The painful lessons of the 2008 financial crisis illustrate that relying solely on capital regulation does not guarantee that commercial banks will be sufficiently resilient. In this regard, the Basel Committee on Banking Supervision (BCBS) put forward a global liquidity regulatory framework as an important part of Basel Ⅲ. Specifically, BCBS strengthened its liquidity framework by developing two minimum standards for funding and liquidity: the liquidity coverage ratio (LCR), which emphasizes short-term liquidity and the ability to prevent fire sales; and the net stable funding ratio (NSFR), which is aimed at reducing funding risk.
Once brought forth, liquidity regulation has raised a fierce debate about its potential impact on commercial banks and the transmission of monetary policy. Although the theoretical banking literature provides a logical framework for liquidity regulation design, no research yet empirically reveals its potential impact, especially the impact of the LCR regulatory requirement. How did commercial banks respond to the LCR regulatory requirement？ Does the LCR regulatory requirement affect the transmission efficiency of monetary policy？ If so, how can we coordinate liquidity regulatory rules and monetary policy？ To the best of our knowledge, these questions have not yet been fully addressed.
From both theoretical and empirical perspectives, our paper sheds light on the coordination mechanism between liquidity regulation and traditional monetary policy tools under a macroprudential regulatory framework.
Our paper theoretically redefines the liquidity shortage cost function based on the LCR regulatory requirement and incorporates it into a classical Monti-Klein model to illustrate the potential impact of the LCR regulatory requirement on monetary policy transmission efficiency. Our model indicates that the existence of liquidity shortage costs is an essential prerequisite for the monetary policy transmission process. Thus, the LCR regulatory requirement may influence the efficiency of monetary policy transmission by changing the marginal cost of a liquidity shortage. However, this effect depends on commercial banks' liquidity management behavior.
Using a semi-annual sample of 65 major commercial banks in China between 2015 and 2019, we empirically test our theoretical predictions. The results show that liquidity regulation has a significant impact on the efficiency of monetary policy transmission, which depends on banks' liquidity management behaviors when facing a possible LCR shortfall. To be specific, commercial banks, which actively adjust their funding structures and strengthen the quality of their liabilities, not only enhance their short-term liquidity profiles, but also improve the efficiency of monetary policy transmission. However, some urban and rural commercial banks with lower LCRs tend to hoard liquidity assets to fulfill LCR requirements, which may reduce the efficiency of monetary policy transmission.
Based on the aforementioned findings, this paper features some policy implications. We suggest that regulators should objectively evaluate the potential impact of liquidity regulation on monetary policy transmission efficiency, closely monitor commercial banks' liquidity management behaviors, and flexibly introduce a variety of regulatory settings to ensure banks' resilience and stability and improve monetary policy transmission efficiency. We also recommend that commercial bank managers should properly adjust the structure of assets and liabilities to cope with the potential impact of LCR regulatory requirements.
The main contributions of this paper are as follows. First, we expand the application range of the Monti-Klein model and reveal the micro mechanism of monetary policy transmission. Second, we provide empirical evidence for the potential impact of the LCR regulatory requirement, which compensates for the current gap in the liquidity regulation research. Third, we reveal the nexus between liquidity regulation and monetary policy transmission with both a theoretical framework and empirical evidence, which may help future researchers understand the potential impact of the liquidity regulation specifically and macroprudential policy generally.
However, this paper is subject to some limitations in terms of data quality and the length of the sample time period. How the LCR affects the interbank market and other monetary policy transmission channels are important questions that require further exploration. For future research in this area, we hope to describe the behaviors of commercial banks more accurately under multiple regulatory constraints, which may enhance the micro-mechanism design of two-pillar policy coordination in China.

The servitization of manufacturing has become a significant trend in the development of global manufacturing, and it is also an important part of the upgrading of China's manufacturing value chain. After the 2008 financial crisis, China's service imports grew rapidly, and net service imports have continued to expand. As the competitiveness of China's service industry is relatively low, it is critical to explore whether service trade openness promotes the development of the service industry, the production efficiency of Chinese manufacturing enterprises, and the upgrading of the value chain.
First, although China's economic growth has steadily progressed, most studies of the impact of service trade openness on manufacturing are based on data before 2007 and thus cannot address the current situation. Second, the definition of service sectors in the literature is relatively narrow. Finally, few studies consider the regulatory role of marketization in the process of service trade openness.
