On October 29, 2020, the Fifth Plenary Session of the 19th CPC Central Committee adopted the Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, which clearly indicated the need to improve the market-based mechanism for setting and transmitting interest rates. After more than 20 years of interest rate liberalization reform, which has included increasing links between deposit interest rates, loan interest rates, market interest rates, and policy interest rates, China's monetary policy framework now has a unique and extremely important transmission channel for bank interest rates. There are two important issues to clarify in the discussion of the traditional interest rate transmission channel. First, it is necessary to recognize that monetary policy is directly related to bank interest rates. Second, various factors may create friction that blocks or interrupts the transmission from short-term nominal to real interest rates. Interest rate liberalization plays an important role in the allocation of financial resources if it allows central bank's policy interest rates to be smoothly transmitted to loan interest and deposit interest rates through market interest rate.
In the context of China's continuing interest rate liberalization reforms, this study treats the adoption of the monetary policy on bank interest rate transmission as a turning point, and comprehensively investigates the effects of two aspects of interest rate liberalization reform: the degree of interest rate liberalization and the monetary policy price rule.
This study constructs a partial equilibrium model that includes residents, manufacturers, and commercial banks to describe the time-varying characteristics of the degree of interest rate liberalization, and then discusses the endogenous relationship between the degree of interest rate liberalization and the transmission of monetary policy to bank interest rates. Both of these factors determine the efficiency of interest rate liberalization reform. Using the TVP-FAVAR model, this study then verifies the conclusion of the theoretical analysis. The data are from the China Financial Statistics Yearbooks, China Economic Network Statistical database, Wind, and Bankscope (renamed Moody's Analytics BankFocus). Public bank annual reports are used to supplement the databases.
This study offers two main conclusions. (1) China's interest rate liberalization reform is characterized by periodic fluctuations, and the progress of interest rate liberalization is not linear. (2) The interest rate liberalization reform has a dynamic policy effect. Various reform policies increase the degree of interest rate liberalization, which in turn makes the transmission of monetary policy to bank interest rates smoother. However, the policy effects are not always marginally incremental.
The effect of the monetary policy price rule on interest rate liberalization reform could be strengthened, and the launch of the LPR formation mechanism reform in 2019 is a good opportunity. Therefore, this study suggests that there is a need to further improve the LPR formation, transmission, and regulation mechanism, improve the Funds Transfer Pricing mechanism so that bank interest rates meet market demand, encourage representative financial institutions to participate in the LPR, regulate the development of shadow banking businesses, exercise prudential supervision based on categories, ensure the effective transmission of monetary policy to bank interest rates, and strengthen the effects of interest rate liberalization reform.
The main contributions of this study are as follows. (1) Drawing on Ma and Wang (2014), this study considers the factors that create frictions between deposit interest rates, loan interest rates, market interest rates, and policy interest rates. The study also creates an index of the degree of interest rate liberalization based on time-varying characteristics and explores the endogenous relationship between the time-varying degrees of interest rate liberalization and the transmission of monetary policy to bank interest rates. The findings show that an objective and comprehensive evaluation of the effect of interest rate liberalization must consider both the degree of interest rate liberalization and the effectiveness of the monetary policy price rule. (2) Drawing on Liu et al. (2018), this study estimates the degree of interest rate liberalization and its time-varying characteristics. Through the time point impulse response function, the lead time impulse response function, and the time-varying forecast variance decomposition, this study explores how to promote the reform by enhancing the effectiveness of the price rule at the macro level.
The deregulation of interest rates in China should not be the full extent of interest rate liberalization. It is necessary to continue interest rate liberalization reforms.Future research should explore the role of shadow banking and digital currency in the process of unifying the dual-track interest rates into one track.

Macro leverage growth in China has been brought under control in recent years and has therefore stabilized. At the first meeting of the Central Committee for Financial and Economic Affairs in April 2018, it was proposed that China should stabilize its macro leverage and quickly reduce the leverage ratio of local government and state-owned enterprises (SOEs). However, stronger financial regulation and U.S.-China trade tensions imposed adverse shocks on the economy's driving force and on public confidence in the economy. The economy experienced increasingly downward pressure. In the face of the COVID-19 shock, the People's Bank of China strengthened counter-cyclical adjustments to monetary policy in 2020. These stronger counter-cyclical adjustments led to a temporary rise in the macro leverage ratio. Some researchers argue that stabilizing economic growth conflicts with stabilizing the macro leverage ratio in terms of counter-cyclical monetary policy adjustments. They therefore argue that monetary policy should now aim to enhance rather than stabilize economic growth.
