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The Impact of Delay in Going Public: Evidence from China
Author(s):
Sabrina T. Howell, New York University and NBER
Lin William Cong, Cornell University
Ran Zhang, Peking University
Discussant(s):
Bohui Zhang, Chinese University of Hong Kong, Shenzhen
Abstract:

Chinese securities regulators have suspended IPO activity on numerous occasions, often as a response to bearish markets. The suspensions were unexpected and of uncertain duration, lasting up to fifteen months. Howell, Cong, and Zhang examine the effect of indeterminate listing delay among firms already approved to IPO. The researchers find that suspension-induced delay has strong, immediate negative effects on patent applications and fixed tangible investment. After listing, these effects endure and are accompanied by a lower market-to-book ratio, higher stock price volatility, and larger increases in CEO pay. The results suggest that by increasing uncertainty and reducing access to capital, disruptions to the IPO process chill investment in innovative and risky projects.

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Liquidity Constraints, Transition Dynamics, and the Chinese Housing Return Premium
Author(s):
Yu Zhang, Peking University
Discussant(s):
Kaiji Chen, Emory University
Abstract:

In China, housing prices grew 170% during 2003-2012 in real terms. Returns on housing commanded a sustained 12% premium annually over the risk-free rate. In this paper, Zhang proposes a quantitative explanation of the Chinese housing boom, based on the upward transition in household wealth from a low initial condition, interacted with liquidity constraints. Across Chinese cities, increases in the value of housing are associated one-to-one with increases in household wealth, whether measured with or without housing, whereas the relationship with increases in current income or population is much weaker. Evaluated in a consumption-housing two-asset dynamic portfolio choice model with housing being priced in equilibrium, calibrated with realistic liquidity constraints and low initial wealth, this explanation matches the high housing return premium and generates the bulk of the observed aggregate increase in housing prices.
Other predictions of this model include an investment motive that helps explain the high Chinese household saving rate puzzle, and that a permanent slowdown in economic growth might only lead to a temporary dip in housing prices that quickly overturns. The analysis in this paper provides insights for understanding episodes in emerging housing markets for which there are both liquidity constraints and low initial household wealth.

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Leverage Network and Market Contagion
Author(s):
Jiangze Bian, University of International Business and Economics
Zhi Da, University of Notre Dame
Dong Lou, London School of Economics
Hao Zhou, Tsinghua University
Discussant(s):
Zhiguo He, University of Chicago and NBER
Abstract:

Using daily account-level data that track hundreds of thousands of margin investors' leverage ratios, trading activities, and portfolio holdings, Bian, Da, Lou, and Zhou examine the effect of margin-induced trading on stock prices during the recent market turmoil in China. They start by showing that individual margin investors have a strong tendency to scale down their holdings after experiencing negative portfolio shocks. Aggregating this behavior across all margin accounts, the researchers find that returns of stocks that share common margin-investor ownership with the stock in question help forecast the latter's future return, which is subsequently reversed. This transmission mechanism is present only in market downturns, suggesting that idiosyncratic, adverse shocks to individual stocks can be amplified and transmitted to other securities through a de-leveraging channel. As a natural extension, the researchers also show that the previously-documented asymmetry in return comovement between market booms and busts can be largely attributed to deleveraging-induced selling in the bust period. Finally, Bian, Da, Lou, and Zhou show that stocks that are more central in the margin-holding network have significantly larger downside betas than peripheral stocks.

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Equilibrium Consequences of Corruption on Firms: Evidence from China's Anti-Corruption Campaign
Author(s):
Haoyuan Ding, Shanghai University of Finance and Economics
Hanming Fang, University of Pennsylvania and NBER
Shu Lin, Chinese University of Hong Kong
Kang Shi, Chinese University of Hong Kong
Discussant(s):
Bernard Yeung, National University of Singapore
Abstract:

Ding, Fang, Lin, and Shi use China's recent anti-corruption campaign as a natural experiment to examine the (market expected) equilibrium consequences of President Xi Jinping's anti-corruption campaigns. They argue that the announcement of inspections of provincial governments by the Central Commission for Discipline Inspection (CCDI) on May 17, 2013 represents a significant departure of past norms of anti-corruption campaigns, and thus represents a rare empirical opportunity to examine the equilibrium effects of anti-corruption campaigns for firms. The researchers first present a conceptual framework to illustrate the channels through which anti-corruption actions can influence firms. Using an event study approach and the announcement of anti-corruption inspection to be conducted by the Central Commission for Discipline Inspection (CCDI) as the event date, they find that, overall, the stock market responded positively to the announcement of strong anti-corruption actions. Consistent with a demand-channel, the announcement returns are significantly lower for luxury-goods producers. In addition, SOEs, large firms, or politically connected firms earn lower returns than private, small, or non-connected firms. Finally, existing local institutions also play a crucial role in determining the announcement returns across firms.