Our main contributions are as follows. First, we build a theoretical framework and then empirically analyze the effects of service trade openness on the labor productivity of manufacturing enterprises under domestic product substitution. More importantly, we explore the regulatory effect of marketization on the openness of service trade. Second, we use the Chinese Industrial Enterprise Database for 2012 and the Service Trade Restriction Index (STRI) of the World Bank, which not only extends the research of Beverelli et al. (2017) to a firm-level study but also explains how the openness of service trade has both promoted the productivity of China's export-intensive manufacturing enterprises and inhibited the productivity of non-exporting enterprises. The productivity promotion effect of service trade openness on export enterprises is stronger in the non-eastern region, but the adverse impact of service trade openness on non-state-owned enterprises and non-export enterprises in the eastern region is even greater. Third, we discuss the regulatory effect of marketization on the openness up of China's service trade. The result shows that domestic marketization has a dual effect on the openness of service trade. Marketization has not only weakened the negative impact of the openness of service trade on non-export enterprises, but also strengthened the positive effect of service trade openness on export firms. Overall, our conclusions are different from those of other studies and provide meaningful policy insights for the establishment of China's dual-circulation development pattern: the international economic cycle should be kept open to promote development, and the domestic economic cycle should be used to expand domestic demand. Therefore, it is necessary to ensure that export firms benefit from trade liberalization, and also to prevent non-export firms from being exposed to excessive negative competition brought about by trade liberalization. Marketization has a vital role in both these functions. We also indirectly explain the improvements in the competitiveness of China's manufacturing products after its accession to the WTO, especially after the 2008 financial crisis. However, further research is needed to determine whether this improvement has been in quality or price.
We use firm-level theoretical and empirical analyses of Chinese data to explain the abnormal results in Beverelli et al. (2017). Unlike Zhang et al. (2013), Sun et al. (2018), Mao and Fang(2020), we use the STRI of the World Bank, which uses a broad definition of service sectors. Moreover, we consider more types of service trade approaches and more service trade sectors. As a result, the conclusions of this article are relatively novel. Although the empirical results show that the competitiveness of Chinese manufacturing products has improved to a certain extent, it is unclear whether this competitiveness comes from quality improvement, price advantage, or both. In addition, although the substitution effect of intermediate goods produced by manufacturing enterprises on imported intermediate goods cannot be observed directly, problems such as whether there is domestic service substitution for foreign services and how the liberalization of service trade affects the upgrading of China's service industry require further study.

Understanding the correlation between financial markets is key for the effective implementation of coordinated supervision. The financial sector is the bloodline of the real economy, and enhancing the capacity of financial services for the real economy requires the coordination and alignment of financial markets with the macroeconomy. A well-informed and well-run financial market should be able to effectively reflect the characteristics of the macroeconomy. Making good use of macroeconomic information and accurately estimating dynamic correlations between financial markets are important for the accurate implementation of cross-market coordinated supervision and the efficient monitoring and early warning of risk resonance between markets.
This paper uses the DCC-MIDAS model to incorporate macro-level low-frequency variables into the analytical framework of high-frequency correlations among financial markets and uses the covariance matrix estimation accuracy comparison method proposed by Engle and Colacito (2006) and Laurent et al. (2013) to compare the macroeconomic information model and the long-term market volatility information model in terms of the estimation efficiency of dynamic conditional correlation coefficients. Additionally, it systematically investigates and discusses the cyclical characteristics of the impact of each macroeconomic variable on the correlation between financial markets. This paper presents direct evidence of the impact of macroeconomic information on financial market correlations and bridges a research gap regarding multi-market correlations. The study more accurately captures the causal factors causing financial market resonance, and the mechanism of macroeconomy influencing financial risk, provides feasible ideas for the implementation of coordinated cross-market regulation in the context of different shocks, and presents a basic framework for the construction of real-time monitoring indicators for financial risk mixing by combining macroeconomic information and financial market data.
This paper uses monthly data of China's industry value added, M2, consumer price index, and economic policy uncertainty index from January 2006 to June 2018, totaling 150 sample points, and daily yield data of the stock market, money market, foreign exchange market, and bond market during the corresponding sample period, totaling 3,258 sample points. The following findings are obtained:
(1) Industry value added and M2 negatively affect financial market correlations, and economic policy uncertainty and inflation levels conversely. The robustness of the results is not affected by the way macroeconomic information is introduced into the financial market correlation analysis framework; (2) AS macroeconomic information is a long-run component of market correlations, the macroeconomic information model achieves an efficiency increase of at least 1.45% over other models based on market information. Real economic performance, economic policy uncertainty, and M2 are the most important factors affecting financial market correlations, whereas inflation is less important; and (3) the impact of industry value added and inflation on financial market correlations is relatively robust, whereas economic policy uncertainty and M2 show cyclical characteristics. During economic upturns, loose monetary policy is more likely to trigger financial market correlations, economic policy uncertainty inhibits financial market correlations, and the efficiency improvements brought by industry value added and monetary policy information are larger. Meanwhile, the efficiency gains from economic policy uncertainty and monetary policy information are higher during economic downturns.