However, monetary policy adjustment may not lead to such a conflict in terms of the economic meaning of the macro leverage ratio and structural deleveraging. In terms of improving credit allocation, when corporations with lower returns deleverage and those with higher returns leverage, resources can be redistributed to better performing corporates. Output productivity will therefore be promoted. This resource redistribution also helps to stabilize the macro leverage ratio and maintain economic growth.
We have three key questions. First, can monetary policy reconcile the stabilization of the macro leverage ratio with the maintenance of economic growth？ Second, how can the structural monetary policy instrument cooperate with existing monetary policy instruments to channel funds precisely？ Finally, how can monetary policy facilitate these two goals under the two-pillar framework of monetary policy and macro-prudential policy？ We develop a two-sector New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model includes an SOE sector and a privately owned enterprise (POE) sector, further incorporating collateral constraints for these two sectors' borrowing. We use Bayesian methods with economic data from China to estimate the model. We address the above questions by providing impulse responses, variance decompositions, and historical decompositions.
Our findings are as follows. First, maintaining economic growth and stabilizing the macro leverage ratio are not contradictory; rather, they can promote each other. If the central bank lowers interest rates and strengthens SOEs' collateral constraints, credit resources will be directed from SOEs to POEs. This redirection can promote credit allocation efficiency. This will help to maintain stable growth and stabilize the macro leverage ratio. These monetary policy adjustments can therefore enhance the effects of financing, serving the real economy and effectively preventing systemic financial risks. Second, the above effects are related to the borrowing costs of SOEs and POEs. The effects can be reinforced by bringing the SOE loan rate closer to the market rate and implementing structural monetary policy that aims to reduce POE loan costs. Third, collateral constraints on SOEs were the main factor in macro leverage from the second quarter of 2006 to the second quarter of 2018. The adjustment of interest rates has had a greater impact on macro leverage since 2017. Fourth, under the macro prudential policy framework, if the central bank targets the macro leverage ratio according to the Taylor rule, which varies over time according to policy background, then the rule will contribute to the balance between maintaining stable growth, making structural adjustments, and guarding against risks. If the central bank loosens interest rates and strengthens SOEs' borrowing constraints, the interest rate coefficient on the macro leverage ratio should be positive. Based on this Taylor rule setting, a decrease in the macro leverage ratio will make the central bank further reduce interest rates. This decrease will then reinforce the effect of lowering interest rates and strengthen the collateral constraints on SOEs.
We make three contributions in this paper. First, we add corporate heterogeneity to the DSGE model according to China's economic features. The model can therefore illustrate credit allocation and the monetary policy mechanism in the corporate sector. Second, we simulate the effect of monetary policy in different settings of corporate borrowing costs to show how the central bank can use structural monetary policy to promote credit allocation and strengthen the effects of financing serving the real economy. This paper provides theoretical insights into the impact of structural monetary policy. Third, we combine the theoretical model with macro leverage ratio data and identify the key factor that drives macro leverage ratio in China. Using counterfactual experiments, we also show how to facilitate the maintenance of economic growth and the stabilization of the macro leverage ratio under the macro-prudential framework.

“Systemic risk” is a widely used term that is difficult to define and quantify.The emergence and evolution of systemic risk resembles a “black box” with the process controlled by exogenous or endogenous shocks and where the contagion channels and orders dominated by various factors.To simplify the combination of factors involved, academics usually focus on three kinds of risk: internal contagion of idiosyncratic risk, extensive damage caused by external common shocks, and imbalance caused by the accumulation of risk over time.These three forms of risk are not exclusive, and usually occur simultaneously and interact with each other in real crises.
The key to identifying systemic risk events is to estimate the potential “system state” and evaluate the ability of these events to further change the “system state.” The vulnerability of the entire system caused by external shocks determines the depth and breadth of idiosyncratic risk contagion.Thus, the results of this paper shed light on the effects of common external shocks on the banking system and establish a simplified interactive contagion model for common shocks and idiosyncratic risks.We introduce a systemic risk contagion model with three stages: original shocks, incremental shocks, and default shocks, based on their dominant risk factors.The model depicts the dynamic and interactive contagion process of common shocks and idiosyncratic risks, the effects of which spill over into the financial market and inter-bank debt chain.
The current paper has three main findings.First, losses caused by common shocks are much greater than those caused by idiosyncratic risks.Second, the key factors that determine the infection multiplier are size and network relevance, and network relevance has a stronger role in determining the infection multiplier when the size factor is not prominent.For example, it is often the case that small-scale and highly related banks have a higher infection multiplier.Third, the leverage that causes systemic loss is generally enhanced when the loss rate of the risk assets of the bank is between 10% and 25%.Furthermore, regulatory intervention by the government can effectively reduce the systemic risk.
