Chenkai Ni

We investigate whether increasing individuals' overseas income tax transparency affects corporate investments of closely-held firms. We exploit the tax information exchange under the Common Reporting Standard (CRS) between tax havens and China, an economy ideally suited to address the question owing to (1) its identity as the largest economy joining the multilateral CRS, (2) predominance of firms with concentrated ownership, and (3) pervasiveness of individuals practicing tax evasions through foreign accounts. Using a stacked difference-indifferences design, we find that Chinese multinational enterprises (MNEs) reduce investments in tax-haven subsidiaries and shift toward non-haven subsidiaries. Both effects are more pronounced when insiders have stronger motives and greater capacity to transfer wealth abroad and where pre-CRS governance and transparency were weaker. Through mitigating tax-distorted investments, the CRS improves MNEs' foreign investment efficiency. Taken together, the CRS curbs insiders' incentives in firms with concentrated ownership to use tax-haven investments for wealth hiding.

By exploiting a mandatory non-diversification reform, we examine the causal effect of business diversification on informational efficiency. In an effort to urge state-owned enterprises to refocus, the Chinese government rolled out a staggering mandate which requires local SOEs to reduce the scope and heterogeneity of their business segments. We construct a pseudo conglomerate which consists of a portfolio of stand-alone firms mimicking each real conglomerate. Consistent with Cohen and Lou (2012), we find that pseudo conglomerates' stock returns positively predict real conglomerates' one-month-ahead stock returns, i.e., informational inefficiency associated with business diversification. Importantly, this return predictability significantly weakens for SOEs relative to non-SOEs after the nondiversification reform. The reform's effect on informational efficiency becomes more pronounced for firms with lower investor sophistication or poorer information environment before the reform, i.e., sources of return predictability. Mechanism analyses suggest that, through non-diversifications, SOEs experience improvements in the quality of both internal control and financial reporting. Collectively, empirical findings provide causal evidence regarding whether and how business diversification shapes informational efficiency.

With a surge in debt due to a fiscal stimulus after 2008, the Chinese government rolled out a “deleveraging” program in 2015, which, through tightening monetary policies, restricting credit flows, and regulating shadow banks, significantly increased firms’ cost of debt and the incentive to deleverage. We find that high-tax-rate firms reduce leverage to a lesser extent than low-tax-rate firms after the initiation of the deleveraging program. This effect is stronger for nonstate-owned firms and firms with fewer nondebt tax shields. More importantly, by retaining more debt, high-tax-rate firms reduce dividends, switch to equity financing to a lesser extent, and cut fewer investments in fixed assets, R&D and human capital. We conclude that taxes constitute an important factor in shaping the microeconomic consequences of a credit crunch and that economic incentives and property rights interact to affect capital structure.

In this study, we examine the causal impact of implicit government guarantees on firms' total factor productivity. By exploiting the initial local bond defaults across different regions in China, we find a positive and significant effect of the weakening of implicit government guarantees on local firms' total factor productivity. The productivity improvement is concentrated in firms with more severe financial constraints, weaker corporate governance, and in regions with adequate institutions to enforce post-default market discipline. Further analyses reveal that local firms improve the allocation efficiency of capital and labor after the initial local bond defaults. Overall, our results suggest that reducing implicit government guarantees can improve firms' total factor productivity.

We utilize performance commitment (PC) provisions in mergers and acquisitions (M&As) to examine whether subsidiary short-termism affects corporate payouts. To mitigate information asymmetry and protect minority shareholders, PCs set performance goals for target firms who should compensate acquiring firms upon the failure of goal achievement. We argue that PCs induce acquired subsidiaries to prioritize short-term performance to meet their committed performance. This short-termism temporarily inflates acquirers' consolidated earnings that are less likely to persist into the future, thereby reducing cash dividends. Consistent with this prediction, we find that listed firms that have made recent acquisitions exhibit lower cash dividends during the PC period, relative to the pre-PC period. Such an effect is more pronounced when performance commitment pressure is stronger, and when incentive alignment between acquirers and targets is higher. In contrast, the effect is attenuated for firms with stronger dividend-paying capacity and historically more stable dividends. Supporting the assumption of PC-induced short-termism, we document evidence of upward earnings management during the PC period. Finally, a placebo test shows no corresponding effect on non-cash dividends. Overall, our findings highlight an unintended consequence of PCs in M&As, i.e., PC-induced subsidiary short-termism leads to lower cash dividends.

We examine whether regulatory attention towards trading manipulation curbs stock price volatility. Exploiting a unique setting in China in which the regulators announced investigations into trading manipulations of selected newly listed firms, we find a significant postinvestigation decline in the price volatility of all newly listed firms. The volatility reduction is stronger for stocks that are more subject to manipulations, that is, stocks with higher uncertainty, lower analyst attention and lower media attention. Furthermore, newly listed firms also experience a reduction in online discussions and trading volume of individual investors who are plausible counterparties of manipulators.

We exploit the rich data of business groups in China and identify sell-side analysts following multiple listed firms within a business group (BG analysts). For a group firm, we find that BG analysts issue more accurate forecasts than non-BG analysts. Such an effect is more pronounced when the focal firm shares stronger economic links with, and when its covering analysts have greater information demand for, its group peers. Further analyses suggest evidence of intragroup information flows. Around group peers’ annual earnings announcements, BG analysts are more likely than non-BG analysts to revise their forecasts for the focal firm along the same direction as group peers’ earnings surprises. Confined to analysts’ coverage initiations for a group firm, those who have covered the focal firm’s group peers prior to the coverage initiation show superior forecasting performance during the initiation year. By adopting the unique perspective of business groups, i.e., a prevalent organizational structure, our study shows that information commonalities within a business group shape analyst behaviour.