- "Subscribing to Transparency" w/ Yinghua He (Toulouse School of Economics), Hong Guo (Shanghai Stock Exchange) and Jiong Yang (Shanghai Stock Exchange)
The paper empirically explores how more trade transparency affects market liquidity. The analysis takes advantage of a unique setting in which the Shanghai Stock Exchange offered more trade transparency to market participants subscribing to a new software package. First, the results show that the additional data disclosure increased trading activity, but also increased transactions costs through wider bid-ask spreads. Thus, in contrast to popular policy belief, the paper finds that more transparency need not improve market liquidity. Second, the paper finds a particularly strong immediate liquidity impact accompanied by altered trading behavior, which suggests a significant impact on institutional traders subscribing relatively early. Lastly, since the effective level of market transparency is bound to depend on how many traders are subscribing to the data, the study can empirically establish the functional form between market-wide transparency and liquidity. The relationship is non-monotonic, which can explain the lack of consensus in the existing literature where each empirical study is naturally confined to specific parts of the transparency domain.
- "The Cost of Political Tension: An Anatomy" w/ Yinghua He (Toulouse School of Economics) and Yonglei Wang (Toulouse School of Economics)
The paper examines how increased political tension in Taiwan’s sovereignty debate has affected stock returns and identifies the channels through which this occurs. Non-violent, historical events harming the Taiwan-China political relationship are associated with an average drop of 200 basis points in daily Taiwanese stock returns. Survey data on the Taiwanese public’s perceived political tension yields consistent results. Examining the source of this cost shows a more severe impact on Chinese firms located close to the potential conflict zone (within missile range). Additionally, the effect varies across political connections, with Taiwanese firms politically supporting the pro-independence party being particularly negatively affected. This result concentrates on those economically exposed to mainland China through either investments or exports. Thus, the paper concludes that the cost of political tension originates not only from the risk of military action, but is also attributable to strategic and selective economic pressures imposed by the Chinese mainland authorities.
- "Proximity and IPO Underpricing" w/ Dariusz Wójcik (University of Oxford)
The paper analyses the relationship between issuers’ location
and IPO underpricing in the U.S. in the period 1985-2011. Issuers headquartered
in rural areas are associated with approximately seven percentage points lower
underpricing compared to urban firms. This finding is consistent with recent
literature indicating strong local bias in rural areas, accompanied by superior
local information and monitoring intensity, which results in more accurate
pricing and less ‘money left on the table’. The paper further finds that
proximity to finance professionals and density of financial expertise affects IPO underpricing more than proximity to large cities.