Based on the main findings, the following policy recommendations are proposed: (1) cross-market coordination and supervision should be informed by the role of macroeconomic factors in the analysis of inter-market correlations and prevent the upside of financial market correlations in advance. Gradually form a systematic set of financial market risk resonance monitoring indicators; (2) cross-market coordinated supervision should be informed by the dynamics of the economic cycle, flexibly apply policy tools according to the stage of the economic cycle, curb financial market risk resonance with macro policies, and dynamically adjust the proportional weights of each macro variable in the monitoring indicators; and (3) pay attention to the channel role of macroeconomic information in market connections, gradually release macroeconomic data, focus on its economic signal role, be wary of the market transmission of market panic, and guide investors to pay attention to the operation of China's macroeconomic fundamentals.

In the past few years, the People's Bank of China (PBC) has created a series of lending facility tools represented by mid-term lending facility (MLF) tools to help guide commercial banks to reduce their financing costs and promote high-quality economic development. Compared to the lending facility tools introduced by the Federal Reserve and other central banks during the crisis, the MLFs are intended as normal monetary policy tools rather than temporary rescue tools. The MLFs are designed to provide base money to commercial banks, support the proper growth of credit, and the reduction of commercial bank loan interest rates.
Due to a lack of suitable causality identification strategies, it remains controversial whether lending facility tools have an effective impact on the interest rates of commercial bank loans. In particular, in China, where a variety of monetary policy tools coexist, the complex effects of different monetary policy tools affect and overlap with each other. This complexity presents difficulties for the study of the policy effects of lending facility tools. So far, empirical research on the impact of China's lending facility tools on bank loan interest rates remains rare. Based on the quasi-natural experiment created by the introduction of MLFs by the PBC, this paper uses hand-collected data from the 2009 to 2017 annual reports of 100 commercial banks to conduct an empirical study of whether China's lending facilities have an effective impact on commercial bank loan interest rates. The main conclusions of this paper are as follows. First, after the creation of the MLFs, the greater the eligible collateral held by commercial banks, the lower the interest rates of their loans. This effect increases over the studied period, showing that lending facilities can significantly affect commercial bank loan interest rates and have an increasing policy effect over time. Second, the PBC’s MLF operation expands the amount of borrowing from the PBC and the lending provided by commercial banks. This increased lending effectively reduces commercial bank loan interest rates, showing that the MLF tools work through the channel of eligible commercial bank collateral.
The contributions of this paper are as follows. First, by using hand-collected eligible collateral data from commercial banks, this paper demonstrates the transmission mechanism by which MLFs affect bank loan rates. Previous empirical studies of the impacts of lending facility tools in China do not consider the eligible collateral of commercial banks or demonstrate how lending facilities exert their policy effects through such banks. Given that China's lending facilities have required that participating commercial banks provide eligible collateral, our use of hand-collected eligible collateral data provides original micro-level evidence that the MLFs work through the collateral channel. Second, by studying the policy effects of the MLF tools from the perspective of commercial bank loan interest rates, this paper verifies the effectiveness of the MLFs, thereby enriching the literature. Our results show that the PBC can effectively decrease commercial bank interest rates by using lending facilities to provide large-scale, low-cost funds to commercial banks, and that the effects are enhanced over time.
The findings of this paper have implications for collateral management in China's monetary policy and its implementation of lending facilities. First, the PBC can use lending facilities to influence commercial bank loan interest rates by adjusting lending facility scales, interest rates, and eligible collateral ranges. The PBC’s lending facilities help improve the formation mechanism of the loan prime rate (LPR) formation mechanism and reduce social financing costs.Second,The MLF is a hybrid monetary policy tool that is both quantitative and price based. In practice, the PBC mainly operates the MLF by adjusting its size. In contrast, the MLF’s interest rate has undergone small changes, with an overall downward trend. As a result, the extent to which the MLF interest rate affects commercial bank loan interest rates is unclear. Therefore, to improve the effectiveness of China's lending facilities, it is important to further explore how the policy effects of the MLF’s functional mechanisms are affected by different scales of operation and lending facility interest rates.

Income gaps, credit constraints, and housing prices are long-established and prominent topics of social concern. International Monetary Fund (IMF) figures from September 2020 report a record high global real house price index of 167.26 (using the first quarter of 2000 as the base period). The data show a rising trend in 47 of the 63 sampled countries and regions. Furthermore, since the U.S. subprime mortgage crisis, many scholars have investigated the potential relationships between income gaps and credit constraints. Numerous papers show that relaxation of credit constraints contributes significantly to rising house prices. Although this finding raises a natural question of how income gaps influence house prices through credit channels, this question is rarely mentioned in the literature.