This study makes the following contributions.First, we deconstruct common external shocks.We assume that there is a bank present to bear the external shock (called the “trigger bank”).This bank's assets loss risk spills over in ordered layers throughout the banking network.The microcosmic simulation of common external shocks is helpful to depict the sensitivity of the systemic loss caused by the assets loss of a single bank (called the “infection multiplier”).As such, this finding will help to inform early warning systems and interventions in cases of systemic risk.Second, we build direct and indirect networks based on risk correlations.To distinguish the transmission paths of common risks and idiosyncratic risks, we construct a relationship network for common risk exposure and idiosyncratic risk exposure.The default order of banks is decided dynamically by mutual verification between the direct debt network of the interbank market and the indirect relational networks of common shock contagion models.Compared with the risk superposition model, this model not only better captures each stage of risk contagion, it also does not rely on the historical default data of banks.Third, we measure the systemic risk caused by different trigger banks.Compared with the leave-one-out method, which evaluates losses by directly removing a single bank one at a time, the trigger bank in this study remains in the simulation network until the solvency bankruptcy occurs.This more closely reflects a real risk scenario.
The conclusions of this study provide empirical evidence that will help to make regulatory decisions in the context of systemic risk.First, the results suggest that the assessment of common risk exposure in the banking system should be increased to control systemic risk from the source, and attention should be paid to the identification and evaluation of the network correlation of small and medium-sized banks.Second, in view of the inflection point, a phenomenon in which an infection multiplier triggers banks, we suggest that regulators intensify the blocking intervention mechanism against systemic risk, for example by setting an early warning rate of risk-weighted asset loss to prevent risk escalation.

In the current phase of China's economic development, scholars and policy makers are becoming increasingly concerned about the financial capital that is now either “shifting from the real economy to the virtual economy” or self-circulating in the financial system. As a matter of fact, this is part of a trend in which large amounts of financial capital, even the operating funds of the real economy, are entering the virtual economy through various channels.
The most objective method of judging the role of these phenomena in the rapid expansion of the financial value added component of China's GDP is to test whether the expansion of China's financial sector or the extension of its financial industry chain to the shadow banking system have either effectively matched or supported local enterprises' ability to independently innovate or have instead diverted resources from the sustainable development of the real economy, which is dominated by the manufacturing industry. While the continuous expansion of financial value added in GDP is a periodic condition in the economic development of developing countries like China, it can have both positive or negative implications. On the one hand, it is an expected component of economic development, but on the other hand, it may indicate the presence of deep-seated risk factors that may slow financial development and the transformation of the financial structure.
Accordingly, using detailed micro data on innovation in enterprises, this study summarizes the characteristics of the rapid expansion of China's financial value added in GDP. Then, by taking advantage of the policy impacts of the Chinese government's deregulation of banking business in 2005, and referring to Stevenson (2010) and Ahern and Dittmar (2012), this study constructs a variety of unique instrumental variables and uses them to empirically explore the impact of financial expansion on the innovation activities of local enterprises in China and the mechanism that drives this process. We find that the relationship between the continuous expansion of the added value of GDP in the financial industry and the innovation investment of local enterprises has a stable inverted U-shaped, which verifies the basic fact that the financial expansion of China's provinces and regions has a dual effect on the innovation activities of micro enterprises. The results show that reasonable financial expansion is conducive to the innovation activities of China's local enterprises, but rapid expansion may have a significant inhibitory effect, particularly on the innovation activities of private enterprises. In an analysis of the impacts on internal and external innovation, we find that the inhibitory effect is stronger on the internal innovation activities of private owned enterprises and the external innovation activities of private enterprises.
More precisely, we find that the inhibitory effect is concentrated in 31.55% of the local enterprises and 45.98% of the privately owned enterprises in our sample. The analysis of internal and external innovation shows that the financial expansion of China's provinces has a significant inhibitory effect on the internal innovation activities of 31.38% of local enterprises and 55.66% of private enterprises. The inhibitory effects on external innovation activities are strongest in enterprises with independent legal personalities and private owned enterprises.
These empirical findings not only provide a unique perspective for understanding the theoretical relationship between financial development and innovation in developing countries like China, they also clearly highlight the occurrence and spread of the phenomenon of “shifting from the real economy to the virtual economy” in the financial system and the internal circulation of financial funds in China. They also show the impact of overly rapid financial expansion on the innovation activities of local enterprises. These insights have important policy implications for China as it seeks to accelerate the reform of its financial system through the development of financial services in the real economy and to build a modern industrial system that coordinates the development of the real economy, scientific and technological innovation, and modern finance.

