We examine whether having an internal labor market can help a firm affiliated with a privately owned business group (POBG) reduce labor cost stickiness. Our findings suggest that, when a POBG-affiliated firm experiences a decrease in sales, it has lower labor cost stickiness than an otherwise equivalent firm that is not affiliated with a POBG. Specifically, we find that, on average, a POBG-affiliated firm entirely mitigates labor cost stickiness when it has a decrease in sales. In addition, we document that, to adjust its labor cost downward, a POBG-affiliated firm hires fewer employees, rather than paying lower wages. We show that the lower labor cost stickiness is due to movement of employees from the focal firm to other firms within the same POBG. When sales fall, the POBG reallocates excess employees at the focal firm to other firms within the business group via an internal labor market, and the focal firm thereby increases its per capita profit. Moreover, we find that agency cost mediates the impact of a POBG on labor cost stickiness. When the external market is less effective or the POBG headquarters have strong incentives, the effect of POBG affiliation on the reduction in an affiliated firm's labor cost stickiness is more salient.

We examine the effect of inside directors with outside directorship, denoted as talented inside directors (TIDs), on corporate social responsibility (CSR) using 17,668 U.S. firm-year observations from 1998 to 2016. We find a significantly negative association between TIDs and excessive CSR and the result remains unchanged after correcting for endogeneity concern. We further shed light on how TIDs reduce excessive CSR through playing monitoring and advisory roles. The result showing a high sensitivity of CEO turnover to excessive CSR in firms with TIDs renders support to the monitoring hypothesis of TIDs. We further demonstrate that the baseline result is more pronounced for TIDs who are more likely to replace CEOs, for positive CSR activities that are more likely to enhance CEOs' personal benefits, and in firms that agency problems are more severe, providing additional evidence to support the monitoring hypothesis. This study also supports the advisory role of TIDs by showing that the baseline result is more pronounced in firms with high demand for board advice. Finally, we show that investors perceive that TIDs improve the value of CSR. Taken together, this study provides promising evidence that TIDs improve the efficiency of CSR investment by monitoring and advising CEOs.

The study examines the effect of earnings management by classification shifting on firm success, focusing on the survival of newly listed firms. We argue that shifting income-decreasing expenses from core to special items should negatively associate with future operating performance because of improper signaling of actual repeatable core profitability. We find that classification shifting strongly and negatively affects future Initial Public Offering (IPO) success and survival. We further identify the economic mechanisms that drive this finding and observe that our results are mitigated when the quality of external corporate governance alleviating agency concerns is stronger, also for IPO firms operating within stronger business contexts. Therefore, in an environment that facilitates firm survivability, the existence of weaker than reported sustainable performance may not end up materializing in the form of lower firm survivability as these factors aid firms' continuing operations from a business perspective. Our findings provide evidence of the longer-term implications of a method of earnings management that has long been considered “soft” and without any longer-term reversing consequences.

We examine the impact of lifetime work experience of top executives on mergers and acquisitions (M&As) behavior and outcome. Based on hand-collected data of top executives in a sample of Chinese firms during 2002–2018, we construct a generalist ability index of top executives to study the impact of generalist top executives (GTEs) vs. specialist top executives (STEs) on M&As. Our findings suggest that GTEs conduct more M&As than those of STEs. The results are robust to alternate specifications of M&A frequencies and after accounting for endogeneity issue. Furthermore, the M&A announcement and long-term returns are better for acquirers with GTEs than those with STEs. We attribute the findings to GTEs' ability of searching target ex ante, making the M&A process efficient, and fully leveraging their social networks post M&A. In addition, we find the increase in M&A activities in GTE firms are primarily due to GTEs' experience of M&As rather than their talents. Finally, the M&As from GTEs improve investment efficiency and are less likely to divest targets post M&As. In sum, GTEs conduct more M&As and they create value in the process.