Theoretically, because different income groups have different housing demands, changes in income distribution should significantly affect house prices through the amplification effect of credit leverage. Therefore, this paper aims to establish a general framework to interpret house price changes through the channel of income gaps affecting credit constraints. It shows that income gaps, credit constraints, and house prices are closely related. Specifically, an income gap reduction improves the relative income levels of low-income groups, which relaxes their credit constraints for house purchases. The relaxation of credit constraints makes the (aggregate) housing liquidity premium decrease. However, low-income groups have higher housing marginal utility, and access to external financing increases the housing market weight of low-income groups that have rising incomes. Thus, relaxation of credit constraints raises the housing marginal utility for society as a whole, which offsets the negative impact that liquidity premium decreases have on house prices, and ultimately increases house prices overall. This paper's findings are further supported by empirical analysis of cross-country panel data, which shows that the rising share of income going to low-income groups has significantly stronger effects on credit constraints and house prices than does growth in the incomes of high-income groups.
This paper makes three main contributions. First, existing explanations of the effects of income gaps on housing prices are mainly based on static analyses; because our model introduces the effects of credit constraints, this paper incorporates dynamic characteristics. Second, previous studies often use representative agent models to investigate the relationships between credit constraints and house prices. This paper enriches the research dimension by including analysis of heterogeneous agents. Third, the literature mainly studies the relationships between income gaps and house prices directly from the empirical level but does not conduct in-depth analysis of the transmission mechanism. In contrast, the construction of this paper's heterogeneous agent model enables a clear description of the transmission mechanisms between income gaps, credit constraints, and house prices. Importantly for policy makers, our results provide new insights into the factors that cause house prices to rise.
Finally, this paper has real-world importance. At present, China's real estate market trends are different in first-and second-tier cities than they are in third-and fourth-tier cities. CREIS data show approximately 10% growth in the land supply and transaction volumes of China's first-and second-tier cities in 2020. In contrast, the data show the land supply and transaction volumes of China's third-and fourth-tier cities decreasing by half in the same year. China's real estate market is deeply tied with bank credit, government revenue, and social investment. If the market encounters a sudden and severe decline, it will inevitably lead to serious systemic financial risks. As far as the current situation is concerned, the proposal of “six priorities and stability in six areas” shows the Chinese central government's concern about the population's livelihood, employment, financial stability, and investment expectations. Narrowing the income gap is itself an important means to protect the basic population's livelihood. This paper shows the further importance of narrowing the income gap to expand the scale of society's use of financing, prevent house prices from collapsing, and stabilize investment expectations. With particular relevance to the “Gray Rhino” real estate market, which is characterized by slowing economic growth and exhaustion of land resources, mechanisms should be considered to prevent the systemic financial risks caused by a “hard landing” of the real estate market. Management of the real economic function of the real estate industry is particularly important at present because the industry has the characteristics of large-scale, long industrial chains, growing employment, and increasing fiscal contributions. Relative to some short-term policies, more analysis should be applied to the basic aspects of income distribution and its influence on the domestic market and the domestic economic cycle.

Many studies confirm that high-quality educational resources have a capitalization effect that results in price premiums for housing in school districts. High-quality educational resources, as measured by physical capital investment in schools and human capital investment in teachers, may be determined by the quality of a district's school education or the quality of its students (the peer effect). Few studies consider the mechanisms contributing to the formation of high-quality educational resources, especially the extent to which school quality determines the quality of educational resources. However, these mechanisms can be examined by using pricing information from the real estate market.
Using records of second-hand housing transactions in Beijing and unique data regarding education quality at the school level, we are among the first to quantify the power of education quality in explaining school district housing premiums, and thus estimate the economic value of education quality. China's unique institutional background makes it possible to quantify the effect of school quality on school district housing premiums. Unlike most European and American countries, where education funding comes from property taxes, China's education investment depends mainly on general fiscal expenditures by local governments. Hence, in China, the causal influence of education quality on housing prices can be identified by relating school district housing price premiums to education quality data at the school level. This allows us to quantify the relationship between education quality and school district housing premiums and thus explore the mechanisms contributing to the formation of high-quality educational resources.
We use the hedonic model with boundary fixed effects. Specifically, we identify the housing transaction records on both sides of each elite school's attendance zone boundary to control for unobserved factors. We then use this information to calculate each school district's housing price premium. We further match the school education quality data with the second-hand housing transaction records to quantify the role of education quality in the calculated school district housing premiums.
