Editorial

Article Type: Editorial From: China Finance Review International, Volume 5, Issue 3.

This issue of China Finance Review International has five interesting papers which cover various issues in China’s financial markets. They are all very inspiring and, in particular, having Chinese characteristics. From a keen observer’s perspective, I offer my opinions on what these papers have advanced our knowledge about the Chinese markets.

The paper by Lam and Zhang studies the effect of instability of government policies on repo rates’ level, term spreads, and volatility. Policy reversal is a typical phenomenon in transitional economies where policymakers experiment reform policies. The authors provide certain evidence that good-quality policy reversals, in terms of predictability, credibility, and timeliness,are associated with reduction in term spreads and volatility. The paper by Liu and Wang examines the effect of a 2004 regulation on IPOs that requires individual guarantors, in addition to institutional underwriters, to certify IPOs. They document an unanticipated and undesirable consequence that, due to individual guarantors’ self-interest of grabbing more business, the earnings manipulation by IPO firms became more tolerated and exacerbated. The paper by Pan and Zhu finds that large trades(presumably conducted by institutions and more sophisticated individuals) reduce stock market return synchronicity. Since high synchronicity is interpreted as lack of firm-specific information, the authors argue that this improves the information environment of the Chinese stock market, still dominated by individual investors. The paper by Ye, Zhang, and Tang finds that stock dividends are more likely to occur for stocks with low ex ante liquidity, complementary to the literature that documents improvement in liquidity after stock splits and stock dividends. Finally, the paper by Li, Tang, and Liao examines the stock price reactions to firms in China that were hit by natural disasters(NDs) and industrial accidents (or production safety accidents, PSAs, in literal translation from Chinese). While the reactions are both negative as expected, the reactions to NDs typically ended within the event day, but reactions to PSAs lingered longer. The authors interpret this as being caused by more uncertainty in the damages by PSAs to the business.

While the interpretations of the results and conclusions of these papers may not be undisputable, they can certainly inspire further analyses along the lines. The readers can definitely benefit from these studies.

Chu Zhang