Since the 19th National Congress of the Communist Party of China (NCCPC), China's economic development goal has changed from ‘high speed' to ‘high quality’.The Fifth Plenary Session of the 19th NCCPC further pointed out that it is necessary to ‘accelerate the construction of a modern economic system with the theme of promoting high-quality development’.In the context of the economic transition from ‘high speed' to ‘high quality’, overcapacity has always been a problem that plagued the process of economic transformation.In order to control overcapacity, China have repeatedly issued de-capacity policies in the past ten years with policy tools covering financial, fiscal taxation and market access areas.The goal of the financial policy is to adjust the allocation of resources among industries from the funding source, limiting the funding channels of overcapacity enterprise and achieving the purpose of reducing overcapacity.After the de-capacity policy was promulgated, relevant financial institutions restricted loans and capital market financing to assist in reducing overcapacity.However, while bank loans and other financing methods for overcapacity enterprises have declined, the funds obtained through financial leasing have continued to increase.Is there some kind of regulatory arbitrage behind this phenomenon？ What consequences will such a regulatory arbitrage have on the implementation of the de-capacity policy？ This paper attempts to provide a possible theoretical explanation for the interaction mechanism between the de-capacity policy and financial leasing, and to confirm the theoretical explanation through empirical research.Specifically, this paper manually collects information on financial leasing transactions of Chinese listed companies, and uses the Difference in Differences (DID) method to identify the relationship between the de-capacity policy and financial leasing.
Our empirical results show that the de-capacity policy has significantly promoted the expansion of the scale of financial leasing, which in turn weakens the effect of the de-capacity policy to a certain extent.Further analysis shows that the de-capacity policy has promoted the expansion of the scale of financial leasing from both the demand side and the supply side.On the demand side, the de-capacity policy restricts overcapacity enterprises from obtaining long-term funds, thus expanding the long-term funding gap and prompting them to actively seek alternative funding channels such as financial leasing.On the supply side, the main channel for overcapacity enterprises to obtain financial leasing is bank-affiliated leasing companies, implying that there are bank funds evading supervision through financial leasing and flowing to overcapacity enterprises.
The innovations of this paper include two aspects.First, this paper provides new evidence for the causal relationship between financing constraints and financial leasing.Existing literature has pointed out that alleviating financing constraints is an important motivation of financial leasing.Enterprises with stronger financing constraints will use more financial leasing.However, these studies often suffer from endogenous problems in the identification of the relationship between financing constraints and financial leasing.The de-capacity policy makes overcapacity enterprises face stronger financing constraints than non-overcapacity enterprises.At the same time, the policy is not under the control of enterprises, which can be seen as an exogenous impact that affects financing constraints and avoid endogenous problems.Therefore, this paper can provide robust causal evidence about financing constraints and financial leasing.Second, this paper can provide ideas for China to formulate more scientific and effective industrial policies, thereby promoting ‘high-quality' development.With the expansion of shadow banks such as financial leasing, the formulation of industrial policies should not only consider mainstream financing channels such as bank loans, but also consider shadow banking channels.Under the goal of high-quality development, China should fully consider the interaction between industrial policies and the financial system to achieve a benign interaction between industrial policies and the financial system.

Limited participation in stock markets is a widespread and puzzling phenomenon, but it is a particularly serious problem in China. We need to understand the factors that affect households' decisions to make risky financial investments. Previous studies indicate that house purchase price is a crucial factor in explaining the level of stockholdings. From 2000 to 2015, China's house purchase price grew rapidly, with a growth rate exceeding the rates in developed countries. In the same period, Chinese households show very high enthusiasm for housing investment. Housing investment requires substantial funds and may reduce households' exposure to risky financial assets.
Following the example of Singapore's Central Provident Fund, in 1994, China implemented the housing provident fund (HPF) to improve housing affordability. The HPF scheme affects the disposable income of households in two ways. First, according to the tax law, there is no need to pay personal income tax on payments to or withdrawals from the HPF. Therefore, the HPF increases households' future disposable income and lifetime wealth. On the other hand, payment to the HPF enhances a household's current liquidity constraints and the interest rates for HPF deposits are low. Furthermore, unlike endowment insurance, the impact of the HPF is different on households with and without housing. Households without housing cannot use withdrawals from the HPF as a down payment or to repay housing loans. Although households can withdraw funds from the HPF to pay rent, the amount that can be withdrawn for this purpose is limited.
Accordingly, this study addresses three main problems. First, does the HPF significantly influence households' investment in risky financial assets？ Second, what is the mechanism through which the HPF affects households' investment in risky financial assets？ Finally, we discuss the heterogeneity of the impact of the HPF on different types of households.
