This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of (i) the firm's political networks (political scandals), (ii) the firm's market credibility (market scandals), or (iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state‐owned banks, and higher departure of political directors.

This paper studies the long‐term consequences of actions induced by vesting equity, a measure of short‐term incentives. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). However, it is also associated with more negative long‐term returns over two to three years following repurchases and four years following M&A, as well as future M&A goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long‐run shareholder value, but consistent with these actions being used to boost the short‐term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm's stock, also inconsistent with repurchases being motivated by undervaluation.

Errors and bias are both inherent features of accounting. In theory, while errors discourage bias by lowering the value relevance of accounting, they can also facilitate bias by providing camouflage. Consistent with theory, we find a hump‐shaped relation between a firm's propensity to engage in intentional misstatement and the prevalence of unintentional misstatements in the firm's industry for the whole economy and a majority of the industries. The result is robust to using firms’ number of items in financial statements and exposure to complex accounting rules as alternative proxies for errors and to using the restatement amount in net income to quantify the magnitude of bias and errors. To directly test for the two effects of errors, we show that when errors are more prevalent, the market reacts less to firms’ earnings surprises and bias is more difficult to detect. Our results highlight the imperfectness of accounting, advance understanding of firms’ reporting incentives, and shed light on accounting standard setting.

We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

Do real assets protect against inflation? Stocks’ core inflation betas are negative, while their energy betas are positive. Currencies, commodities, and real estate mostly hedge against energy inflation, but not core inflation. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent within and across asset classes, uniquely among macroeconomic risk factors. Energy inflation has become more procyclical and volatile since the 1990s, which helps explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian asset pricing model accounts for these facts quantitatively.

This paper considers the problem of testing whether there exists a non‐negative solution to a possibly under‐determined system of linear equations with known coefficients. This hypothesis testing problem arises naturally in a number of settings, including random coefficient, treatment effect, and discrete choice models, as well as a class of linear programming problems. As a first contribution, we obtain a novel geometric characterization of the null hypothesis in terms of identified parameters satisfying an infinite set of inequality restrictions. Using this characterization, we devise a test that requires solving only linear programs for its implementation, and thus remains computationally feasible in the high‐dimensional applications that motivate our analysis. The asymptotic size of the proposed test is shown to equal at most the nominal level uniformly over a large class of distributions that permits the number of linear equations to grow with the sample size.

Despite the significance of social networks in influencing firm behavior, research on their impact on corporate tax behavior is limited. In this paper, we construct social networks of CFOs from U.S. companies based on their employment history, education, and non-professional activities. We find that firms with more socially connected CFOs have lower effective tax rates (ETR) compared to firms with less socially connected CFOs. This effect is more pronounced when corporate governance is weaker and managers have higher incentives. Furthermore, a firm's ETR decreases as CFO centrality increases. We do not observe similar results regarding the connectedness of boards of directors. Additionally, firm pairs exhibit similar ETRs when their CFOs are socially connected, suggesting an exchange of tax-related information among CFOs through their social networks. We also find that the past ETRs of firms with central CFOs predict the ETRs of firms with non-central CFOs. This indicates that less socially connected CFOs tend to follow the tax planning strategies of their more socially connected counterparts. Overall, our findings indicate that more socially connected CFOs possess more relevant information and resources regarding tax planning, leading to the adoption of more aggressive tax strategies compared to their less socially connected counterparts.

This study employs a broad set of machine learning (ML) methods to examine cross-sectional variation in corporate bond returns in China. Using macroeconomic indicators together with bond- and issuer-specific characteristics, we find that ML techniques outperform traditional linear models in both statistical and economic terms. These models are particularly effective at capturing distinctive features of the Chinese market, including the dominance of state-owned enterprises, implicit government guarantees, and rapid market evolution. We compare long-short and long-only portfolio strategies to account for practical constraints on short selling. The results indicate that ML methods are effective in markets where institutional features and information asymmetries play a central role in asset pricing.

Migrant welfare policies serve as crucial institutional levers for achieving sustainable urban development, yet the underlying mechanisms through which they influence firm value remain largely underexplored. This study proposes a new method for measuring the level of urban migrant welfare policies based on policy text scoring, and, using Chinese data, explores the impact of urban migrant welfare on corporate value and its underlying mechanisms. We find relatively robust evidence consistent with urban migrant welfare policies spilling over onto local corporate value. Mechanism tests suggest that these policies enhance corporate value by improving human capital allocation, promoting corporate social responsibility, and fostering innovation. The positive effect is more pronounced for firms in the growth stage and those operating in less competitive industries. Furthermore, we show that local fiscal capacity acts as a binding constraint: the value-enhancing effect of migrant welfare policies depends on sufficient fiscal resources for implementation. Our findings provide a new methodological perspective on quantifying policy text and elucidate the micro-foundations of how public policy shapes corporate performance.

We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding. The price impact of herding is also highly asymmetric. While buy herding facilitates price discovery, sell herding causes transitory yet large price distortions. Such price destabilizing effect of sell herding is particularly pronounced for speculative-grade, small, and illiquid bonds, and during the financial crisis.