Our results show that education quality, measured by the physical capital investment in schools and the human capital investment in teachers, explains 64.71% of the overall price premium on school district housing. Our results are robust to various confounding factors, including the potential effects of newly built primary schools, education reforms, and access to private schools. Furthermore, we quantify the power of education quality in explaining housing price premiums in three high-quality educational districts in Beijing (Xicheng District, Dongcheng District, and Haidian District). We find that high-quality educational resources come either from concentration of high-quality students within a district or from improvements in school quality due to long-term accumulation of education spending.
From a Chinese policy perspective, the education equalization reforms implemented in recent years promote high-quality equity in compulsory education, which will help curb inflation of school district housing prices and moderate price fluctuations in the real estate market. Our findings indicate that the main sources of school district housing price premiums are physical capital investment and the quality of human capital at the school level, and that recent education reforms can help stabilize housing prices. Therefore, the recent equalization reforms to compulsory education will significantly improve overall school quality by increasing both physical capital investment and human capital investment in weak schools. Furthermore, given the importance of student quality (the peer effect), increasing intergenerational mobility and continuing to advance equalization of opportunities may also be important ways to stabilize school district housing prices.
We contribute to the literature in three ways. First, we add to the literature by discussing the relationships between education quality and school district housing price premiums using a unique dataset that measures education quality at the school level. By matching the education quality data with housing transaction records in the real estate market, we quantify the power of education quality to explain school district housing premiums and explore the mechanisms that contribute to the formation of high-quality education resources. Second, in the context of China, we identify the causal relationship between school quality and housing premiums based on a hedonic model with boundary fixed effects. We take advantage of various stock indicators to measure education quality, including fixed asset value, school building area, the teacher-student ratio, and average teacher salary. Based on the heterogeneous effects identified among three high-quality educational districts in Beijing, we also examine how policy can influence high housing prices in school districts.

China reformed its basic pension insurance system in the 1990s from a pure “pay-as-you-go” plan to a mixed system consisting of two accounts: a social pooling account operating as a pay-as-you-go plan and a personal account operating as a funded pension plan. The original intention of this reform was to achieve both fairness and efficiency in the provision of basic pensions in China. However, due to a failure to deal with the transition costs, the social pooling account accumulated large deficits. To guarantee pension payments, local governments misappropriated funds in the personal accounts, creating a large number of “empty” personal accounts. As the scale of the empty personal accounts grows, the design of the mixed basic pension system is starting to be questioned. Some scholars propose abolishing personal accounts and going back to the pure pay-as-you-go plan. Until now, the problem of empty personal pension accounts in China remains unresolved. To address this issue, we try to answer two important questions. First, what is the theoretical foundation for China's mixed basic pension insurance system？ Second, what is the optimal mix of the social pooling and personal accounts in one pension system?
In the face of the population aging, many countries are considering reforms of their basic pension insurance systems. In the pension insurance literature, there are growing concerns regarding the sustainability of pay-as-you-go systems and their negative macro-economic impacts. There are also increasing worries regarding the high investment risk and redistribution restriction of funded pension systems. The two pension systems carry different risks, so there is no one clearly dominating the other. The internal return rate of the pay-as-you-go system depends on the growth rate of a country's total social wages, which depend on the quantity of labor supply and labor productivity. Although in some developed countries, the investment return rate of the funded system can be substantially higher than the internal return rate of the pay-as-you-go system,it does not necessarily indicate that the funded system is the optimal one for those countries. Doing so may overlook many other risk factors and the transition costs of pension system reform.
Since a pay-as-you-go pension can be regarded as a quasi-asset, some researchers have been working on designing public pension insurance systems from the perspective of risk diversification in pension investments. In this paper, we adopt the same perspective and construct a two-period consumption utility maximization model to study the optimal split of a representative employee's pension contribution between a social pooling account and a personal pension account in the Chinese mixed pension system. When making his or her pension investment decision, the representative employee faces three types of risks related to: the total labor supply, the wage growth rate, and the pension funds' investment return rate. Based on our theoretical results, we numerically estimate the optimal ratio of the two plans in China by collecting data on the growth rate of China's basic pension insurance contribution per capita, the trend of the working-age population, and the investment return rate of the National Social Security Funds. We then perform sensitivity analysis on our results. Finally, using our optimal design for the mixed pension system, we calculate the pension contribution required to achieve a goal set by the Chinese government for the pension replacement rate.