We use data from the 2013 China Household Finance Survey (CHFS). The CHFS database includes detailed information on household assets, liabilities, financial wealth, income, and insurance. This survey of 28,151 sample households covers 29 provinces (autonomous regions and municipalities) and 262 counties (districts and cities). As the majority of people with an HPF are urban, we delete rural households. After data pre-processing, our sample contains 11,093 urban households.
We use a Probit model to test the impact of the HPF on the possibility that a household will make risky financial investments. Then, we use a Tobit model to test the impact of the HPF on the proportion of risky financial investments made by households. Finally, we examine the mediating factors to determine the mechanism driving this relationship. To address endogeneity concerns, we use an instrumental variable. We also use the Heckman two-step model and panel fixed effects model as robustness tests.
The empirical results show that the HPF can significantly increase the possibility and proportion of risky financial investments made by households with houses. However, the HPF has no significant impact on households that do not own the place in which they live. The analyses of the mechanism show that the HPF significantly increases households' disposable incomes and improves their risk preference levels, and thus increases the possibility and proportion of investments in risky financial assets. These findings suggest that it is necessary to strengthen the support function of the HPF for households without houses. For example, by relaxing the conditions under which households can make withdrawals from the HPF. In addition, it is very important to increase the interest rate of HPF deposit, to reduce the opportunity cost of the mandate deposit of HPF.
The contributions of this study are as follows. First, this study is the first to link the HPF to risky financial investments and confirms that the HPF can significantly affect households' investment in risky financial assets. We put forward new evidence to explain individuals' limited participation in the stock market, expand the research on the HPF, and provide new topics for follow-up research. Second, the results indicate that the HPF not only improves housing affordability, but also regulates households' investment in risky financial assets. This conclusion provides insights into ways to increase households' property income and to promote the development of a multi-level capital market. Finally, the heterogeneity analysis shows that the HPF has no significant impact on investment in risky financial assets by households that do not own housing. This suggests that the government needs to pay attention to the implementation of the HPF system.

In recent years, the existing population of China has begun to relocate among different cities.This is exemplified by a new trend among China's massive migrant population of returning to their hometowns.With the relaxation of the Hukou system, it is worth considering how to promote the reasonable and orderly flow of labor and improve the efficiency of human resource allocation.Many factors influence migration.Tiebout proposed that residents flow into the region that best matches their preferences, after considering the public goods and tax levels of each location.Studies of developed countries suggest that this mechanism exists (Bayoh et al., 2006;Kleven et al., 2013;Dustmann and Okatenko, 2014;Akcigit et al., 2016;Moretti and Wilson, 2017).However, due to the uniform tax system and Hukou system in China, the effectiveness of the Tiebout model is debated, especially in the context of populations returning to their hometowns.
We empirically investigate the causal effect of public goods supply on a migrants' decisions to return to their hometowns.We obtain data on residential address and “usual place of residence five years ago” from the 2005 National Sample Survey to construct a dynamic variable denoting whether migrants return to their hometowns.We also construct a proxy variable for change in the number of schools at the city level according to the extended implementation of the “School Consolidation” policy in China.This is a public policy promoted in China since 2001 that aims to improve the quality of education by eliminating many smaller schools and merging them into larger institutions.Using a quasi-natural experimental approach, we divide the sample into treat and control groups based on the presence of children aged 6-10 years in the family (a child was 10 years old in 2005 when the data was collected, given that he/she started primary school at 6 years of age in 2001) and build a difference-in-differences model.
Our findings are as follows.First, a decrease in the number of schools significantly hinders the return of the migrant population.Furthermore, the greater the decrease in the number of schools, the greater the negative impact on the return of the migrant population.This result still holds when considering endogeneity and other factors.Second, the results of our heterogeneity analysis show that the impact above is valid for both rural and urban areas and is more obvious among smaller families and families with boys.Third, the impact is not only on parents but also on their school-age children, meaning that the availability of educational public goods affects the migration decisions of two generations.
Beyond confirming the Tiebout model, this paper contributes to the literature in at least in two additional ways.First, we demonstrate the impact of public goods on migrants returning home and enrich the literature in this field.Most existing studies exploring the impact of public services on migration are based on an outflow perspective, and little attention has been paid to returning inflows.Further, due to limited data, the available studies are more theoretical in nature.Second, our identification setup is new.We attempt to explore the dynamics of migration based on cross-sectional census data at the household level, which may inform future studies.
The conclusions of this paper are informative in the context of policy decisions.In developing countries, improving the efficiency of public resource distribution and optimizing the provision of public goods such as education could help break down barriers to labor mobility and thus further promote economic growth and quality of life.For cities trying to attract talent, enhancing the provisioning of public goods could help to stimulate further population inflows.In this paper, we focus on the impact of changes in the number of schools.Future studies could assess the impacts of public education quality or other public goods (e.g., health care) to explore the effect of public goods supply on population mobility to a broader and deeper extent.

