk-output country, the greater its long-term spillover risk to other countries. Correspondingly, the greater the risk of the risk-input country, the greater is its short-term spillover risk from other countries. Moreover, trade volume, financial market integration, and business cycle synchronization between two countries are all positively correlated to the long-term spillover risk, but their correlations with short-term risk spillover are not significant. Fourth, both the short-term and long-term sovereign debt risk spillover networks show obvious characteristics of regional clustering. In the short-term spillover network, a country always has clear connections with a narrow group of countries—usually those that are in the same region or have similar economic and financial environments. However, in the long-term spillover network, the connections can extend to countries out of the narrow group through economic and trade relations.
Our study has three types of policy implications. First, market regulators should be aware of the sovereign debt risks from cross-country spillovers, and they should actively strengthen international cooperation in terms of financial supervision. Such measures can help regulators accurately evaluate the risk levels of other countries, and thus respond quickly to the risk and minimize the overall losses. Second, it is important to build a differentiated regulatory system for long-term and short-term sovereign debt risk spillovers. The dominant risk of short-term sovereign debt spillover should receive more attention and be subjected to daily supervision. Finally, measures to prevent long-term and short-term sovereign debt risks should be considered separately. In the short term, it is essential for countries, and especially for emerging market countries, to enhance disclosure of assets as a means to reduce information asymmetry. It is also essential to improve financial supervision as a means to avoid dramatic changes in short-term capital inflows or outflows. In the long term, governments should reduce their fiscal deficits, trade deficits, and foreign debts, and balance their debt structures to reduce their sovereign debt risk. Furthermore, each country should improve the ability of its economic and financial system to resist economic shocks and risk spillovers from other countries.

With the increasing uncertainty of the international and domestic economic and financial situation, the short-term liquidity supply and demand fluctuations in China's banking system have increased in recent years. Drawing on its international experience, the People's Bank of China has made a series of innovations in using monetary policy tools, such as short-term liquidity operations (SLO), standing lending facilities (SLFs) and medium-term lending facilities (MLFs). Compared with the traditional liquidity management tools, what are the transmission mechanisms and effects of these new liquidity facilities? How should the central bank regulate and use these liquidity facilities? As the related domestic literature focuses either on empirical analysis or else adopts a partial equilibrium analysis framework, it is difficult to identify the transmission effects of such monetary policy tools on the real economy. To solve this problem, this paper constructs an endogenous liquidity demand mechanism for mediating between banks with liquidity shortages and banks with liquidity surpluses. The paper also builds a DSGE model to assess the inter-bank market, and then conducts theoretical and empirical research on the transmission mechanisms and effects of liquidity facilities.
First, the paper compares the macroeconomic fluctuations in a frictionless inter-bank market situation with the fluctuations in a frictional inter-bank market situation, and then it analyzes the reasons why the central bank needs to facilitate liquidity intervention through liquidity facilities. In the frictionless inter-bank market, runs only occur in the deposit market, and not in the inter-bank market. However, in the frictionless inter-bank market, runs occur simultaneously in both the deposit and the inter-bank markets. The differences between these two situations reflect the net effects of macroeconomic fluctuations caused by runs on the inter-bank market. When the financial sector suffers a negative impact, the banks with liquidity shortages and banks with liquidity surpluses both increase their preventive demands for liquidity, thereby pushing the inter-bank market's overall demand for liquidity to remain high.
Second, this paper considers the case of an enlarged liquidity gap in the inter-bank market and of market failure, in which the process of relying solely on the spontaneous return of the market to a steady state takes too long, and the central bank is required to intervene in support of liquidity. Through modeling the operations of the liquidity facility, this paper finds that on one hand, the central bank can guide loan market pricing by adjusting the interest rates of liquidity facilities, thereby keeping credit spreads within a reasonable range. on the other hand, under uncertain economic conditions, the banks with liquidity surpluses fail to quickly restore the supply of liquidity to the banks with liquidity shortages. In such cases, the central bank can supplement liquidity directly into the market by acting as the lender of last resort, thereby supplying external liquidity to eliminate the gap caused by the insufficient internal liquidity supply in the inter-bank market.