Acknowledging the significant differences in the demographic, labor productivity, and capital market in different countries, governments of all countries should carefully design their basic pension insurance system according to their specific environment and their ability to deal with risks.The optimal mix of the social pooling account and the personal account in China is determined by its own characteristics of the internal return rate of the pay-as-you-go plan and the investment return rate of the funded account. At the current stage, we find that the pay-as-you-go plan should play the dominant role in China's basic pension insurance system, but inclusion of a small-scale personal account can diversify the risks that the population aging brings to the pay-as-you-go plan. Given China's goal of achieving a pension replacement rate of between 40% to 45%, keeping its basic pension system financially sustainable will be challenging. We suggest that the Chinese government pay more attention to the long-term investment of its pension funds and adopt various family supporting policies to establish a child-friendly society and thereby increase the population's fertility rate. Furthermore, the Chinese government could consider some specific parametric adjustments to the pension insurance system, such as extending the retirement age, to better align the assets and liabilities in the pension insurance balance sheet.

When studying irrational decision-making characteristics,psychologists find that people are unable to objectively predict the probability of various future situations when the decision-making environment is uncertain. Instead, as expected under neoclassical economics, people selectively over-rely on some pieces of available information. The resulting process, in which inadequate adjustments and decisions are made under the influence of initial “anchor values,” is called “the anchoring effect.” However, few studies examine whether this irrational psychology affects investment decisions made by corporate executives. Therefore, this paper explores whether there is an anchoring effect that affects executive investment decisions.
The premises of the anchoring effect are that decisions carry uncertainty and that decision-making can be influenced by anchor values. This paper studies the anchoring effects of tax rates, which are an important factor in enterprise investment decision-making. When the effective tax rate is volatile, executives are unable to rationally predict all possible outcomes and accurately estimate future effective tax rates. If the existing enterprise effective tax rate is higher than the normal tax burden, executives may over-rely on the conspicuously heavy current effective tax burden and irrationally predict that future effective tax rates will be high. This irrational anchoring of executive expectations on existing tax rates will directly affect enterprise investment decisions.
Therefore, this paper examines the impacts of tax anchoring effects on enterprise decisions. As its initial sample, our analysis uses data regarding all of the non-financial A-share listed companies in the Shanghai and Shenzhen stock markets from 2003 to 2018. The results reveal significant irrational tax rate anchoring behaviors that influence corporate investment decision-making and significantly reduce future investment expenditure. At times when the current enterprise tax rate is higher than either the contemporary average tax rate (inner anchor) or the equivalent corporate tax rate (external anchor), future investment spending is shown to decline significantly. In such cases, the inner anchoring effect is found to be much stronger than the external anchoring effect. Furthermore, this paper finds that the effects of tax rates on investments vary according to specific executive and corporate characteristics. With increasing age and tenure, executives with fiscal and tax backgrounds are all more able to effectively restrain irrational tax rate anchoring behaviors in their investment decisions. The influence of tax rate anchoring on investments increases with the volatility of the corporate tax rate. Overall, this paper finds that the underinvestment caused by the tax rate anchoring effect significantly reduces a company's operating performance and enterprise value. This conclusion reveals the negative economic consequences of tax rate anchoring in investment decision-making.
The potential contributions of this paper to the literature are as follows. First, irrational executive behaviors are important factors that affect senior investment decision-making. From the perspective of the tax rate anchoring effect, this paper enriches the empirical study of the influence of irrational factors on investment decisions. Second, from the perspective of tax rates, which are an important factor in investment decisions, this paper studies the impact of the tax rate anchoring effect on investment decision-making by senior executives. It thereby enriches relevant studies on the selection of anchor values in the anchoring effect, and thus provides evidence in support of existing behavioral economics theories (Zhu Jigao et al., 2017; Chen Shihua and Li Weian, 2016). Third, the literature mainly studies the direct impacts of tax rates and tax rate uncertainty on investments (Fazzari et al., 1988; Jacob et al., 2016; Meng Qingyu et al., 2020). This paper supplements traditional tax investment theory by enriching research on the influence of tax burdens on investment decisions from the perspective of the anchoring effect. Fourth, the conclusions of this paper have implications for the investment practices of enterprises. Solving the problem of tax rate anchoring in investment decision-making will help improve investment efficiency. Maintenance of the continuity and stability of macro tax policy will promote healthy and sustainable enterprise development.

A pyramidal ownership structure is quite typical of enterprise group organization in many countries and regions. A typical feature of this structure is the separation of control rights and cash flow rights as a means for strengthening control. Control rights reflect the influence of the ultimate controller on major decisions by voting at listed companies' shareholders' meetings, while cash flow rights denote the responsibility characterized by investment in capital contributions. The separation of the two is indicative of the asymmetry between taking responsibility and enjoying rights in a pyramidal ownership structure, and is often the source of negative economic externalities.
