Using the Chinese stock market data, we test the hypothesis that cognitive dissonance influences the stock market response to earnings news. Supporting this notion, we find that investors disregard earnings news that contradicts their sentiment due to cognitive dissonance, thereby causing a muted announcement date price reaction to such news. Further analysis shows that higher retail concentration and greater valuation uncertainty of the underlying firm exacerbate this cognitive dissonance and hence amplify its impact, but less credible financial report does not. Finally, we find that cognitive dissonance is temporary for bad news under optimism, but is quite persistent for good news under pessimism. Overall, our findings offer a behavioral bias explanation to understand why investors underuse accounting information.

This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

One caveat of current literature on the value of active management is the lack of treatment for the performance measures that can be gamed. We propose to use the performance measure that can’t be manipulated with respect to the underlying distribution, time variation, nor estimation error, (the manipulation-proof performance measure (MPPM, Goetzmann et al. (2007)), to rank all active U.S. domestic equity mutual funds from 1980 to 2013 on a quarterly basis to analyze managerial skills. We find fund managers in the higher ranked persistently outperform lower ranked managers by posting higher gross and net fund returns, higher holding-based returns, and generating positive return gap. Analyzing the holdings of the portfolios indicates higher ranked managers hold stocks with higher information asymmetry, especially the growth companies that are younger, smaller, and with lower liquidity. Our results show that the spread on gross and net fund returns between highest ranked and the lowest ranked fund managers is between 49 and 52 basis points per month. The holding returns are statistically significant for up to six months indicating the stock picking skills exist for those higher ranked managers. Even though MPPM identifies managerial skills, the positive alphas may not be warranted due to their operating expenses.

This paper investigates whether joint ventures and strategic alliances create value for bondholders by examining the bond market’s reaction to announcements of these two types of cooperative business activities. Based on 2964 announcements from 1985 to 2011, we find that joint ventures and strategic alliances create significant value for bondholders. The average two-month abnormal bond return is 0.64% for joint ventures and 0.70% for strategic alliances. We find no evidence of a wealth transfer between the bondholders and stockholders. We further explore the determinants of bond value creation through hypotheses on the synergy effect, the alleviation of financial constraints, and real options. The results of our study show that financial synergy is a main driver of bondholder wealth effects in joint ventures, while operating synergy is a dominant factor in strategic alliances. We also find evidence to support the real option hypothesis for both events. Finally, we show that the structure of bond contracts plays an important role in the link between synergy and abnormal bond returns.

We examine how strategic interaction in an industry influences the earnings expectations of financial analysts with regard to new product strategies. We find that following announcement of new products, analysts revise earnings forecasts upward more for announcing firms competing in low-strategic interaction industries than for firms competing in high-strategic interaction industries. For value-enhancing (value-reducing) product strategies, earnings forecast revisions are more favorable for rivals competing under a high (low) degree of strategic interaction than for rivals competing under a low (high) degree of strategic interaction. Overall empirical evidence indicates that the nature of strategic competition within the industry is important in assessing the market expectations of earnings for new product announcers and their rivals.

We conduct an international study on the effect of climate policy uncertainty on the systemic risk of banks from G20 countries. We find that climate policy uncertainty is associated with lower bank systemic risk. This relation is more pronounced in countries with high innovation capacity, climate readiness, more systemically important banks, and a more competitive banking system. Climate-related information disclosure and sustainable investments are critical economic channels through which the effect of climate policy uncertainty works. Our findings alleviate the concern that climate transition risk may contribute to financial instability and provide practical implications for regulators to design climate transition policies.

This paper explores the interplay between politics and law enforcement in China and its effects on firm financing decisions. By examining a sample of corporate lawsuits involving listed firms in China, we find that politically connected firms are less likely to be defendants, have higher win rates, and experience shorter litigation durations than non-connected firms. Additionally, we observe that firms with higher legal risk extend more accounts receivable and receive less accounts payable, but this relationship holds only for non-connected firms. Our findings support the financing advantage theory for politically connected firms and the legal risk compensation view for non-connected firms. Moreover, reforms in China's judicial system do not appear to mitigate the disadvantages faced by non-connected firms in terms of lawsuit outcomes and trade credit provision. Our findings suggest that well-functioned judicial independence might be still lacking in China, and that political connections continue to negatively impact law enforcement and corporate policies.

This paper examines corporate tax evasion from both a financial and governance perspective: one, the impact of tax evasion on a multinational (MNC)'s financial performance and secondly, whether corporate governance levels affect the probability of the multinational committing tax evasion. We specifically address: (i) whether MNCs suffer any adverse short and long-term effects on their financial performance following news that the firm in question has committed, or is suspected of committing, tax evasion and (ii) whether firm and country level governance has any influence on the likelihood of MNCs evading tax. In the short-term, we find that share prices drop in the event window around the announcement date. Further, we find evidence that multinationals do not suffer long-term reputational damage from tax evasion (unless there is repeated media follow-up); leaving no impact on firm profitability or value. We also find that a small number of firm level governance, tax-efficiency based governance and country governance measures have a significant relationship with an MNC's likelihood to commit tax evasion.

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.

We hypothesize that managers use stock splits to attract more uninformed trading so that market makers can provide liquidity services at lower costs, thereby increasing investors’ trading propensity and improving liquidity. We examine a large sample of stock splits and find that, consistent with our hypothesis, the incidence of no trading decreases and liquidity risk is lower following splits, implying a decline in latent trading costs and a reduced cost of equity capital. Further, split announcement returns are correlated with the improvements in both liquidity levels and liquidity risk. Our analysis suggests nontrivial economic benefits from liquidity improvements, with less liquid firms benefiting more from stock splits.