Finally, this paper evaluates real quarterly data on China's macroeconomic variables from 2002 to 2018, and it does so on the basis of parameter calibration and Bayesian estimation. This assessment enables a discussion of the theoretical aspects of the inter-bank market liquidity risk contagion mechanism, and the transmission effects of liquidity facilities. The findings indicate that liquidity facilities can guide loan market pricing and keep credit spreads within a reasonable range. At the same time, the central bank's direct liquidity intervention, as the lender of last resort, has a very significant effect.
Based on these research conclusions, the following policy suggestions are provided: (1) The central bank should further improve the LPR pricing mechanism, play a guiding role in setting a medium-term lending facility interest rate, and promote the reduction of financing costs in the real economy. (2) Liquidity facilities are of great significance in reducing the liquidity risk of the inter-bank market, and in weakening macroeconomic fluctuations due to negative shocks. However, it should not be assumed that these monetary policy tools are omnipotent. (3) The central bank should further improve the collateral framework, expand the scope of collateral to ensure the safety of central bank assets, and enhance the availability of central bank funds to financial institutions. (4) The liquidity supply from lending facility operations should be linked with commercial bank credit, thereby establishing an incentive compatibility mechanism. Such a mechanism can guide funds for investment in key areas of the national economy, and help to promote the optimization and upgrading of the economic structure.

As important part of the economy, small and micro-enterprises (SMEs) play a critical role in providing employment opportunities, developing technological innovation, promoting economic growth and maintaining social stability. However, the development of SMEs has been troubled by financing difficulties. With the shocks of the 2019, China-U.S. trade tensions and the 2020 COVID-19 pandemic, the situation seems to be deteriorating further. China has rolled out multiple measures to address SMEs' financing difficulties. Formal financing for SMEs has shown steady growth in recent years. However, certain questions require further investigation, such as whether the formal credit demand of SMEs is satisfied by financing, whether formal financing promotes SME development and the extent to which such promotion is effective. Finding the answers to these questions will greatly help not only to address the financing difficulties of SMEs, but also to objectively formulate and evaluate relative credit supporting policies and further promote SME development.
Objectively evaluating the impact of formal financing for SMEs is not an easy task. In addition to data restrictions, the effectiveness of controlling sample selection can greatly affect the research outcomes. For example, SMEs' access to financing may not be random. Those that operate well are more likely to obtain bank loans, causing endogenous problems in SMEs' financing choices. Ignoring such nonrandom selection bias would lead to mistakes, such as attributing the good performance of SMEs to financing or exaggerating the impact of formal financing on SMEs.
We aim to provide an unbiased estimate of the effectiveness of formal financing for SMEs and draw a reliable conclusion. We focus on whether the formal credit demand of SMEs is satisfied by financing and explore how and to what extent formal financing affects the operation of SMEs. Based on survey data on 3,134 SMEs in Sichuan Province, we adopt the matching method to address our research questions. First, we define and identify the types of formal credit demand of SMEs based on data characteristics and further analyze the basic features of the credit market. We find that up to 83.83% of SME credit demand may be satisfied through formal financing. Thus, the conclusion that financing is difficult seems to be inaccurate and oversimplified. However, financing difficulties mainly manifest in insufficient effective credit demand, especially for SMEs in non-manufacturing industries. The distribution difference of the main characteristic variables, including operating duration, number of employees, total assets and income, is significant between the samples with financing and those without. This shows that bank loan acquisition is not random, which may cause endogeneity problems. To scientifically evaluate the impact of formal financing on SMEs, we analyze the factors influencing financing for SMEs using the GBM model and probit regression. Furthermore, we construct matching concomitant variables to control the endogeneity problems caused by selection bias via the matching method. Formal financing significantly improves SMEs' profitability, but is not conducive to employment in the short term. We also test the balance of the matched samples using a variety of statistical indicators to ensure the effectiveness of the matching process. Propensity score matching and alternative samples are also used in the robustness tests to further enhance the reliability of the research findings. Finally, we address the situation by industry and find that the inhibitory effect of formal financing on the employment of SMEs is mainly manifested in the manufacturing industry.
