Firm-level Uncertainty and Risk: Evidence from China [Job Market Paper]

Abstract: Conducting textual analysis from firms' annual reports, I construct a novel firm-level uncertainty index of China. At the emerging market, I find the majority variation(66\%) of the uncertainty measure is at the firm level, which is captured neither by time, industry, nor industry fixed effects. The dispersion of firm-level uncertainty from industry-mean increases with a high aggregate uncertainty index over time. I validate my measure at the aggregate level by showing the industry-average firm-level uncertainty negatively correlated with aggregate investment, employment, and GDP growth. At the firm level, I find high uncertainty is associated with low investment, operational expenses, and employment growth, but high net investment cash holding, stock return volatility, and ROA. These findings continue to hold after decomposing firm-level uncertainty index into topic-specific uncertainty. Most importantly, I identify one potential channel--financial integration, which could significantly alleviate the negative association between uncertainty and firms' corporate outcomes. I verify this mechanism by exploring the direct impact of financial integration on firms' uncertainty perception. I find that uncertainty arises from financing and governance is significantly weakened by financial integration. Following the implementation of the Stock Exchange Connect between mainland China and Hong Kong, I find that treated firms with high uncertainty ex-ante have a more pronounced increase in their corporate investment, ROA, and employment growth.

Financial Integration and Firm Responses, with Rui Ruan and Yuchen Sun

Abstract: From a novel angle, we show that financial integration plays an important role in shaping the information environment in the emerging market. We conduct textual analysis and exploit an exogenous event--- Shanghai and Hong Kong Stock Exchange Connect, which significantly affects the information environment in mainland China. Following the implementation of SHK-Connect, firms that are eligible for the programs improve their corporate disclosure quality significantly in comparison to those that are ineligible. This effect is more pronounced in the presence of a large retail investors base or strong external financing demand. Moreover, compared to firms that can only be traded in the mainland China stock market, firms that can be traded in both markets decrease their abnormal return and return volatility significantly, which indicates a decrease in asymmetric information between firms and investors in the emerging market.

Public Debt Financing and Local Credit Allocation: Evidence from Listed Companies in China, with Xueping Sun

Abstract: Does public borrowing crowd out corporate borrowing? We argue that to what extent public debt competes with corporate financing demand matters. The recent local public debt expansion in China since 2008 and the concurrent shift from bank-borrowing to bond-issuance due to regulation change provides a unique opportunity for identification. Combining local public debt issuance data with listed firms' financial data and loan data, we compare the impact of public borrowing by bank loan and the impact of public borrowing by bond issuance. We first find that only when the credit market is tightening is crowding out of firm s borrowing by public borrowing. We then examine how firms' exposure to the liquidity shock induced by bond issuance affects firms' capital structure. We find that when local public borrowing turned to bond issuance, firms are subject to a positive credit supply shock.

Can Capital Market Liberalization Improve Firms' Information Disclosure Quality? Evidence from "Shanghai Hong Kong Connection" and Annual Reports Text Analysis, with Rui Ruan, Yuchen Sun and Huihua Nie. [In Chinese]

Revised and Resubmitted to Journal of Financial Research

Do firms really know about their financial constraints? with Rui Ruan and Yuchen Sun. [Work in Progress]