This paper analyzes international portfolio selection with exchange rate risk based on behavioural portfolio theory (BPT). We characterize the conditions under which the BPT problem with a single foreign market has an optimal solution, and show that the optimal portfolio contains the traditional mean–variance efficient portfolio without consideration of exchange rate risk, and an uncorrelated component constructed to hedge against exchange rate risk. We illustrate that the optimal portfolio must be mean–variance efficient with exchange rate risk, while the same is not true from the perspective of local investors unless certain conditions are satisfied. We further establish that international portfolio selection in the BPT with multiple foreign markets consists of two sequential decisions. Investors first select the optimal BPT portfolio in each market, overlooking covariances among markets, and then allocate funds across markets according to a specific rule to achieve mean–variance efficiency or to minimize the loss in efficiency.

This paper investigates the impact of background risk on an investor’s portfolio choice in a mean–variance framework, and analyzes the properties of efficient portfolios as well as the investor’s hedging behaviour in the presence of background risk. Our model implies that the efficient portfolio with background risk can be separated into two independent components: the traditional mean–variance efficient portfolio, and a self-financing component constructed to hedge against background risk. Our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape. Moreover, both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors, including the proportion of background assets in total wealth and the correlation between background risk and financial risk.

This paper proposes a new approach to evaluating banks’ liquidity needs, which is not only well-grounded theoretically, but is also easy to apply practically. Within the framework of a global game with imperfect information, we first establish a boundary condition for bank runs and show that there exists a unique Nash equilibrium for bank runs. Using the option-pricing approach, we then obtain a closed-form formula for the value of bank equity with both run risk and insolvency risk. Finally, a bank's optimal liquidity ratio is derived by maximizing the value of bank equity. Using data on Chinese listed banks, we show that the deviation of the actual liquidity ratio from the optimal liquidity ratio in a bank represents a robust proxy for its liquidity risk. An increased liquidity shortfall leads to worsening liquidity problems, and this is particularly pronounced when the liquidity shortfall is high.

This paper studies bargaining power allocation and stable matching between venture capitalists and entrepreneurs with double-sided moral hazard in venture capital markets. We find that the optimal bargaining power allocation is determined by the output elasticities of effort by the two parties; the higher the output elasticity for one's effort, the greater her bargaining power. We show that efficient and stable matching follows the principle of positive assortative matching, suggesting that strong entrepreneurs/VCs match with strong partners, and weak ones match with weak counterparts. Using a large sample from the Chinese venture capital market, we empirically confirm that entrepreneurs and VCs with similar standing in their peer groups are more likely to match.

This paper investigates portfolio selection in the presence of transaction costs and ambiguity about return predictability. By distinguishing between ambiguity aversion to returns and to return predictors, we derive the optimal dynamic trading rule in closed form within the framework of Gârleanu and Pedersen (2013), using the robust optimization method. We characterize its properties and the unique mechanism through which ambiguity aversion impacts the optimal robust strategy. In addition to the two trading principles documented in Gârleanu and Pedersen (2013), our model further implies that the robust strategy aims to reduce the expected loss arising from estimation errors. Ambiguity-averse investors trade toward an aim portfolio that gives less weight to highly volatile return-predicting factors, and loads less on the securities that have large and costly positions in the existing portfolio. Using data on various commodity futures, we show that the robust strategy outperforms the corresponding non-robust strategy in out-of-sample tests.

This paper investigates why and how firms’ bribe payments vary as a result of the interaction between firms and local public officials under the decentralized regulatory system for rights offerings implemented prior to 2001 in China. Using the gap between the estimated and reported total direct costs of rights offerings as a measure of firms’ bribes payments in the process of rights offering applications under this system, we find that bribe payments are positively related to local governments’ control rights, firms’ opportunity costs of refusing to pay bribes, and the severity of firms’ Jensen agency problems. We further show that after termination of the regulatory system, firms’ bribe payments are substantially reduced, and local governments’ control rights as well as the severity of firms’ Jensen agency problems can no longer explain the variation in bribe payments.

This paper documents an anomaly in privately-placed stock returns in China and provides an explanation based on deliberate interest transfers. Using a sample of private investments in public equity (PIPEs) with lock-up periods ending between 2007 and 2015, we find that stocks with price inversion (unlock-date price lower than the issuing price) generate higher short-term returns post lock-up period than other stocks, and the greater the degree of price inversion, the better the short-term returns. This anomaly cannot be explained by the effects of price reversal, investors' under-reaction to companies' prospects, or improved governance after PIPEs. Rather, it reflects the interests transferred by issuing firms to participating investors via means including aggressive earnings management and dividend increase, given the unique regulations on PIPEs in China. Interest transfer is particularly pronounced if local investors participate in a PIPE, but sound corporate governance can restrain it.

This paper examines the spillover effect of environmental regulatory pressure on firms' green technological innovation, from the perspective of supply chain relationships. Analyzing data from Chinese listed companies, we find that the average environmental regulatory pressure faced by the customer firms of a supplier firm enhances the green patent applications filed by the supplier firm. When the industry of the supplier is more competitive or the proportion of the supplier's sales from its largest customer is higher, the supplier feels more pressured to pursue green innovation, resulting in more green patent filings. Thus, via their negotiation power, customer firms can prompt the supplier firm to innovate to meet their demand for green technologies. Finally, we show that this effect is particularly pronounced when the supplier firm has a strong financial position, is located in a highly marketized region, receives low R&D government subsidies, or enjoys a high ESG rating.