We make three contributions. First, we reevaluate the financing difficulties of SMEs. Based on the credit demand characteristics of SMEs, we evaluate the degree to which they experience financing difficulties by distinguishing effective credit demand from potential credit demand. This reflects the basic situation of the credit market for SMEs more objectively. Second, we help narrow the research gap regarding the analysis of formal financing effectiveness for SMEs in China. No research in this field has used the matching method. Third, we provide policy makers with valuable information regarding how to solve SMEs' financing difficulties and the financing dysfunction in the credit market.We verify the need to optimize credit supporting policies for SME financing and innovatively propose suggestions for classifying and implementing these policies in combination with credit policy objectives.

For a long time, low labor costs have been the cornerstone of the international competitiveness of Chinese enterprises, especially labor-intensive manufacturing enterprises. In recent years, with the aging of China's population structure, the slowdown of rural labor force migration, the implementation of the new “Labor Contract Law”, and the improvement of the minimum wage standard, labor costs in China have increased rapidly. Consequently, there is great pressure on the production costs of Chinese enterprises, and the cost advantage of these enterprises is gradually diminishing. Studies in the literature focus more on the impact of labor costs on enterprise cost advantage and innovation incentive and less on the impact of labor costs on enterprise financing constraints. However, we find that in the context of rapidly increasing labor costs, due to information asymmetry, there may be overreaction and discrimination in the credit market. This is especially true for labor-intensive enterprises, which are subject to the “screening effect” of bank credit, leading to more severe financing constraints. These labor-intensive enterprises are facing the “double pressure” of rising production costs and tightening financing constraints, which makes it more difficult for them to transform and upgrade.
Based on the credit rationing theory, we use the survey data of Chinese enterprises provided by the World Bank to examine the impact of labor costs on corporate financing constraints. In terms of specific research methods, we do not study financing constraints based on whether enterprises obtain bank loans. Instead, based on the credit rationing theory, we examine whether enterprises need and apply for bank loans and the availability of such loans, identify the enterprises that are subject to credit rationing, and distinguish between two types of credit rationing: enterprise self-credit rationing and bank credit rationing. Under this framework, we use the ratio of labor costs to total cost and the ratio of labor costs to enterprise sales volume as proxy indicators of labor costs to systematically investigate the various effects of labor costs on the credit decisions of banks and enterprises.
The main findings of this paper can be summarized in three points. First, an increase in labor costs significantly increases the probability of enterprises being constrained by credit rationing, which indicates that bank credit has an adverse “screening effect” on enterprises with higher labor costs. Meanwhile, the increase in labor costs reduces the credit demand of enterprises, which reflects the social capital allocation effect in the transformation brought about by rising costs. Second, the rise in labor costs has a significant positive effect on the probability of enterprises being constrained by both self-credit rationing and bank credit rationing. Therefore, increased labor costs not only subject enterprises to higher credit rationing from banks, but also to higher self-credit rationing, thus inducing a double “screening effect.” Third, mechanism analysis shows that labor costs affect enterprise credit rationing through information asymmetry. Higher financial development and a higher level of marketization and state ownership of enterprises can significantly alleviate the adverse impacts of labor costs on credit constraints.
The results of this study have some theoretical value in terms of extending the relationship between labor costs and corporate financing constraints, more accurately identifying the credit rationing status of enterprises, and, hopefully, promoting research in related fields. When faced with a rapid rise in labor costs, labor-intensive industries are not only directly affected by rising costs, but are also subject to credit constraints from both banks and themselves. Therefore, the results of this study help us better understand the transformation dilemma faced by China's labor-intensive enterprises.
This study provides new policy implications for deepening financial supply-side structural reforms and solving the financing problems of enterprises. The enterprises themselves need to consciously accelerate their transformation and upgrade to avoid the serious “double pressure” of rising production costs and tightening financing constraints. In terms of credit policies, the current solutions to the financing problems of enterprises should be improved accordingly. With regard to the financial market environment, by comprehensively deepening financial supply-side structural reforms, we can further improve the degree of financial development and the level of marketization in various regions, reduce the adverse impact of labor costs on enterprise credit constraints, and help labor-intensive enterprises break out of the current transformation dilemma.

