Contrary to the prediction of the standard portfolio diversification theory, many investors place a large fraction of their stock investment in a small number of stocks. I show that underdiversification may be caused by solvency requirements. My model predicts that for quite general preferences and return distributions: (1) underdiversification decreases in discretionary wealth; and (2) expected return and covariance determine which stocks to invest in, but variance, higher moments, and Sharpe ratio do not matter for this choice. In addition, a less-diversified stock portfolio has a higher expected return, a higher volatility, and a higher skewness, and idiosyncratic risks are priced.

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we find that CDB credit to strategic industries at the top of supply chains leads to lower prices, higher volume, and more product varieties and destinations for exports for firms in downstream industries. These positive spillovers stem from reduced intermediate goods prices and increased trade credit from upstream to downstream firms caused by CDB loans. Notably, this surge in import activity displaces U.S. firms within the same industry but bolsters downstream U.S. firms’ business performance and employment.

We argue that syndicates associate venture capitalists (VCs) with uneven skill levels in order to lower their expected gains from threatening to stop financing: Non-continued participation would send a milder negative signal to alternative financiers. This can explain the empirical observations that i) early-round syndicates regularly associate VCs with different levels of experience and ii) follow-on syndicates often involve none of the early-round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is i) negatively related to the extent to which the founders of the VC-backed firm are professionally well connected and ii) positively related to the likelihood of syndicate switching in a later round.

We examine the impact of managerial entrenchment on firm value using a dynamic model with firm fixed effects. To estimate the model, we employ the long-difference technique, which is shown by our simulation to deliver the least biased estimates. Based on a large sample of U.S. companies, we document a significantly negative and causal effect of managerial entrenchment on firm value after taking into account omitted variables, reverse causality, and highly persistent endogenous variables. Additional analysis suggests that the causality running from managerial entrenchment to firm value is more pronounced than that for reverse causality.

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.

We study how managers react to shareholder empowerment that makes votes on shareholder proposals binding. We empirically exploit staggered legislative changes that introduce such empowerment for proposals regarding majority voting in director elections. We find that managers become more responsive to shareholder requirements by initiating majority voting through either management proposals or governance guidelines. This early action crowds out shareholder proposals. Further results suggest compromised implementation: Managers adopt provisions that give them greater control over the channel of implementation and allow them to retain directors who fail in elections. Our results suggest that managers retain substantial discretion to modulate shareholder requirements. This article was partially completed when Wu was at Fudan University. Any errors are attributable solely to the authors.

We present evidence of investors underreacting to the absence of events in financial markets. Routine-based insiders strategically choose to be silent when they possess private information not yet reflected in stock prices. Consistent with our hypothesis, insider silence following a routine sell (buy) predicts positive (negative) future returns, as well as fundamentals. The return predictability of insider silence is stronger among firms with a poor information environment and facing higher arbitrage costs, and a large fraction of abnormal returns concentrates on future earnings announcements. A long–short strategy that exploits insiders’ strategic silence behavior generates abnormal returns of 6% to 10% annually.

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 use a novel experiment in China to examine the effects of having a quasi-official investor own a small number of shares on specific firm outcomes. We find that, relative to control firms, pilot firms experience an increase in dissenting votes from independent directors, a reduction in tunneling and earnings management activities, and an improvement in merger performance. Independent directors questioned by the quasi-official shareholder in activism events subsequently lose board seats in the director market. Overall, our results shed light on a new mechanism for enhancing the protection of minority shareholders.