The effects of portfolio size on international equity home bias puzzle

This paper investigates a new explanation for the international equity home bias puzzle based on an endogenous asymmetric information model. Using a cross-sectional mutual fund data set, it is found that the degrees of home bias across fund managers are negatively correlated to the asset sizes under their management. This result is consistent with the theoretical prediction in the endogenous asymmetric information model—the portfolio managers with the larger assets tend to acquire more information regarding foreign equity and, hence, hold more foreign equity holdings

INSTITUTIONAL OWNERSHIP AND FIRM’S DIVIDEND POLICY

This paper examines the linkage between dividend policy and institutional ownership within the context of the dividend model of Allen, Bernardo and Welch (2000). Specifically, it provides an empirical test of Allen, Bernardo and Welch (2000)’s novel implication that a tax differential between institutions and retail investors effects dividend policies. Using merge data of US industrial firms from 1980-2002, our results indicate that the dividend paying decision is positively related with institutional ownership. That is, firms with higher institutional ownership are more likely to be dividend payers. Further, we find that the deferred tax or tax credits that the institutional investors own significantly contribute to the dividend initiation decision as well as the level of dividend payments

Testing the Pecking-Order Theory: Evidence from Chinese Listed Companies

The pecking-order theory of capital structure, which predicts that firms prefer internal to external finance, is one of the most influential theories of corporate leverage. This article examines whether the financial structure of China\u27s listed companies follows a pecking order from debt to equity. Using the entire cross-section sample of China\u27s listed companies in 2004, the authors find no evidence that China\u27s listed companies follow a pecking order when they need funds to finance investment projects. Further subgroup analyses indicate that big companies follow a pecking order and small and medium companies do not. These results suggest that the Chinese capital market is still under development. However, the large companies face a relatively looser financing environment than the small ones

The Border Effects of Domestic Trade in Transitional China: Local Governments’ Preference and Protectionism

Following a two-region border effect model with consumption preference of local governments, this article examines the segmentation of the Chinese domestic market as well as its determinants. Through empirical tests, we find that the average border effect of domestic trade among provinces in China showed an upward trend from 1997–2002 and 2002–2010. The significant difference of border effects between western and eastern areas of China indicate more regional trade barriers in the western areas than in the eastern areas. In addition, compared to agricultural products, there are less trade barriers on industrial products. This partially verifies that there is more trade protection and self-consumption from local government on raw materials. Under the local governments’ preference for regional protection, the higher degree of financial autonomy and larger output share of SOEs will both significantly contribute to the trade barriers among provinces. Local governments’ behavior is the key to understanding the pattern of border effects among provinces

Information Technology (IT) Investment Decisions Under Asymmetric Information: A Modified Rational Expectation Model

In this paper, we propose that information technology (IT) managers make investment decisions about new IT initiatives based on a modified rational expectation model. Unlike traditional rational expectation models, we emphasize the relevance of market uncertainty and its impact on the return of new IT investment. This results in information acquisition decisions by managers that can cause information asymmetry. This information asymmetry is endogenous and so the IT manager can become well informed if and only if it is beneficial to do so. We also capture different levels of IT investment across managers by introducing heterogeneity across managers in terms of different levels of initial capital. Based on a simulation analysis to validate our theoretical model, we find that it is the IT manager with larger initial capital outlay who is particularly interested in acquiring information about their IT investments in order to reduce any asymmetry with competitors. Furthermore, we find that holding other things constant, fewer IT investors are informed when information cost increases and in consequence the difference of investment level between the informed and uninformed investors is more pronounced

Land Acquisition, Labor Allocation, and Income Growth of Farm Households

This article investigates how land acquisition during urbanization affects labor allocation decisions of farm households in China. We develop an agricultural household model by including land acquisition to examine its impacts on nonfarm labor participation and income. Two data sets (self-designed household surveys at Xingwen County in 2012 and the China Household Finance Survey (CHFS) data covering 29 provinces in 2013) are adopted for empirical analysis. The results find that land reduction has significantly positive effects on the probability and the share of family nonfarm labor allocation from both data sets. We also find that land acquisition increases the household income of the land acquisition group in CHFS data

Endogenous asymmetric information and international equity home bias: The effects of portfolio size and information costs

Equity home bias is one of the major puzzles in international finance. This paper investigates the impact of asymmetric information on equity home bias in a rational expectation model where portfolio managers differ in their levels of initial portfolio size and information acquisition is endogenous. The model characterizes the information acquisition and investment decisions made by each portfolio manager, and the resulting equilibrium. We find that portfolio managers with larger portfolio size acquire information about the foreign asset; this is consistent with new evidence linking the degree of home bias across portfolio managers to portfolio size

Chinese household saving and dependent children: Theory and evidence

This paper examines the impact of family size on household saving. We first study a theoretical life-cycle model that includes finite lifetimes and saving for retirement and in which parents care about the consumption by their dependent children. The model implies a negative relationship between the number of dependent children in the family and the household saving rate. Then, we test the model\u27s implications using new survey data on household finances in China. We use the differential enforcement of the one-child policy across counties to address the possible endogeneity between household saving and fertility decisions in a two-stage least squares Tobit regression. We find that Chinese families with fewer dependent children have significantly higher saving rates. The data yields several additional insights on household saving patterns. Households with college-age children have lower saving rates, and households residing in urban areas have higher saving rates and a lower ratio of education expenditures to income. However, having an additional child reduces saving rates more for households in urban areas than in rural areas. Our regressions also indicate that saving rates vary with age and tend to be higher for households with more workers, higher education, better health, and more assets

Social network, intra-network education spillover effect and rural–urban migrants\u27 wages: Evidence from China

This study examines the determinants of rural–urban migrant wages, paying special attention to the intra-network education spillover effect of the migrants\u27 social network in China. Using the new migrant sample of Rural Urban Migration in China (RUMiC) 2009 survey data, we find that the migrants\u27 social network does have a significant impact on their own earnings. In particular, we find evidence that there exists an education spillover effect of the migrants\u27 social network, which indicates that the education level of the migrants\u27 social network has a significant positive effect on their earnings. We also find that the education spillover effects differ with gender. The results are robust after considering the potential problem of endogeneity

Predicting Bankruptcy After The Sarbanes-Oxley Act Using Logit Analysis

Our study proposes firm bankruptcy prediction using logit analysis after the passage of the Sarbanes-Oxley (SOX) Act using 2008-2009 U.S. data. The results of our logit analysis show an 80% (90% with one year before bankruptcy data) prediction accuracy rate using financial and other data from the 10-K report in the post-SOX period. This prediction rate is comparable to other data mining tools. Overall, our results show that, as compared to the prediction rates documented by other bankruptcy studies before SOX, firm bankruptcy prediction rates have improved since the passage of SOX. Our findings shed light on the benefits of SOX by providing evidence that legislation makes the financial reporting more informative. This study is important for regulators to implement public policy. Investors may be interested in our findings to better assess company risk when making portfolio decisions