During the post-crisis period, regulators encourage financial innovation to stimulate economic growth. However, financial innovation is accompanied by the rapid development of shadow banking, which has raised many concerns among practitioners and policymakers. Although many studies have discussed the unintended consequences of financial innovation on the financial system, empirical evidence of how financial innovation affects the real economy is rare.
In this paper, we attempt to fill this gap by studying how interbank financial innovation can affect the operating risk and likelihood of stock price crashes of listed firms. Stock price crashes are regarded as extreme bad events in stock markets. They fundamentally depend on a firm's operating risk and are largely driven by the intentional hoarding of bad news by firm insiders. When a firm's operating risk is high, the firm is more likely to experience negative events during the operating process, leading firm insiders to withhold bad news from external investors. Once the bad news is suddenly leaked to the market, the firm will experience tremendous stock price crashes. Specifically, to understand how interbank financial innovation affects firms' operating risk, we focus on the introduction of Interbank Negotiable Certificates of Deposit (INCDs) in 2013. Although INCDs were introduced to propel the liberalization of interest rates, they have been widely used in the banking sector to circumvent regulations. Since INCDs are introduced by the banking sector at different times across different provinces, we are able to study the effects of regional interbank financial innovation on the firm stock price crash risk in a difference-in-differences (DiD) setting.
We conduct a quarterly empirical analysis of listed Chinese firms over the 2011-2016 period. We find that the stock price crash risk of local listed firms increases significantly after INCDs are introduced into the corresponding region. The effect is also of economic significance: on average, the stock price crash risk of firms increases to around 9% of the sample standard deviation. We confirm that the increase in stock price crash risk emerges only after the introduction of INCDs, but not before it, indicating that the parallel trend assumption holds in the baseline DiD setting. This positive relationship is more pronounced among firms with higher risks and lower financial flexibility, indicating that the introduction of INCDs mainly affects firms that are susceptible to operational difficulties. Our results are robust when we consider alternative measures of the key variables, different subsamples, and other model specifications.
Further analysis indicates that the introduction of INCDs is associated with increased cost of debt, higher level of risk-taking, poorer operating performance, and lower market values of local listed firms. Evidence indicates that the introduction of INCDs extends firms' financing chains and increases moral hazards in the credit market: some firms are more likely to undertake excessive risk and, thus, experience sudden negative events, which can increase the risk of stock price crashes. The above findings indicate that regional-level interbank financial innovation can intensify the moral hazard problem in the credit market, which will increase local firms' operating risk and potentially reduce the stability of financial markets.
Our paper contributes to the literature in two aspects. First, different from the traditional view of bad news hoarding behavior and the micro-level determinants of stock price crash risk, our paper sheds light on how macro-level factors affect stock price crash risk. We use the introduction of INCDs at the provincial level as a quasi-exogenous shock and show that this financial innovation is an important macro-level determinant of firm operating risk and stock price crash risk. Second, our paper contributes to the literature on the real effects of financial innovation and shadow banking. The existing literature mainly focuses on how financial innovation and shadow banking activities affect the financial system, while their real effects are rarely studied. Our paper provides direct evidence of how interbank financial innovation can affect the operating risk of the real sector and the stability of the financial market. Lastly, our paper provides direct policy implications and evidence to support the introduction of new regulations for the asset management industry. Our study confirms the importance of policy goals in promoting the healthy development of multilevel capital markets, serving the real economy better, and maintaining the bottom line to prevent systemic financial risk.

Both the sustainable development goals (SDG) issued by the United Nations and China's “13th Five-Year Plan” highlighted the importance of corporate social responsibility. Nonetheless, doubts about corporate social responsibility and even major negative incidents involving social responsibility efforts still occur from time to time. Therefore, many enterprises' social responsibility behaviors have been criticized as ineffective, hypocritical, or purely for show, and the legitimacy and rationality of corporate social responsibility have been seriously challenged.