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Implicit Guarantee and Shadow Banking: The Case of Trust Products
Author(s):
Franklin Allen, Imperial College London
Xian Gu, Durham University Business School
Qian Jun, Fudan University
Yiming Qian, the University of Iowa
Discussant(s):
Ning Zhu, Tsinghua University
Abstract:

A central feature of China’s shadow banking is the prevalence of implicit guarantee investors come to expect for returns on risky investments. Allen, Gu, Qian, and Qian examine underlying investments and the pricing of a comprehensive set of investment products issued by trust companies. They find that a large share of the capital flows into the real estate industry. The pricing of the products not only depends on the risks of the underlying investments, but also on the strength of implicit guarantee. The yields decrease with the strength of implicit guarantee, and the spread-to-risk sensitivity is flattened by strong implicit guarantee. Finally, the researchers find evidence that one reason behind the exponential growth of shadow banking in China since 2010 is the need to fill the financing gap of the real estate industry.

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Interest-Rate Liberalization and Capital Misallocation
Author(s):
Zheng Liu, Federal Reserve Bank of San Francisco
Pengfei Wang, Peking University HSBC Business School
Zhiwei Xu, Shanghai Jiao Tong University
Discussant(s):
Zheng Michael Song, Chinese University of Hong Kong
Abstract:

Liu, Wang, and Xu study the consequences of interest-rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, liberalizing interest rate controls improves capital allocations within each sector, but exacerbates misallocations across sectors. Under calibrated parameters, interest-rate liberalization may reduce aggregate productivity and welfare, unless other policy reforms are also implemented to alleviate SOEs' distorted incentives or improve private firms' credit access.

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Production Networks and Misallocation
Author(s):
Pravin Krishna, Johns Hopkins University and NBER
Heiwai Tang, Johns Hopkins University
Discussant(s):
Abstract:

This paper studies aggregate TFP losses due to policy-distorted (mis-)allocation of resources across heterogeneous firms in the presence of intermediate input trade. Different from the existing literature on misallocation, Krishna and Tang pay close attention to both allocative efficiency between sectors and amplification through industry input-output (IO) linkages. They extend the model of Hsieh and Klenow (2009) to study firms' decisions to source inputs both domestically and globally from multiple industries. Solving the general equilibrium model with industry linkages reveals that an economy's aggregate TFP loss due to distortions is equal to the geometric mean of sector-level TFP losses, with weights equal to the sector's Domar weights. Using Chinese firm-level and Indian plant-level data over the period of 2000-2007, The researchers find, however, that the estimated aggregate TFP losses due to resource misallocation with IO linkages are lower, relative to the value-added approach adopted by Hsieh and Klenow (2009). Despite the amplification of distortion costs due to input-output linkages, this surprising result is due to the fact that the estimated sectoral TFP losses are on average an order of magnitude smaller than the estimates using the value-added approach, as for both countries, the marginal revenue products of intermediate inputs are much less dispersed across firms within industries, compared to those of labor and capital. Finally, trade liberalization raises the aggregate share of imported intermediates in total intermediates for India, increasing the size of the IO multiplier and thus the macroeconomic costs of firm-level distortions.

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Local Crowding Out in China
Author(s):
Yi Huang, The Graduate Institute, Geneva
Ugo Panizza, The Graduate Institute, Geneva
Marco Pagano, University of Naples Federico II
Discussant(s):
Dragon Tang, University of Hong Kong
Abstract:

In China, between 2006 and 2013 local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms' investment unaffected. Huang, Panizza, and Pagano establish this result using a novel, purpose-built dataset for Chinese local public debt. The investment of private firms is inversely correlated with city-level public debt, and this result is stronger for private firms that depend more heavily on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.

