Knowledge that Transforms

The China Accounting and Finance Review (CAFR) was jointly established in 1999 by the Hong Kong Polytechnic University and Tsinghua University. Over the past 22 years, CAFR has published original papers in accounting and finance with a focus on China-related research. In this article, we review the journal’s publishing patterns and the impactful articles it has published, with the aim of better understanding past research on China-related issues and recent publication patterns and trends as well as developing new insight that may inspire future submissions. We divide past CAFR articles by topic into six groups: (i) information disclosure; (ii) auditing; (iii) corporate governance; (iv) market efficiency; (v) corporate finance; and (vi) miscellaneous. We use these categories as the basis of our review for articles published before 2020. We also summarize articles by their regional setting, research methodology, and authors’ university affiliation. We then highlight the contributions of a few impactful CAFR articles that are actively cited in both the Chinese and English literature. We complement the literature review by going over China’s financial stability research in JFS. We also compare CAFR with other major accounting and finance journals in the Asia-Pacific region. CAFR stands out by welcoming research using a diversity of regional settings and research topics. Finally, we discuss the new editorial strategies that began in 2020. Under the new editorial policy, CAFR now publishes more non-China and more cross-disciplinary studies than it used to. We review several recent publications to demonstrate the change. Going forward, we intend to call for the publication of more high-quality papers in accounting and finance that are not restricted to a region, area, or methodology providing new insights into accounting and finance.

In this paper, we gauge the degree of interconnectedness and quantify the linkages between global and other systemically important institutions, and the global financial system. We document that the two groups and the financial system become more interconnected during the global financial crisis when linkages across groups grow. In contrast, during tranquil times linkages within groups prevail. Global systemically important banks (G-SIBs) contribute most to system-wide distress but are also most exposed. There are more links coming from G-SIBs to other systemically important institutions (O-SIIs) than the other way around, confirming the role of G-SIBs as major risk transmitters in the financial system. The two groups and the global financial system tend to co-vary for periods up to 60 days Prior to their official designation as G-SIBs or O-SIIs, the prevalent news sentiment about these institutions (we measure with a textual analysis) was negative. Importantly, the systemic importance and exposure of G-SIBs and O-SIIs is perceived differently by the Financial Stability Board (FSB) and the European Banking Authority (EBA).

This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.

We investigate how reputational risk arising from traditional and online media coverage of Corporate Social Irresponsibility (CSI) conducts affects the cost of borrowing and what are the factors that can mitigate or amplify this effect. First, we find that negative media attention increases bank loan costs and show that this result is robust to endogeneity concerns and alternative measures of key variables. Next, we find that the impact of negative media attention on bank loan costs is more severe if the misconduct involves borrowers with prior high Corporate Social Responsibility (CSR) reputations, while it is smaller when prior lending relationships exist between the lead arranger and the borrower.

We examine how community banks respond to liquidity shocks created by natural disasters. We address community banks’ responses to liquidity shocks due to their focused geographic and economic presence, which coincide with their communities’ exposure to the disasters and the ability of the local banks to meet their needs. We find that community banks respond to liquidity shocks by managing their balance sheet, rather than any single balance sheet account. In particular, we find that they respond to the liquidity needs of their communities by increasing loans as deposits are withdrawn.

In addition to tail macroeconomic events (e.g. wars, financial crises and pandemics), climate change poses a threat to financial stability — with extreme climatic events increasing in frequency and intensity and policy risks putting pressure on asset valuations. We study the effect of a changing climate on asset prices and interest rates through the lens of a dynamic CAPM with rare disasters, time-varying risk and recursive preferences. In our model, a changing climate makes tail events more frequent and less predictable, increasing the premium of climate risk; interestingly, this change may not be fully reflected in the overall market risk premium that includes both components of risk: macroeconomic and environmental. Our results also support the hypothesis of a declining real rate of interest as the planet warms, while the increasing risk of climate policy reduces the participation of brown assets in the market portfolio.

This study examines the influence of political uncertainty proxied by national election on analysts’ forecasts across 28 countries. We find analysts’ forecasts’ accuracy decreases, and the optimism increases in national election years compared to these in non-election years. Further analysis supports information opacity, local political connections, politically sensitives industries and the quality of institutions channels through which political uncertainty affects the analysts’ forecasts.

Multiple-bank lending is the most prevalent form of bank-firm credit relationships in nearly all countries. It results in high asset commonality and interconnectedness, allows idiosyncratic risks to become systemic, and makes the banking system more fragile and vulnerable to shocks. Using detailed, granular-level, supervisory data on large corporate loans, we show that multiple bank lending is driven, inter alia, by regulatory limits on large credit exposures. These limits, aimed at mitigating an individual bank's concentration risk, force firms to explore alternative sources of funding, making the common borrowers' phenomenon more prominent. We find that multiple bank lending is determined endogenously, and its likelihood increases with the level of portfolio similarity between lenders. The size of the original lender and its systemic importance magnifies this effect. We argue that banks do not internalize the systemic effect of their lending decisions and that multiple bank lending constitutes an insurance mechanism related to an implicit "too-many-to-fail" guarantee. Its externalities are suboptimal and should be reinforced with better monitoring by the related authorities.