The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets (ROA¯ or ROI¯) as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI=Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable.

We empirically quantify the welfare implications of bank entry in the United States between 2000 and 2008. We use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes. We find no evidence for under- or over-entry. Compared with the socially efficient outcome, there is a mild welfare loss resulting from banks entering wrong locations in product space. Compared with the observed outcome, consumer surplus drops by 20–38% and bank profits decline by 48–59% when banks are homogeneous. Therefore product differentiation significantly improves welfare under free entry.

The effect of diversification on firm performance has been debated. We reexamine the effect using a sample of 44,248 observations of non-financial US firms for the 1997–2009 period employing the quantile regression approach. Our empirical results show that the effect of diversification on firm performance is not homogeneous across various quantile levels: the diversification discount (premium) shows up in firms with high (low) RoE quantiles. Further, we find that diversification affects firm risk as well. Therefore, we consider a risk-adjusted performance measure and find that both diversification discount and premium disappear, which is consistent with the risk-return trade-off principle.

This study extends the theoretical model of dynamic investment, dividend payout, costly external financing, and liquidation for financially constrained firms by incorporating ambiguity. We demonstrate that ambiguity aversion induces a trade-off between the “bird-in-hand” effect and an amplified precautionary motive in determining firms’ cash management, which consequently affects firms’ investment, dividend payout, costly external financing, and liquidation decisions. Unlike the models considering risk only, we identify a non-monotonic relationship between the endogenous payout boundary and ambiguity aversion. Our model generates several new implications, including providing an explanation for the high cash holdings and speed-up of asset sales during the recent COVID-19 crisis.

Capital controls segment the offshore credit market of Chinese renminbi from the onshore market. Using a novel administrative data set, we provide evidence that firms arbitrage the onshore-offshore interest differentials using bank-intermediated “entrepôt trades,” which supposedly re-export imports with little or no processing. Onshore-offshore interest differentials drive renminbi inflows from entrepôt trades, which strongly predict 1-year-forward outflows to settle bank-issued letters of credit. The patterns and timing of entrepôt trade flows are consistent with lending by onshore banks and borrowing from offshore banks through bank-intermediated trade finance. A larger interest differential allows transactions with a lower value to be profitable and induces entry into arbitrages. Our findings suggest that renminbi interest arbitrages are feasible but costly under capital controls.

We investigate the real effects of tail risk on firm-level capital investment. Using an option-implied tail measure, we find that tail risk impedes investment, controlling for investment opportunities and existing uncertainty measures. This relation is stronger for firms with higher tail exposure and crash risk. The tail risk effect is more pronounced for firms with higher investment irreversiblility and demand uncertainty, consistent with the real options mechanism. Corporate resilience built by hedging activities attenuates the effect, while stressed debt financing conditions weaken the resilience and amplify the effect. Tail risk also delays investment spikes. Two instrumental variables enhance the causal interpretation. Overall, we highlight the distinctive role of tail risk in shaping real investment.

Using unique data on trading commission payments to mutual fund rating companies (MFRCs) by mutual funds in China, this paper investigates whether the conflicts of interest arising from trading commission payments bias MFRCs’ mutual fund star ratings and hence affect their informativeness. We find the rating of a mutual fund is more optimistic when the MFRC either (i) receives trading commission fees from the mutual fund or (ii) can potentially receive fees in the future. The paper further shows that the usefulness of ratings in terms of predicting a fund’s future performance is negatively impacted by conflicts of interest. There is also evidence that investors can see through the problem, responding less enthusiastically (in terms of fund flows) to the ratings of conflicted MFRCs. We further find that the introduction of a rating qualification system that aims to improve mutual fund rating quality exacerbates the rating bias.

This paper examines the effects of bond liquidity on firms’ investments. We postulate that bond liquidity increases firms’ investment opportunities by reducing the cost of capital and improving access to financing. Using the variation in liquidity generated by several – both positive and negative – exogenous shocks, we find that firms respond to positive (negative) shocks by expanding (contracting) capital expenditures and acquisition activity. Further, by enhancing access to funding, bond liquidity facilitates acquisition financing and reduces the likelihood of investment delays. We also find a positive impact of bond liquidity on market valuations and profitability, suggesting that these investments are value-increasing.

Mutual funds have emerged and rapidly developed since 2000 in China. This study tests empirically the impact of mutual funds’ ownership on firm performance in China, using a large sample for the period of 2001–2005. We find that equity ownership by mutual funds has a positive effect on firm performance. The result is robust to several measures of firm performance and various estimations. Our finding supports recent regulatory efforts in China to promote mutual funds as a corporate governance mechanism and suggests that pooling diffuse minority interests of individual shareholders who are prone to free-rider problems via mutual funds is beneficial.

This paper investigates whether attitudes towards gambling help explain the occurrence of stock price crashes in China. By using a province's per capita welfare lottery sales as a proxy for local gambling preference, we find that firms in regions with stronger gambling preference experience greater stock price crash risk. This result is robust to a battery of sensitivity tests after addressing possible endogeneity issues by using an instrumental variable approach and propensity score matching. Furthermore, we find that the impact of local gambling attitudes on stock price crash risk is mitigated by higher quality internal monitoring and more stringent external monitoring. Lastly, we identify two channels through which gambling preferences intensify stock price crash risk: aggressive corporate strategies and speculative accounting practices. Overall, these findings suggest that local gambling preferences influence firms’ stock price crash risk.