Using a sample of Chinese A-share listed firms from 2007‐2017, we examine the impact of short sales on a firm's financial constraints. We develop three conceptual frameworks, the negative information effect, the undervaluation effect, and the deterrent effect, based on the prevailing theories and conduct an in-depth empirical analysis using the difference-in-differences, propensity score matching, and instrumental variable methods. Our findings suggest that: (1) Short sales generally worsen a firm's financial constraints by reducing its ability of raising cheap and overvalued external capital. (2) A shortable firm's financial constraints deteriorate more seriously in the case of higher credit risk or information asymmetry. (3) When a firm becomes shortable, its negative media coverage increases, external financing cost rises, and the amount of new external financing decreases. (4) The adverse impact of short sales on financial constraints is more pronounced for inefficient state-owned firms and mainly concentrates in the short term. Collectively, these results support the underlying logic of the negative information effect. However, further analysis shows that: (1) The deterrent effect also exists but is much weaker than the negative information effect. (2) The strength of the two effects will “wan and wax” with time or circumstances. Thus, the deterrent effect may outweigh the negative information effect by easing a firm's financial constraints in some cases, such as in the long term after short sales deregulation and when short sales magnitude is low or the managers are more sensitive to the decline of stock price. Our paper provides new insights into the impact of shorts sales on financial constraints, revealing some unique Chinese features compared to the US market and offering valuable lessons to other emerging markets.

We investigate the impact of excess perk consumption on crash risk in state-owned enterprises in China. To enjoy excess perks, executives in state-owned enterprises have an incentive to withhold bad news for extended periods, leading to higher future stock price crash risk. Consistent with this assertion, we find a positive correlation between excess perks and crash risk. The findings are robust to the inclusion of other determinants of crash risk identified in the literature, such as earnings management, conditional conservatism, and firm-level corporate governance mechanisms. The results still hold after accounting for possible endogeneity issues using a two-stage least squares estimation. Earnings management (conditional conservatism) helps amplify (lessen) this impact. Moreover, better external monitoring mitigates the impact of excess perks on firm crash risk. We further find that the impact of excess perks on crash risk is more pronounced in firms whose executives are approaching retirement and persists for at least two years.

We investigate how a state's political corruption affects a resident firm's debt contracting and how a change in anti-corruption regulation alters the relation between corruption and loan contracting. Firms in more corrupt states are associated with significantly higher loan spreads and tighter loan covenants than firms in less corrupt states. Furthermore, the passage of the Dodd–Frank whistleblowing provision amplifies the conhcerns of banks about the detrimental impact of corruption due to the increased exposure of firms to whistleblowing threats. The detrimental impact of corruption is further amplified when a state has a higher level of whistleblowing involvement, when firms are located in more corrupt states or closer to the SEC office, and when the bank's state is less corrupt than the firm's state. In general, we document the externality of corruption in the debt financing of firms and the response of banks to changes in regulation.

We examine how societal secrecy affects the underpricing of initial public offerings (IPOs). Using a large sample of 18,304 IPOs across 38 countries, we find robust evidence that IPO underpricing is positively related to societal secrecy. Additional analyses reveal that investor protection, market openness, and third-party certification moderate the effect of societal secrecy on IPO underpricing. We find that societal secrecy influences IPO underpricing through the information asymmetry, demand for control, and information cascade channels. Collectively, we show that societal secrecy exerts a strong influence on IPO underpricing globally.

We find that Chinese-listed firms are more likely to pay dividends and implement larger payout ratios when their directors have foreign experience. This finding remains after using various methods to address potential endogeneity concerns. The positive association is stronger for low-growth firms, non-state-owned firms, and when directors obtain foreign experience in countries with stronger investor protection. The effect of directors' foreign experience on dividend payouts is also more pronounced for independent directors than for executive directors. Directors with foreign experience appear to overcome the weak investor protection environment as the effects are more pronounced among poorly governed firms and before the regulatory dividend reforms in 2013. Overall, our findings identify a mechanism through which better governance practices are propagated.