In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.

Previous studies show that in contrast to evidence that share issue privatization (SIP) in most other countries have improved firm profitability, China’s SIP of the 1990s had no such effect. We argue that the main reason for the failure of China’s SIP is likely to have been the weak institutional environment in place at that time. We examine China’s SIP in a more recent period in which the institutional environment was greatly improved. Using a matching sample method, we find that SIP firms continued to experience negative post-SIP profitability changes in our sample period. However, their performance decline was significantly less than that of their matched non-SIP SOEs. We also find that the introduction of the independent director rule helped to improve firm performance. Our results reconcile the findings of the SIP effect in China with international evidence and illustrate the importance of a developed capital market to ensuring the success of privatization schemes.

In this paper, we investigate the problem of controlling shareholder Non-Operational Fund Occupancy (NOFO) in China, where controlling shareholders directly take funds away from listed firms without matching business transactions. The NOFO problem was an evident and widely used tunneling activity in China and was identified by the securities market regulators. Unlike previous literature that used indirect measures of tunneling, we directly collect the actual amounts of NOFO from mandated disclosures and utilize this direct measure of tunneling in a series of empirical tests. First, we examine and find that various mechanisms such as ownership structure, corporate governance and institutional environments could restrain tunneling activities. Second, we find significantly positive market reactions to regulations that aimed to solve the NOFO problem. Third, we find evidence that the operating performance and valuation of firms with a NOFO problem improved after the regulations went into effect. Our study sheds light on the severe issue of minority shareholder expropriation and the effectiveness of regulators' policy to remedy the tunneling problem.

We examine the impact of China's anti‐corruption campaign on firm‐level financial reporting quality (FRQ). As an important component of the anti‐corruption campaign, in October 2013, “Rule 18” was issued to prohibit party and government officials from serving as directors for publicly listed firms. The regulation led to a large number of official directors resigning from their roles as directors involuntarily. As such, Rule 18 has effectively weakened, if not fully discontinued, the political connections of the firms that previously hired officials as directors. Our empirical analyses employ a difference‐in‐differences research design with firm fixed effects and propensity‐score matching to examine the pre‐ and post‐period FRQ around the enactment of Rule 18. We find that, compared to propensity‐score‐matched control firms, FRQ of firms with resigned official directors increases after Rule 18. Further evidence suggests that the impact is stronger when firms are located in regions with more developed financial markets and in regions with higher judiciary efficiency. We also find that the effect is more pronounced when firms are non‐state‐owned, received preferential credits, and face refinancing pressure.

We investigate the role of national culture in corporate risk-taking. We postulate that culture influences corporate risk-taking both through its effect on managerial decision-making and through its effect on a country's formal institutions. Further, we postulate that the influence of culture is conditioned on the extent of managerial discretion as measured by earnings discretion and firm size. Using firm-level data from 35 countries and employing a hierarchical linear modeling approach to isolate the effects of firm-level and country-level variables, we show that individualism has a positive and significant association, whereas uncertainty avoidance and harmony have negative and significant associations, with corporate risk-taking. Greater earnings discretion strengthens and larger firm size weakens the association of culture with corporate risk-taking. We conclude that even in a highly globalized world with sophisticated managers, culture matters.

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment-level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, cross-sectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal capital markets. We find that the other theories that rely on the potentially effective use of asset sales of non-core segments of diversified firms to generate cash, and the increased agency/influence costs in diversified firms do not offer an economically significant explanation for the lower cash holdings among diversified firms.

Credit borrower concentration arises when a bank or financial institution lends a large amount of its funds to a few large borrowers. We find that borrower concentration is positively related to non-performing loans and negatively related to financial performance. We also find that the voting power of bank’s controlling shareholder is positively related to the borrower concentration. The evidence is consistent with the view that controlling shareholders divert resources away from banks by extending a high volume of loans to a few related parties, which leads to high borrower concentration. Further evidence indicates that some seemingly unrelated large borrowers, as reported in the financial disclosure, are actually related to the controlling shareholders. We also provide evidence that going public mitigates the tunneling activities of controlling shareholders.

We examine how short sellers affect long‐run management forecasts using a natural experiment (Regulation SHO) that relaxes short‐selling constraints on a group of randomly selected firms (referred to as pilot firms). We find that compared to other firms, the pilot firms issue more long‐run good news forecasts but do not change the frequency of long‐run bad news forecasts. The increase in good news forecasts is greater when the pilot firms have higher‐quality forecasts, greater uncertainty about firm value, or higher manager equity incentives. Overall, these results and the results of additional analyses indicate that the reduction in short‐selling constraints and the increase in short‐selling threat induce managers to enhance disclosures through more long‐run good news forecasts to discourage short sellers.