Many studies have examined this topic from the perspective of corporate investment, financing, and earnings management. The results show that corporate social responsibility (CSR) is a positive moral behavior accepted by stakeholders (e.g.Chen et al., 2018). However, some studies also find that Chinese enterprises engage in social responsibility activities primarily to cover up or divert public attention from their misconduct, and they argue that management engages in CSR out of self-interest (e.g.Gao et al., 2012). However, these studies mainly focus on the impacts of corporate social responsibility on corporate behaviors, and few explore how corporate social responsibility affects the individual behavior of executives. Clearly, whether CSR affects the individual behaviour of planners and promoters can indicate whether it is “sincerity” or “veneer.”
This paper chooses A-share listed companies in China from 2008 to 2014 as a research sample to empirically examine the governance role of corporate social responsibility on the insider trading of senior executives, and it further explores the impact of corporate social responsibility on the insider trading of executives in different situations. This study finds the following: (1) Fulfilling corporate social responsibility has a significant governance effect on the scale and profitability of internal trading, and executives of CSR enterprises show stronger self-discipline in internal trading. (2) Evidence from the dual perspectives of the “information model” and “reputation model” indicate that in the context of opaque corporate information or executives with low personal reputation, corporate social responsibility plays a more significant role in restraining senior executives' insider trading. (3) When corporate information is opaque, corporate social responsibility plays a more significant role in restraining insider trading than in the case of executives with lower reputation.
The results of this study have the following important implications. First, the evidence shows that enterprises should actively undertake social responsibility. When corporate information is opaque or the reputation of executives is lower, corporate social responsibility has a more significant governance effect on insider trading. Thus, this paper suggests that corporate social responsibility can best be understood from the perspective of sincerity, and it provides empirical evidence for promoting and encouraging corporate social responsibility. Second, from the perspective of the “information model”, regulatory authorities should guide, encourage, and standardize information disclosure on corporate social responsibility, and improve the related supervision and evaluation system. Therefore, in the future, regulators should focus on encouraging listed companies to disclose social responsibility and enhancing the incentives for voluntary disclosure. At the same time, regulators should standardize social responsibility disclosure and improve the authentication and evaluation system of corporate social responsibility information to better enhance its quality and transparency. Finally, from the perspective of the “reputation model,” enterprises should increase top management's ideological and ethical standards by engaging in social responsibility. In view of this, enterprises should actively utilize social responsibility activities to cultivate a good corporate culture, which will ultimately improve the moral standards of top management. Thus, both the information model and reputation model show that by effectively fulfilling social responsibility, corporations can restrain insider trading by executives, improve the efficiency of economic operations, and promote market fairness.

Buying funds is an important channel for investors who lack the professional skills to obtain good returns on securities, and the investment styles of funds are expected to help in matching the investors with the funds that are most appropriate in terms of goals and risk preferences. However, in practice, many funds deviate significantly from their pre-committed investment styles. Funds often gravitate toward “market hotspots”, resulting in so-called “style drift”. Although the existing literature has empirically identified many contributing factors for style drift, no unified analytical framework has explained the underlying mechanisms and the ensuing effects of style drift. This paper presents a theoretical and empirical examination of how the performance of funds affects their tendency for style drift and for dismissal of fund managers.
We emphasize the crucial role of fund performance, for good performance is usually the key target for both fund companies and managers. To start with, we assume that fund performance increases with the manager's ability in terms of first-order stochastic dominance. However, at any given time, neither the company nor the manager him-or herself knows exactly what the manager's ability is. Therefore, the company needs to use the Bayes rule to update its belief of manager ability, based on its available information, and especially its information on historical fund performance.
We build a two-period theoretical model and derive three results: (1) There is a U-shaped relationship between fund style drift in the second period and fund performance in the first period. (2) Fund managers with poor first-period performances have incentives to mimic the investment styles of funds with excellent first-period performances. (3) Consecutively underperforming fund managers are more likely to be fired in the second period if the market has experienced a style drift.
To test these results, we collect the quarterly data on 1,579 open-end funds in China from 2008 to 2017. We measure the funds' performances by fund ranking, characterize the fund investment styles according to Sharpe's strong model, and use the “Manhattan distance” of the investment styles of each fund over two periods to measure the degrees of fund style drift. Our empirical analysis strongly supports our theoretical results. First, we find a significant U-shaped relationship between fund ranking and style drift. Second, the Granger causality test shows that low-ranking funds do tend to imitate the investment styles of the funds with excellent performances in the last period. Third, fund companies are more likely to replace fund managers who have poor previous performance when the optimal style of the market changes. To tackle potential endogenous problems due to missing variables or other causes, we use a one-period-lagged fund size change as our instrument for fund ranking, and IV estimation shows that our conclusions remain unchanged.