Enterprises are the main participants in scientific and technological innovation, and corporate innovation is a crucial driver of economic growth.However, the complex international situation and the impact of the COVID-19 pandemic have increased the uncertainty surrounding economic development, leading to a rise in the macro leverage ratio.A rapid rise in macro leverage might lead to the accumulation of risk, and a reduction in macro leverage does not support the real economy.In this context, the relationship between debt structure optimization and corporate innovation is an important topic.This relationship also has important relevance in the context of maintaining the stability of the enterprise leverage ratio, realizing innovation-driven development strategies, and handling the relationship between economic growth and risk prevention.
From the perspective of bond financing, we examine whether enterprises can use the bond market to increase the proportion of direct financing, optimize their debt structure, and promote corporate innovation.Theoretically, the impact of bond financing on corporate innovation is unknown.On the one hand, as a main direct and long-term financing channel of corporate debt, bond financing can optimize the debt structure and promote corporate innovation by reducing the cost of debt financing and extending debt maturity.On the other hand, compared with relationship debts like bank loans, bond financing, as a transaction debt, has a more rigid debt contract and is more likely to give operators greater rights to control, possibly weakening the effect of corporate governance of debt and impeding corporate innovation.
Based on sample firms listed on the Shanghai or Shenzhen Stock Exchanges during the 2006-2017 period, we use the number of patent applications and patent citations to measure corporate innovation to empirically test the relationship between bond financing and corporate innovation.We find that bond financing is significantly and positively correlated with corporate innovation, which indicates the positive role of bonds in enhancing corporate innovation ability through the optimization of the corporate debt structure.Our further findings are as follows.(1) Bond financing can promote corporate innovation by reducing the overall debt financing cost and extending overall debt maturity.Moreover, bond financing has a spillover effect on bank loans: bond issuance can promote corporate innovation by reducing the interest rate and extending the term of bank loans.(2) Product market competition and agency problems can weaken the role of bond financing in promoting corporate innovation.(3) The effects of different types of bonds on corporate innovation are heterogeneous.Compared with corporate bonds and convertible bonds, short-term commercial paper and medium-term notes play more significant roles in promoting corporate innovation, which indicates that the convenience of bond issuance is an important factor affecting corporate innovation.
The results of this paper contribute to the literature in the following ways.First, we extend the literature on the determinants of corporate innovation.From the micro perspective, existing studies mainly discuss the relationship between debt level and corporate innovation, ignoring the impact of debt structure.Given an assumed level of debt, we discuss whether and how the proportion of bond financing affects corporate innovation.From a macro perspective, existing studies mainly discuss the relationship between financial development and corporate innovation in terms of the credit market and stock market, ignoring the role played by the bond market.Our results reflect the positive effect of bond market development on corporate innovation.Second, we provide new evidence of the economic consequences of corporate bond financing.By assessing social financing cost, bank loan cost, cash dividend policy, and corporate innovation performance, we focus on corporate innovation and discuss the impact of bond financing on corporate innovation from the perspective of innovation output scale and quality, further enriching the literature on the economic consequences of bond financing.Furthermore, we analyze the spillover effect of direct debt financing (bond financing) on indirect financing (bank loans).Bond financing helps improve bank loan conditions, including loan cost and term structure, and thus promotes corporate innovation.We provide evidence of the underlying economic mechanisms through which bond financing improves corporate innovation.Finally, we reveal the conditions in which bond financing can improve corporate innovation.We find that the effects of different types of bonds on corporate innovation are heterogeneous.Compared with corporate bonds and convertible bonds, short-term commercial paper and medium-term notes with greater financing convenience a have stronger promoting effect on corporate innovation.This finding has important implications for policy-making during bond market reform in China.

In August 2001, the China Securities Regulatory Commission statutorily required that the longest tenure of each independent director of a Chinese listed firm must be less than six years.Due to this limitation, a number of independent directors left after their term expired.However, they can be rehired by their former firm after a cooling-off period.Scholars and practitioners have expressed concern about the economic consequences of independent directors.Nevertheless, whether rehired independent directors improve corporate governance is a pending question.
Rehired independent directors are those who leave a firm at the end of their second term (i.e., the sixth year) but are then rehired as independent directors by the same firm after a cooling-off period.Given the non-scarcity of independent directors in China, why some Chinese listed firms rehire former independent directors is an open question.On the one hand, the learning effect suggests that rehired independent directors are different from other independent directors because they have accumulated knowledge and potentially formed relationships, allowing them access to internal information.Thus, rehired independent directors can better perform supervisory and consultative roles.On the other hand, the relationship effect suggests that the close relationship between a rehired independent director and the firm may impair the independence of the director.