The literature on the negative externalities of the pyramidal ownership structure focuses on “tunneling” by the ultimate controller of listed companies by means of capital occupation and other channels. Different from the negative externalities examined in other studies, this paper investigates the opportunistic tendencies of the ultimate controller's capital operations with the aim of revealing other negative externalities of the pyramidal ownership structure.
In China's capital market, the pyramidal ownership structure is very common in both state-owned and non-state-owned firms. However,capital operations of state-owned listed companies are more influenced by national macroeconomic policies such as state-owned enterprise restructuring, industrial policy, and supply-side structural reform. As an example of the negative externalities of the pyramidal ownership structure, capital operation is more typical in non-state-owned listed companies. Therefore, this paper selects non-state-owned listed companies as the object for empirical research, using a sample from 2007-2017. This paper demonstrates that for listed companies characterized by a pyramidal ownership structure, with an increase in the pyramidal structural complexity, the listed companies' shares become more like “lottery shares,” non-financial enterprises' financial asset allocation becomes greater, and more related capital operations are implemented. These behaviors do not improve enterprise performance as expected; rather, they evolve into opportunistic capital operation behavior to realize the short-term rapid appreciation of the wealth of controlling shareholders and their ultimate controllers.
This paper makes a novel contribution to the corporate governance literature, especially the literature on the negative externalities of the pyramidal ownership structure. First, in addition to the tunneling concept examined by the previous literature, this paper illustrates other negative externalities arising from the opportunistic capital operations behavior of firms' ultimate controllers.This paper constitutes an important expansion of the literature on the pyramidal ownership structure. Second, from the new perspective of the pyramidal ownership structure, this paper reveals the institutional incentives underlying the financialization of non-financial enterprises and the phenomenon of allocating capital from the real economy to the virtual economy. Affected by the incentive distortion of unequal rights and responsibilities, the controlling shareholders under a pyramidal ownership structure prefer to allocate financial assets to realize the short-term appreciation of the ultimate controllers' wealth in the face of uncertain industrial investment returns. Third, this paper shows that the opportunistic tendencies of controlling shareholders' capital operations under a pyramidal ownership structure attracts more investors to speculate in stocks. Therefore, companies under a pyramidal ownership structure characterized by “lottery shares” of listed companies have become a new influencing factor. Thus, this paper constitutes an important expansion of the literature on the factors influencing lottery stocks.
This paper shows that the negative economic externalities of pyramidal ownership structure has become a potential institutional root of the trend whereby capital flows from the real economy to the virtual economy and the severe volatility of financial markets. Therefore, to promote the healthy future development of the capital market and real economy, restraining the disorderly expansion of the pyramidal ownership structure is an important issue that must be urgently confronted.

With the promulgation of Guidance on the Implementation of Employee Stock Ownership Plans in Listed Companies (ESOP) in 2014, ESOPs provide a new type of employee incentive. In the period following the introduction of ESOPs, equity pledges have been common as an easy way for controlling shareholders to secure loans. These pledges create strong motivations for controlling shareholders to mitigate their risk of control transfer by maintaining stock price stability.
According to the theory of “shareholder opportunism”, controlling shareholders with equity pledges are motivated to find effective tools to manage the prices of their pledged stocks. Equity pledges by controlling shareholders intensify the separation of cash rights from control rights. The existence of pledge arrangements can indicate a company's lack of funds and high potential capital demands. These factors may encourage controlling shareholders to actively participate in the structure of a company's incentive system as a mechanism to align the interests of insiders, such as managers and key employees, with their own. For controlling shareholders, ESOPs provide an incentive method that has low cost, a short planning cycle, low supervision requirements, and almost no performance threshold. Hence, ESOPs offer a highly convenient mechanism to bind the interests of company employees with those of controlling shareholders with equity pledges.
To investigate the relationship between the pledges of controlling shareholders and the implementation of ESOPs, we analyze a 2013 to 2018 sample of A-share listed companies in China. We find that the probability of an ESOP increases significantly if a company's controlling shareholders have equity pledges and also increases with the shareholder pledge rate. Furthermore, the greater the risk of control transfer that controlling shareholders are exposed to is, the higher the probability of an ESOP being implemented is. We argue that ESOPs are useful to controlling shareholders as a mechanism to increase a stock's price in the short term, but they do not improve a company's long-term value and operating performance. Our further research on corporate governance shows that the power of controlling shareholders has a significant positive impact on the relationship between the pledges of controlling shareholders and the likelihood of ESOPs implementation. In contrast, variables relating to the board of directors and independent directors are found to have no significant effect.