Our paper makes several potential contributions to the literature. (1) To our limited knowledge, we are the first to characterize the micro-foundation for how fund performance affects fund style drift and the dismissal of fund managers via beliefs of the players in a two-period model. (2) We measure fund style drift by using the “Manhattan distance” of investment styles between two periods. This approach is more suitable than traditional measures for analyzing China's financial market, with its high volatility and frequent style rotations. (3) Unlike the existing related literature, which simply divides funds into winners and losers and then investigates the cross-group differences in their managers' attitudes towards risk and investment styles, we study the U-shaped relationship between fund ranking and style drift over the whole spectrum of performance.
Our findings shed some light on investment decision-making. If investors have high tolerance for risk, they can seek high rates of return by buying funds with continuous outstanding performance without paying attention to those funds' style drifts.However,for investors with low risk tolerance, they'd better focus on funds which are ranked in the middle and share similar investment styles with them.

Share pledges are pervasive in China's A-share market. By the end of 2019, the market value of major shareholders' pledges had reached 5482 billion RMB, which accounted for 9.25% of the total market value of the A-share market. As a typical method of collateralized financing,the value of share pledges changes with the stock price. When the company's stock price goes down, the major shareholders are more likely to face margin call or fire-sale pressures, which can endanger the control rights of major shareholders. Even worse, in the case of a systemic market downturn, a large number of pledging risk events may lead to a systemic crisis in the financial market.
Stake raising (i.e., a practice whereby major shareholders use their own money to buy stocks and increase their holdings of listed firms through the secondary market) is often interpreted as a positive signal by the stock market. Thanks to the effectiveness of stake raising in stabilizing and improving stock prices, its flexibility in terms of implementation and its controllability in terms of costs, stake raising can be used as an alternative way in managing share pledging risk. However, is this the case in China's A share market? If so, what is the underlying channel and what is the market performance of stake raising?
Based on a sample of A-share listed companies from 2004 to 2016 , we find that share pledges tend to affect the stake-raising behavior of large shareholders, and the underlying channel is through risk management. Compared with large shareholders who are not facing margin call pressure, shareholders who are facing such pressure are more likely to increase their personal holdings of shares. Compared with shareholders in state-owned enterprises, those who owned private companies' shares show a more significant relation between share pledges and stake raising.
In addition, we extend above results by further analyzing the aspects of market performance, media reports, and investor attention to shareholders' stake-raising behavior. We find that for shareholders who have faced margin call pressure, the market performance of listed firms for which major shareholders have conducted stake raising is significantly better than the performance of firms whose shareholders have not done so. In analyzing media reports and investor attention, we find that after completion of an actual stake-raising, the relevant media coverage and investor attention improve significantly.
All of the above results show that in situations that involve share pledges, the majority shareholders are more likely to increase their shareholding in order to improve the risk management of share pledge. In addition, stake-raising behavior can indeed stabilize stock prices and mitigate the risk of share pledges for major shareholders.
Our paper makes two contributions. First, we show that beyond the traditional financial and political motivations for stake raising, shareholders can also be motivated by the need for managing the risk of share pledges. Second, we show that apart from the ex-ante methods of risk prevention, such as earnings management, tax avoidance, or dividend policies, stake raising can serve as another effective means for alleviating the risks of share pledges for large shareholders,and this is due to its effectiveness, flexibility, and the controllability of costs.
Our findings have two main policy implications. For large shareholders themselves, the findings suggest that stake raising can be an effective means for managing the risk of share pledges, apart from the methods of earnings management, tax evasion, dividend policies, and other ex-ante risk-management measures. For the authorities, our findings imply that regulating stake raising and share pledges are of great importance for improving the corporate governance of listed companies, especially in terms of regulating the behavior of large shareholders. Such methods are critical in preventing risks and promoting the healthy development of China's financial markets.