The Chinese University of Hong Kong-Fudan University Joint Research Center for International Finance

復旦大學-香港中文大學國際金融聯合研究中心

Heterogeneous Overreaction in Expectation Formation: Theory and Evidence
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Abstract
Using firm-level earnings forecasts and managerial guidance data, we construct guidance surprises for analysts, i.e., differences between managerial guidance and analysts’ initial forecasts. We document new evidence on expectation formation: (i) analysts overreact to managerial guidance and the overreaction is state-dependent, i.e., it is stronger for negative guidance surprises but weaker for surprises that are larger in size; and (ii) forecast revisions are neither symmetric in guidance surprises nor monotonic. We organize these facts with a model where analysts are uncertain about the quality of managerial guidance. We show that a reasonable degree of ambiguity aversion is necessary to account for the documented heterogeneous overreaction pattern.

 

Heng Chen, Xu Li, Guangyu Pei and Qian Xin
Journal of Economic Theory, 2024, Volume 218, 105839.

Pessimism, Disagreement, and Economic Fluctuations
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Abstract
The pessimistic bias and the cross-sectional dispersion of households’ subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accountsfor the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism—to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement—the cross-sectional dispersion of households’ beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the real business-cycle framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accountsfor a significant fraction of the business-cycle fluctuationsin pessimism, disagreement, and real quantities. (JEL: E32, E13, D8)

 

Guangyu Pei
Journal of the European Economic Association
, 2024, Volume 22, Issue 3, Pages 1177–1227.

How firms accumulate inputs: Evidence from import switching
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Abstract
We uncover new dynamic facts in Colombian manufacturing importers’ data. First, imported input switching, a firm’s simultaneous adding and dropping of foreign intermediates, is pervasive and a substantial fraction of firm’s imports. Second, larger firms switch more conditional on age, whereas younger firms switch more conditional on size. Third, the number of imported varieties increases with firm age. Fourth, inputs of lower expenditure are more frequently dropped. Fifth, firms that switch more, have larger sales growth. Analogous facts also hold for suppliers. We propose a dynamic model where firms accumulate foreign suppliers and choose which heterogeneously productive intermediates to import. A firm compares each input’s productivity across suppliers and keeps the best source, switching, lowering its unit cost, and growing in size. In the calibrated model, a 20% tariff reduction: (1) generates a 5.2% increase in welfare across steady states, and (2) upon impact only 76% of the gains accrue.

 

Dan Lu, Asier Mariscal and Luis-Fernando Mejía
Journal of International Economics, 2024, Volume 148, 103847.

Misallocation under trade liberalization
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Abstract
This paper formalises a classic idea that in second-best environments trade can induce welfare losses: gains accrued can be outweighed by incremental income losses stemming from distortions. In a Melitz model with distortionary taxes, we derive sufficient statistics for welfare gains from trade, and show that its departure from the efficient case (ACR) can be captured by the gap between an input and output share and domestic extensive margin elasticities. The loss reflects the impact of an endogenous selection of more subsidized firms into exporting. We show sufficient conditions under which conventional formulas overestimate trade gains as well as conditions under which welfare losses can occur. Using Chinese manufacturing data, we demonstrate by taking into account firm-level distortions, welfare losses largely offset conventional gains to trade.

 

Yan Bai, Keyu Jin and Dan Lu
American Economic Review, 2024, Volume 114, Issue 7, Pages 1949-85.

A Liberalization Spillover: From Equities to Loans
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Abstract
The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (Bekaert, Harvey, and Lundblad, 2005) despite a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.

 

Xin Liu, Shang-Jin Wei and Yifan Zhou
Journal of Financial and Quantitative Analysis, 2024, Volume 59, Issue 1, Pages 395-433.

Dissecting the Long-term Performance of the Chinese Stock Market
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Abstract
Domestically listed Chinese (A share) firms have lower stock returns than externally listed Chinese, developed and emerging country firms during 2000-2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance in both stock and accounting returns is more pronounced for large A share firms, while small firms show no underperformance in either dimension. Investor sentiment explains low stock returns in the cross-country and within A share samples. Institutional deficiencies in IPO and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.

 

Franklin Allen, Jun “QJ” Qian, Chenyu Shan and Julie Lei Zhu
Journal of Finance, 2024, Volume 79, Issue 2, Pages 993-1054.

