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Analyses of wavelet coherence: financial risk and economic risk in China
Purpose
This study aims to close a gap in the relevant literature by investigating the causal linkage between financial risk (FR) and economic risk (ER) in China for the period 1985Q1–2018Q4.
Design/methodology/approach
Based on the aim of the present study, Toda Yamamoto causality and wavelet coherence tests are used to capture the relationship between FR and ER in China.
Findings
The findings from wavelet coherence reveal that there is feedback causality between FR and ER in China at different frequencies and different periods between 1985 and 2018. The consistency of the findings from wavelet coherence is confirmed by the outcomes of Toda Yamamoto causality test.
Research limitations/implications
Although this study provides strong and consistent empirical findings for China, further studies should consider advancing the argument by focusing on different emerging markets.
Practical implications
Results are crucial for policy decision-making and can be used by researchers and macro-economic policymakers to take an action, if necessary, by implementing more appropriate or alternative economic and financial decisions.
Originality/value
To the best of the author’s knowledge, this relationship in China has not been comprehensively explored by using newly developed econometrics techniques. Therefore, this study is likely to open a debate about the literature as the study concludes with a discussion on short- and long-run implications for policymakers in China.
Journal Article
Latin American macroeconomic reforms
Hidden behind a number of economic crises in the mid- to late 1990s-including Argentina's headline-grabbing monetary and political upheaval-is that fact that Latin American economies have, generally speaking, improved dramatically in recent years. Their success has been due, in large part, to macroeconomic reforms, and this book brings together prominent economists and policymakers to assess a decade of such policy shifts, highlighting both the many success stories and the areas in which further work is needed. Contributors offer both case studies of individual countries and regional overviews, covering monetary, financial, and fiscal policy. Contributors also work to identify future concerns and erect clear signposts for future reforms. For instance, now that inflation rates have been stabilized, one suggested \"second stage\" monetary reform would be to focus on reducing rates from high to low single digits. Financial sector reforms, it is suggested, should center on improving regulation and supervision. And, contributors argue, since fiscal stability has already been achieved in most countries, new fiscal reforms need to concentrate on institutionalizing fiscal discipline, improving the efficiency and equity of tax collection, and modifying institutional arrangements to deal with increasingly decentralized federal systems. The analysis and commentary in this volume-authored not only by academic observers but by key Latin American policymakers with decades of firsthand experience-will prove important to anyone with an interest in the future of Latin American's continuing economic development and reform.
eBook
How Does Firm ESG Performance Impact Financial Constraints? An Experimental Exploration of the COVID-19 Pandemic
This research assesses the effects of COVID-19-associated shocks on financial constraints and sustainable development goal (SDG) performance to shed light on the impact of SDGs on economic recovery. We construct a large sample of Chinese listed firms from quarterly firm-level accounting data from the China Stock Market & Accounting Research Database for the period 2019Q1–2021Q1, matched with environmental, social, and governance (ESG) scores, SDG performance from the WIND Database, and complemented with data on cumulative and new cases of COVID-19 from the World Health Organization. We use difference-in-differences to investigate any causal effect from COVID-19. We find that COVID-19 induces financial constraints in firms. Further, differing from the existing literature on the determinants of SDGs, we explore the supportive role of SDG performance on firm financial performance and show that ESG can better describe SDG performance and alleviate financial constraints. Moreover, both internal and external financial intermediaries improve with enhanced ESG performance in overcoming financial constraints. Our findings strongly indicate that a sustainable development strategy facilitates efficient adaptation to financial challenges and assists in overcoming external shocks.
Journal Article
Formal versus Informal Finance: Evidence from China
The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries.
Journal Article
Punishment by Securities Regulators, Corporate Social Responsibility and the Cost of Debt
This study examines whether penalties issued to Chinese listed companies by securities regulators for violations of corporate law affect the cost of debt, and the moderating role of corporate social responsibility (CSR) fulfillment on this relationship. Our sample consists of firms listed on Shanghai and Shenzhen stock exchanges from 2011 to 2017 and the data are collected from the announcements of China Securities Regulatory Commission. The findings are as follows: (1) punishment announcements by regulatory authorities increase the cost of debt; and (2) the effect of punishment announcements on the cost of debt is partially offset by prior CSR performance. These findings are shown to be robust. The reputation insurance effect of CSR is more pronounced in state-owned enterprises and in an institutional environment with low marketization, a weak legal environment, and low information transparency. The findings support the reputation insurance hypothesis of CSR and employ the cost of debt as a governance mechanism.
Journal Article
Do Individual Auditors Affect Audit Quality? Evidence from Archival Data
We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze approximately 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.
Journal Article
Does Mandatory Rotation of Audit Partners Improve Audit Quality?
Opponents of mandatory rotation argue that a change of partner is bad for audit quality, as it results in a loss of client-specific knowledge. On the other hand, proponents argue that a change of partner is beneficial, as it results in a positive peer review effect and a fresh perspective on the audit. We test the impact of mandatory partner rotation on audit quality using a unique dataset of audit adjustments in China. Our results suggest that mandatory rotation of engagement partners results in higher quality audits in the years immediately surrounding rotation. Specifically, we find a significantly higher frequency of audit adjustments during the departing partner's final year of tenure prior to mandatory rotation and during the incoming partner's first year of tenure following mandatory rotation.
Journal Article
FinTech regulation and banks’ risk-taking: Evidence from China
By utilizing China’s 2016 Implementation Plan for the Specific Rectification of Internet Financial Risks as an exogenous shock, we employ a difference-in-differences identification strategy to investigate the impact of FinTech regulation on banks’ risk-taking. Our findings indicate that FinTech regulation strengthens banks’ deposit franchises and funding liquidity. As reliable and interest-rate-insensitive funding sources, higher deposit franchises weaken banks’ incentives for risk-taking. Further analysis, conducted to control for the potential interference of other policies, confirms the stable incremental effect of FinTech regulation. Moreover, we find that FinTech regulation tends to benefit banks with higher capital buffers and smaller sizes from a triple difference (difference-in-difference-in-difference) analysis. By focusing on the external effects of FinTech regulation, we aim to shed light on how regulatory gaps impact the formal financial system and highlight the importance of effectively regulating emerging financial entities.
Journal Article