We assess a sample of Chinese listed firms from the 2003-2016 period to examine the effect of rehired independent directors on corporate misconduct, and then distinguish the learning effect from the relationship effect.First, the findings show that for firms with rehired independent directors, the number of reported corporate misconduct issues is significantly lower in the rehired period than that in the cooling-off period (vertical comparison).Second, compared with the cooling-off period, the number of instances of corporate misconduct is significantly lower in the first-term period (vertical comparison).Third, the number of corporate misconduct issues is significant lower in firms with more rehired independent directors than in firms with no or fewer rehired independent directors (horizontal comparison).These results suggest that the presence of rehired independent directors mitigates corporate misconduct, validating the learning effect, and it is unlikely that firms rehire independent directors to circumvent regulations.These conclusions stand after a variety of sensitivity tests and correction of the endogeneity effect.
The present study makes several contributions to the existing literature.First, given the inconsistent results of previous studies, we focus on rehired independent directors to examine the influence of rehired independent directors on corporate misconduct, supplementing the literature on the relationship between independent directors and corporate governance.In addition, we vertically compare the number of corporate misconduct issues during the first-hired period, the cooling-off period, and the rehired period to mitigate the endogeneity problem (i.e., the selection of independent directors may be influenced by corporate governance structure, corporate performance, and other factors).Second, existing studies do not examine why independent directors are rehired or the economic consequences of rehiring.This paper fills this gap in the literature.Third, we attempt to determine whether former independent directors should be rehired after a cooling-off period.Previous studies find that it is appropriate to extend an independent director's tenure, but do not mention the specific service term.We find that rehired independent directors play a more important role in improving corporate governance than other independent directors.
This study has several practical implications.First, we explore the economic consequences and motivations of rehired independent directors, thereby contributing to the improvement of the independent director system.The findings will also help governments to better monitor independent directors.Second, the results will help investors to understand the phenomenon of “rehired independent director”. The conclusions provide empirical guidance for the selection of future independent directors by Chinese listed firms and document a practical approach to mitigating corporate misconduct.

In recent years, it has become common in China's capital market for large shareholders to use stock pledging for financing purposes.However, due to market turbulence, large shareholders are facing a pledge crisis, which has become a hot topic in the capital market and has raised concerns about systemic risk.Stock pledging seems to be a financing behavior of shareholders that is unrelated to their companies.However, because shareholders occupy a special position, once the risk of the pledged stocks is high, it will have a significant impact on the company's control, stock price, operating performance, and information disclosure, among other effects.Therefore, in the face of risk, large shareholders are strongly motivated to take measures to stabilize the company's stock price.
Some scholars have studied the measures adopted by large shareholders, such as information disclosure manipulation or tax evasion.However, these studies have ignored one important aspect: capital operations.In fact, listed companies have often stabilized their share prices through capital operations.
Capital operation refers to the process of adding value to a company through the use of capital market instruments and financial instruments by skillfully operating capital.Capital operations mainly include asset acquisition, equity transfers, asset divestiture, absorption and mergers, debt restructuring, asset replacement, and tender offers.Capital operations are often used by companies, and may be a way for large shareholders to alleviate equity pledge risk.First, in reality, many listed companies suspend trading for long periods due to capital operation uncertainty in attempts to avoid a further decline in their stock price.Second, some studies have shown that capital operations are an effective method for listed companies to increase their excess return.Therefore, we try to answer the following question: when the proportion of large shareholders pledging stocks is high or when the stock price reaches the closing line, will listed companies use capital operations to survive potential risk？ If the answer is yes, how does this affect their capital operations？ Furthermore, what is the mechanism behind large shareholders' use of capital operations to avoid pledge risk？
Based on these questions, we investigate the relationship between stock pledging by large shareholders and capital operations using Chinese A-share listed companies over the 2007-2018 period.The results show that (1) the higher the proportion of stocks pledged, the greater the possibility of capital operations in companies; this relationship is more significant in margin calls and in private listed companies.(2) The mechanism test shows that when the pledge ratio increases, the suspension time after capital operations increases; from the perspective of the effect of stock price promotion, capital operations can improve the stock price and alleviate pledge risk in the short term, but the effect is not significant in the long term.(3) The main types of capital operations in listed companies are equity transfers, asset acquisition, and asset divestiture.Further analysis shows that large shareholders mainly use asset acquisition and asset divestiture to increase the suspension time and use equity transfers to increase the stock price.
