Using a panel data set (1997–1999) for 235 publicly listed companies in the People's Republic of China (PRC), this study tests empirically whether the purchase of property insurance mitigates principal-agent (agency) incentive conflicts. In contrast to prior studies, we first estimate a probit insurance participation decision model and then a fixed-effects insurance volume decision model (with Heckman's sample selection correction) in order to shed light on the determinants of both property insurance participation and volume decisions. Our results suggest that a major motivation for the corporate purchase of insurance in China appears to be the mitigation of agency conflicts. Additionally, various ownerships seem to have different impacts on the corporate purchase of insurance in China. Moreover, the results show that the same factor can have different impacts on the insurance participation and volume decisions, and that binding financial conditions may be a key factor accounting for such observed differences.

By examining required rates of return, we study how shareholders perceive stronger stakeholder orientation arising under the adoption of constituency statutes. Constituency statutes decrease (increase) the cost of equity for firms operating in high- (low-) competition industries. For firms in high-competition industries, constituency statutes increase future cash flows and performance resilience to negative industry downturns, suggesting that constituency statutes facilitate CSR activities for product differentiation in competitive industries. In contrast, for firms in low-competition industries, constituency statutes reduce future cash flows and increase tail risks, suggesting that constituency statutes shield managerial agency problems from discipline.

Using a unique insurance dataset for a sample of Chinese publicly listed companies for the period 1997 through 2003, this study tests the simultaneous linkages between debt capacity, cost of debt, and corporate property insurance. Our results suggest that, on the one hand, a higher cost of debt appears to motivate the use of more property insurance, but high leverage alone does not lead to the purchase of more property insurance. The latter finding might reflect the unique institutional setting of China, for example, where there is a low chanceof legally enforced company liquidation. Also, there is evidence that leverage can interact with tangible assets intensity and exert a positive conjoint effect on the corporate purchase ofproperty insurance. On the other hand, we find evidence that supports that property insurance helps expand insuring firms' debt capacity and helps lower their borrowing costs. However, themoderate evidence on the cost reduction effect suggests that lowering the borrowing cost is likely to be a concern secondary to facilitating corporate borrowing and thereby expanding debt capacity in corporate property insurance decisions in China. Overall, we conclude that debt capacity, cost of debt, and corporate insurance appear to be simultaneously related.

Using China's 2008 four-trillion-yuan economic stimulus as a setting and proprietary loan data, we study how a large publicly listed state-owned bank responds to the government's countercyclical financing initiative while trying to meet the expectations of bank regulators and public investors. We find that the bank exhibited little changes in the process of setting internal credit ratings of borrowers, and internal ratings remain a valid, albeit weaker, predictor of interest rates in the stimulus period. Interest rates also remain a valid predictor of loan delinquency in the stimulus period. Evidence from analyzing unlisted borrowers is broadly similar. Overall, there is no systematic evidence that loan decisions of the state-owned bank are severely compromised in the stimulus period. The study adds to the limited understanding of how partially privatized state-owned banks balance different objectives in managing credit risk and is relevant to the longstanding debate over the roles of state-owned banks.

This article analyzes how creditors’ simultaneous debt and equity holdings affect firm investment policies. We find that firms with dual ownership are less likely to have capital expenditure restrictions in loan contracts, and the relation varies in predicted ways with the monitoring needs of borrowers and the monitoring capacity of dual owners. A less frequent use of capital expenditure restrictions, however, does not result in borrowers’ risk-shifting. Dual ownership firms are also more likely to be granted an unconditional waiver and do not significantly reduce debt issuance or investment expenditures after a financial covenant violation. Our results highlight how dual ownership can help mitigate shareholder–creditor conflicts.

The recent split share structure reform in China involves the nontradable shareholders proposing a compensation package to the tradable shareholders in exchange for the listing rights of their shares. We find that state ownership (the major owners of nontradable shares) has a positive effect on the final compensation ratio. In contrast, mutual fund ownership (the major institutional owner of tradable shares) has a negative effect on the compensation ratio and especially in state-owned firms. The evidence is consistent with our predictions that state shareholders have incentives to complete the reform quickly and exert political pressure on mutual funds to accept the terms without a fight.

We examine the effect of directors' and officers' liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation.

We investigate the impact of implicit government guarantees (IGGs) on the trading behavior of retail stock investors for non-default firms, using China’s first corporate bond default in March 2014 as a negative shock to public expectations of IGGs. Our difference-in-differences analysis shows that, following the Chaori default shock, retail investors withdraw from high-default-risk firms that have not yet defaulted. This outcome is not attributed to industry, geographical or supply-chain contagions, declining stock prices, worsened financial metrics, or merely a seasonal effect. The effect is more pronounced for firms with preexisting larger retail ownership breadth or higher stock trading turnovers, for non-state-owned enterprises, and for firms with less sustainable earnings. When the initial default shows signs of a bailout, retail investors’ withdrawal partially reverses. Overall, the diminishment of IGGs seems to have reduced the moral hazard of retail stock investors and encouraged them to focus more on firms’ fundamentals, potentially enhancing the capital allocation efficiency in China’s stock market in the long run.

There are two main tax-related arguments regarding the use of reinsurance – the income volatility reduction and the income level enhancement arguments. The income volatility reduction argument contends that firms facing convex tax schedules have incentives to hedge in order to reduce the volatility of their annual taxable income and thereby lower expected tax liabilities [Smith, C.W., Stulz, R.M., 1985. Optimal hedging policies. Journal of Financial and Quantitative Analysis 19, 127–140]. The income level enhancement argument, advanced by Adiel [Adiel, R., 1996. Reinsurance and the management of regulatory ratios and taxes in the property–casualty insurance industry. Journal of Accounting and Economics 22, 207–240], is more specific to hedging via reinsurance. This perspective holds that reinsurance enhances current reported earnings via the receipt of reinsurance commissions and so increases tax liabilities. Consequently, insurance firms with high marginal tax rates should use less reinsurance than those with low marginal tax rates if tax matters. Prior studies using data on financial derivatives have produced mixed results on the validity of the first argument, while Adiel (1996) finds the second argument insignificant in his study of the use of reinsurance by a sample of United States (US) property–liability insurance firms. This study tests the two tax-related arguments using 1992–2001 data for a sample of United Kingdom (UK) life insurance firms. We find that UK life insurers with low before-planning marginal tax rates tend to use more reinsurance; in contrast, tax convexity is found to have no significant impact on the purchase of reinsurance and so the volatility-reduction argument is not supported.