Our findings have two main implications. First, because controlling shareholders face the risks of share price decline and threat of losing control, they will encourage ESOPs implementation to serve their self-interests, especially when their equity pledge rates are high. This relationship with the motivations and short-sighted behaviors of shareholders weakens the role of ESOPs as an employee incentive. Second, ESOPs are convenient for controlling shareholders because they offer flexible establishment, short lock-in periods, and low restriction and supervision requirements. Our further finding that internal corporate governance has no significant influence on ESOPs implementation should be important to regulators and investors. The restrictions on ESOPs can be improved by making changes, such as lengthening the lock-up period and increasing the information disclosure requirements. However, internal and external governance should also be improved to reduce the role of self-interested controlling shareholder behaviors in corporate decision-making.
Regarding our contributions to the literature, we expand on research into the economic consequences of equity pledges. By examining the significant impact of ESOPs on company incentive plans, we find empirical evidence that controlling shareholders with equity pledges have significant influence on the binding of stock price management to insider interests. In such a situation, an ESOPs loses its power to improve a company's long-term market value and operating performance. Second, the extensive literature discussion of shareholder and executive incentive systems focuses mainly on the impacts of shareholder power (i.e., the shareholding ratio); we contribute new empirical evidence that controlling shareholders are motivated to reduce their risk of transfer of control by influencing company incentive systems. Our results provide direct and powerful evidence regarding why and how controlling shareholders become involved in company incentive systems.

Goodwill bubbles generated by the M&A boom have recently become an important financial risk factor. The economic consequences of such a bubble for listed firms and the capital market as a whole have raised concerns among shareholders and regulatory authorities. Thus, preventing goodwill bubbles has attracted much attention from practitioners and academics. Managers are deeply involved in the entire M&A process, directly participating in the formulation and implementation of M&A plans and being the main decision makers in the selection and valuation of M&A targets. Therefore, managers' motivation directly impacts M&A, including the scale and amount of goodwill.
Principal-agent theory holds that agency conflicts in M&A activities cause executives to pay more attention to their private interests at the expense of shareholder wealth created by M&A activities. Furthermore, the existence of agency problems drives executives to rely on their information and decision-making advantages to increase the frequency and scale of M&A and even pay a higher premium to complete M&A, which leads to the overestimation of goodwill. This leads to the question of how to prevent goodwill bubbles. In addition to internal control quality and external auditing, the innovation of basic market mechanisms is required to restrain goodwill valuation bubbles.
The implementation of a margin trading mechanism is an innovation in China's stock market and opens the door to short selling. Research on short selling predominantly focuses on two areas. The first is the effect of short selling on the liquidity, stability, and efficiency of stock prices. The second is the effect of short selling on corporate financial decisions, such as earnings management, investment policy, and firm innovations. Studies generally indicate that short selling has the function of price discovery and can be an effective external corporate governance mechanism that reduces earnings management, improves the efficiency of corporate investment, and enhances innovation expenditure and output. However, few studies have investigated whether short selling can restrain the formation of goodwill bubbles caused by M&A decisions.
We explore the effect of short selling on M&A goodwill bubbles using a sample of Chinese A-share listed firms from 2007 to 2017. Our findings are as follows: (1) After lifting the short-selling constraint, excess goodwill significantly declines and goodwill assets also decline, which indicates that the short-selling transaction mechanism significantly inhibits goodwill bubbles; (2) The restraining effect of short selling on the M&A goodwill bubble is stronger for private enterprises than for state-owned enterprises; (3) Short selling can restrain goodwill bubbles through channels such as increased analyst coverage and increased managerial incentives; (4) The effect of short selling on goodwill bubbles is more pronounced for firms in regions with more developed financial intermediaries or lower industry competition; (5) Short selling improves stock price efficiency by restraining goodwill bubbles;(6) Short selling increases firm profitability.
Our study makes three main contributions to the literature. First, this article based on the deregulation of short selling in the capital market, provides new ideas for how to suppress an M&A goodwill bubble, and contributes to the literature by examining the effect of short selling on goodwill bubbles. Second, as an external governance mechanism, the short-selling transaction mechanism plays an effective governance role in M&A decisions. Studies examine the governance effect of the short-selling transaction mechanism based on the performance of M&A but ignore the impact of short selling on goodwill valuation bubbles, which are an important invisible economic consequence of M&A. Thus, we fill a research gap in this new field. Third, we find that short selling can restrain goodwill bubbles through channels such as increased analyst coverage and increased managerial incentives, which has implications for policymakers to improve the structure of China's capital market and protect the interests of investors.