Stock pledged loans and market crash risk: Evidence from China
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Abstract
Stock pledged loans have become prevalent among large shareholders of listed firms in China. The largest shareholder pledges a greater fraction of her holdings as collateral for credit when the firm is in growth industries, less profitable, not state owned, and has higher leverage. Stock performance of highly pledged firms is indistinguishable from that of firms with low pledge ratios in 2017. During 2018, however, highly pledged firms have worse stock returns and operating performance, and experienced ‘contagion’ – the crash risk of one highly pledged stock spreading to others. Using a regulatory reform in 2013 that allowed securities companies to provide stock pledged loans, we find that obtaining these personal loans had no adverse effects on the firms when the pledge ratio was low. Overall, forced sales of pledged stocks and worsened agency conflict are responsible for the poor performance of highly pledged firms during the 2018 bear market.

 

Feng Li, Jun “QJ” Qian, Haofei Wang and Julie Lei Zhu
The Journal of Finance and Data Science, 2023, Volume 9, 100104.

Implicit Guarantees and the Rise of Shadow Banking: the Case of Trust Products
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Abstract
Implicit guarantees provided by financial intermediaries are important in China. We argue theoretically that project screening by financial intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement. It can also mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a comprehensive set of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

 

Franklin Allen, Xian Gu, Wei Li, Jun “QJ” Qian and Yiming Qian
Journal of Financial Economics, 2023, Volume 149, Issue 2, Pages 115-141.

Trade networks and firm value: Evidence from the U.S.-China trade war
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Abstract
We study the financial implications of the 2018–2019 U.S.-China trade war for global supply chains. Around the dates when higher tariffs are announced, U.S. firms that depend more on exports to and imports from China experience larger declines in market value, with the negative effect spilling over to the affected firms’ suppliers and customers through production networks. The trade war effect is mainly concentrated among customers with low R&D intensity and suppliers outsourcing differentiated goods. We also exploit the within-firm variation in tariff exposure according to the detailed product lists and conduct a reverse experiment based on the 2019 trade talks. To explain the findings, we propose a theoretical model that highlights how complex trade structures shape shareholder wealth.

 

Yi Huang, Chen Lin, Sibo Liu and Heiwai Tang

Journal of International Economics, 2023, Volume 145, 103811.

Welfare gains from market insurance: The case of Mexican oil price risk
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Abstract
Mexico has a long-standing practice of hedging oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.

 

Chang Ma and Fabián Valencia
Journal of International Money and Finance, 2024, Volume 142, 103028.

Sudden Stop with Local Currency Debt
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Abstract
Over the past two decades, emerging market economies have improved their liability structures by increasing the share of their debt denominated in local currency. This paper introduces a local currency debt (i.e., in units of aggregate consumption) into a sudden stop model and explores how this alternative structure sheds new perspectives on financial regulations. Decentralized agents do not internalize the effects of their portfolio decisions on financial amplification and undervalue the insurance benefit of using local currency debt. However, due to debt-deflation incentives and the cost of buying insurance, a discretionary planner is reluctant to issue local currency debts, and capital controls are primarily used to restrict credit volumes. In contrast, a social planner with commitment would promise a higher future payoff to obtain a more favorable bond price. The capital control under commitment encourages borrowing in local currency, mitigates the severity of crises, and improves welfare relative to laissez-faire.

 

Siming Liu, Chang Ma and Hewei Shen
Journal of International Economics, 2024, Volume 148, 103888.

Modern Pandemics: Recession and Recovery
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Abstract
We examine the immediate and bounce-back effects from six modern health crises that preceded Covid-19. Time-series models for a large cross-section of economies indicate that real GDP growth falls by around two percentage points in affected economies relative to unaffected economies in the year of the outbreak. Bounce-back in GDP growth is rapid and strong, especially when compared to non-health crises. Unemployment for less educated workers is higher and exhibits more persistence, and there is significantly greater persistence in female unemployment than male. Moreover, the negative initial effects of pandemics and bounce-back are economically contagious through international trade. The negative effects on GDP and unemployment are felt less in economies with larger first-year responses in government spending, especially on health care. Our estimates imply that the impact effect of the Covid-19 shock on world GDP growth is approximately four standard deviations worse than the average past pandemic.

 

Chang Ma, John Rogers and Sili Zhou
Journal of the European Economic Association, 2023, Volume 21, Issue 5, Pages 2098-2130.