We contribute to the literature in the following ways.(1) From the perspective of capital operations, we find new evidence that large shareholders influence the behavior of companies.In addition, one of the main contributions of this study is to identify the mechanism of capital operations to alleviate equity pledge risk, that is, large shareholders can alleviate the pledge crisis by influencing the market reaction and the suspension time of capital operations.(2) We expand relevant research on the suspension of listed companies.So far, the literature has mainly analyzed the economic consequences of suspension.Based on the motivation for the suspension of listed companies, we find that shareholders may use this suspension to realize their own interests.(3) Previous research has mainly focused on the measures taken by companies when faced with stock pledge risk, but there is little discussion of whether these measures can actually address this risk.We provide an answer to this question and find that improving stock prices through capital operations can resolve stock pledge risk in the short term, but the effect is not significant in the long term.

In 2001, the China Securities Regulatory Commission (CSRC) officially cancelled the Particular Transfer (PT) of stocks and announced that listed companies reporting losses for three consecutive years will have their listings suspended within 10 days of the announcement of the third annual report.In the same year, the CSRC required listed companies that want to issue new stocks to meet the requirement that the average of the weighted average return on equity (ROE) of the previous three fiscal years must not be less than 6%.Given these regulations, listed firms are likely to attempt to manage their earnings to avoid delisting or to satisfy secondary public offering (SPO) conditions.In this paper, we use a bunching design method to estimate the earnings management frequency (how many companies manage their earnings) and the earnings management magnitude (how many companies' earnings are manipulated) from the distribution of weighted average ROE of listed companies for the 2002-2017 period using two thresholds: 0% (delisting policy) and 6% (SPO conditions).The results shed light on whether the scale of earnings management is economically significant.
Although many papers focus on the estimation of earnings management, they do not solve the problems associated with estimations in the case of multiple thresholds.Furthermore, the estimation models used have too many assumptions.Domestic research on the estimation of the earnings management of listed companies has stagnated over the last 10 years.However, many policy changes have taken place during this period, such as allowing listed companies to conduct non-public secondary issuance and the strengthening of financial supervision.Therefore, we use a new methodology—bunching design￣￣—to determine whether the previous findings still hold after such policy changes and to simultaneously estimate the frequency of earnings management at two thresholds.
In contrast to existing studies, which assume the specific form of the ROE density function, we use a polynomial function and other control variables to approximate the ROE density function beyond the threshold intervals.Estimated parameters in the approximation are used to estimate counterfactual ROE density within the threshold intervals.The difference between the counterfactual ROE density and the real ROE density yields an estimation of earnings management that represents how many firms manipulate their ROE from the left side of the threshold to the right side.
Using a bunching design, our estimations of the frequency and magnitude of earnings management show that about 3.184% of listed companies managed their earnings to avoid reporting losses, accounting for 59.25% of firms with losses if no earnings management was conducted.The counterfactual estimations suggest that about 93% of firms with an ROE within-1.5-0% engaged in earnings management.The firms that conducted earnings management increased their ROE by 2.115 percentage points on average.Although only 0.28% of listed companies managed their earnings to satisfy SPO conditions, these firms account for 58.13% of all successful SPOs.The counterfactual estimations suggest that firms with an ROE within 5￣-6% were most likely to engage in earnings management.
We also analyze the heterogeneity of earnings management.First, we estimate the frequency and magnitude of earnings management year-by-year.During the 2002-2015 period, the earnings management incentives for listed companies to avoid delisting were relatively stable, but our estimations are not significant after 2016 as the CSRC strengthened its financial supervision.The proportion of companies that managed their earnings to satisfy SPO conditions was the highest in the 2002-2004 period and has fallen sharply since then, which may be attributable to the deregulation of non-public secondary issuance.Furthermore, the frequency of earnings management for special treated (ST) companies is 3.62 times that of non-ST companies.High-leverage companies have stronger earnings management incentives to avoid delisting and satisfy SPO conditions.Finally, industry analysis suggests that the manufacturing industry has a high incidence of earnings management to avoid delisting, and that the agriculture industry has the largest magnitude of earnings management at the 0% threshold.
The conclusions of this paper have practical implications.From the macro perspective, the intention of using accounting indicators as a hard constraint to supervise listed companies is to eliminate poor-performing firms from the stock market and enable strong-performing companies to refinance.However, this policy has unintentionally strengthened firms' incentives to manage earnings to avoid delisting or having to issue additional shares.If the regulatory agency requires accounting indicators as a hard constraint of supervision, strict earnings management supervision should be supplemented to achieve the desired effect.From the micro perspective, we estimate the aspect of earnings that is most likely to be falsely reported.Regulators should focus their review and supervision efforts on these listed companies.