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Rise of Bank Competition: Evidence from Banking Deregulation in China
Author(s):
Haoyu Gao, Renmin University of China
Hong Ru, Nanyang Technological University
Robert Townsend, Massachusetts Institute of Technology and NBER
Xiaoguang Yang, Chinese Academy of Sciences
Discussant(s):
Jian Wang, Chinese University of Hong Kong, Shenzhen
Abstract:

Using proprietary loan-level data and detailed bank branch data in China, Gao, Ru, Townsend, and Yang investigate the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, they find that new entrant banks target mostly the firms borrowing from incumbent banks. After deregulation, new-entry banks tend to lend significantly more to SOEs or
relationship borrowers. Loans from new-entry banks have longer maturity, better internal ratings, more third party guarantees, and lower delinquency rates. When competition pressure is higher, incumbent banks lower loan-screening standards and have higher delinquency rates. Although bank entry deregulation make credit allocation worse, it has significantly positive effects on firms with bank credit access. Increased interbank competition leads to decreases in interest rates and increases in firm investments, employments, sales, and efficiency, especially for private firms.

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In addition to the conference paper, the research was distributed as NBER Working Paper w25795, which may be a more recent version.

Target Setting in Tournaments: Theory and Evidence from China
Author(s):
Xing Li, Peking University
Chong Liu, Peking University
Xi Weng, Peking University
Li-An Zhou, Peking University
Discussant(s):
Yingyi Qian, Tsinghua University
Abstract:

Motivated by the prevalence of economic targets in all levels of territory administrations in China, Li, Liu, Weng, and Zhou propose a Tullock contest model to study optimal target setting in a multi-layered tournament-based organization. In the researchers' model, targets are used by the upper-level official to convey the importance for economic growth and incentivize their subordinates in the tournaments. Li, Liu, Weng, and Zhou's model predicts a top-down amplification of economic growth targets along the jurisdiction levels, which is consistent with the observed pattern in China. Using both provincial and prefectural level data, they test the model predictions and find consistent evidence.

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The Causes of China's Great Famine, 1959-1961: County-Level Evidence
Author(s):
Bingjing Li, National University of Singapore
Hiroyuki Kasahara, University of British Columbia
Discussant(s):
Abstract:

Li and Kasahara provide evidence that over-export of grains aggravated the severity of China's Great Famine. The researchers collect the county-level information on the death rate, the birth rate, the procurement amount of grains, the output of different types of grains, crop productivity, weather condition, distance to railways, and the share of local Chinese Communist Party (CCP) members in 1953-1965. The researchers exploit the county-level variation in the types of crops each county specialized in to construct Bartik style measures for export shocks. They regress the death rates on the Bartik export measures and use the weather shocks as instruments for output and consumption. The regression result suggests that an increase in grain exports substantially increases the death rates, where the effect of grain exports on death rates is larger for counties with lower current output, higher two-period lagged output, larger distance to railways, and smaller share of local CCP members. The researchers also estimate the determination of procurement policy as well as the relationship between the death rates and the average level of consumption at the county-level during the famine period, and conduct counterfactual experiments to quantify the relative importance of different causes of the Great Famine. The counterfactual experiments indicate that the effect of grain exports explains 12 percent of excess deaths, which amounts to 1/5 of the effect of increase in procurement rate between 1957 and 1959. By comparing the distribution of county-level counterfactual changes in death rates if the amount of grain exports in 1959 had been the same as that in 1957, the researchers find that the distribution of the high-export-exposure counties first-order stochastically dominates that of the low-export-exposure counties.

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E-Commerce Integration and Economic Development: Evidence from China
Author(s):
Victor Couture, University of British Columbia
Benjamin Faber, University of California, Berkeley and NBER
Yizhen Gu, Jinan University
Lizhi Liu, Georgetown University
Discussant(s):
Daniel Xu, Duke University and NBER
Abstract:

The number of people buying and selling products online in China has grown from practically zero in 2000 to more than 400 million by 2015. Most of this growth has occurred in cities. In this context, the Chinese government recently announced the expansion of e-commerce to the countryside as a policy priority with the objective to close the rural-urban economic divide. As part of this agenda, the government entered a partnership with a large Chinese e-commerce firm. The program invests in the necessary transport logistics to ship products to and sell products from tens of thousands of villages that were largely unconnected to e-commerce. The firm also installs an e-commerce terminal at a central village location, where a terminal manager assists households in buying and selling products through the firm's e-commerce platform. Couture, Faber, Gu, and Liu combine a new collection of survey and transaction microdata with a randomized control trial (RCT) across villages that they implement in collaboration with the e-commerce firm. The researchers use this empirical setting to provide evidence on the potential of e-commerce integration to foster economic development in the countryside, the underlying channels and the distribution of the gains from e-commerce across households and villages.

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In addition to the conference paper, the research was distributed as NBER Working Paper w24384, which may be a more recent version.

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