We examine the effects of bank’s political connection on bank performance and risk in China. We use hand-collected information on CEOs’ professional background to identify their political affiliations, and find that banks whose CEOs have former government experiences have higher return on assets, lower default risk, and lower credit risk. Additionally, politically connected banks have disproportionally higher performance when the CEOs previous worked in the same city where the current bank’s headquarter locates, had past banking experiences, spend more on entertainment and travel costs, and have higher previous administrative rankings (e.g., at the provincial or state level). These results suggest that politically connected banks have better access to lending to politically connected firms, which are high yield assets and more likely to be bailed out when in distress. Our results offer a mechanism of political rent seeking, consistent with the institutional environment of China’s banking and political system.

We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through. To answer this question, we use scanner data from a large U.S. retailer to estimate product level pass-through for three vertical structures: national brands, private label goods not manufactured by the retailer, and private label goods manufactured by the retailer. Our approach circumvents issues associated with internal firm prices and demonstrates that accounting for horizontal market structure is important for measuring the effects of vertical integration and reduced double marginalization on pass-through.

The liquidity premium theory of interest rates predicts that the Treasury yield curve steepens with inflation uncertainty as investors demand larger risk premiums to hold long-term bonds. By using the dispersion of inflation forecasts to measure this uncertainty, we find the opposite. Since the prices of long-term bonds move more with inflation than short-term ones, investors also disagree and speculate more about long-maturity payoffs with greater uncertainty. Shorting frictions, measured by using Treasury lending fees, then lead long maturities to become overpriced and the yield curve to flatten. We estimate this inflation-betting effect using time variation in inflation disagreement and Treasury supply. Received September 3, 2014; editorial decision August 5, 2016 by Editor Andrew Karolyi

Following the enactment of reforms in the mid-1990s, China's state-owned enterprises (SOEs) became more profitable. Using theoretical insights from Azmat, Manning, and Van Reenen (2012) and Karabarbounis and Neiman (2014) and econometric methods in De Loecker andWarzynski (2012), this paper finds that SOE restructuring was nevertheless limited. This is because SOE profitability gains in part reflect that they were under less political pressure to hire excess labor and also their cost of capital fell and their capital-labor elasticity of substitution generally exceeded unity. Moreover, SOE productivity lagged that of foreign and private firms.

Higher default probabilities are associated with lower future stock returns. The anomaly cannot be explained by strategic shareholder actions, traditional risk factors, characteristics, or mispricing, but, instead, is consistent with a risk-shifting hypothesis. Consistent with the risk-shifting hypothesis, we find that distressed firms tend to overinvest, destroy value, and exhaust their cash flows. Effects are concentrated in firms with wide credit spreads, firms with no convertible debt, and in cases where CEOs receive above-average equity-based compensation. As default risk rises, credit spreads rise, equity betas fall, and equity returns fall.

We extend Ellsberg's two-urn paradox and propose three symmetric forms of partial ambiguity by limiting the possible compositions in a deck of 100 red and black cards in three ways. Interval ambiguity involves a symmetric range of 50 − n to 50 + n red cards. Complementarily, disjoint ambiguity arises from two nonintersecting intervals of 0 to n and 100 − n to 100 red cards. Two-point ambiguity involves n or 100 − n red cards. We investigate experimentally attitudes towards partial ambiguity and the corresponding compound lotteries in which the possible compositions are drawn with equal objective probabilities. This yields three key findings: distinct attitudes towards the three forms of partial ambiguity, significant association across attitudes towards partial ambiguity and compound risk, and source preference between two-point ambiguity and two-point compound risk. Our findings help discriminate among models of ambiguity in the literature.

ABSTRACT This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.

This paper explores the determinants for the leverage decision of financial institutions via the channels of bank-specific characteristics, peer bank behavior, and economic policy uncertainties, which are critical to appropriately control the risk of the financial system and explain the cross-sectional heterogeneity in risk-taking behavior among financial institutions. Our results indicate that bank-specific characteristics are the most influential one among the three channels for leverage decision of financial institutions, while the other two channels also exhibit significant effects on the leverage decision. We further note that economic policy uncertainty may affect their leverage decisions through the channels of their shifting lending behavior and risk-taking capacity.