Research articles for the 2020-05-07

#21N (#21N)
Bogliacino, Francesco,Rojas-Berrio, Sandra,Castellanos, Daniel,Chamorro, Julio Cesar,Forero, David,Gómez Villegas, Mauricio,González Peña, Andrea del Pilar,Junca Rodriguez, Gustavo Adolfo,Reina Bermúdez, Luis Eduardo,Rodriguez, Jorge Armando,Urrea-Ríos, Ivan Leonardo,Yepes Chica, Federico,Villamil, Jesús Alberto,Rincón Ruiz, Alexander
Spanish Abstract: A partir del 21 de noviembre 2019 (#21N) en Colombia se ha abierto un ciclo de movilizaciones y protestas sin precedentes en la historia del país. En las múltiples instancias de discusión y asambleas, uno de los llamados de movimientos y organizaciones ha sido dirigido hacia la Academia para que aporte con análisis y propuestas. Desde la Dirección del CID se ha considerado importante involucrar docentes e investigadores para que respondan a ese llamado. Este documento es el resultado de este esfuerzo. Como siempre, los autores tenían completa libertad de enfoque y posición teórica.English Abstract: On November 21st 2019, (#21N) a cycle of mobilizations and protests has begun in Colombia that is unprecedented in the country's history. In the multiple instances of discussion and assembly, one of the calls from movements and organizations has been directed towards the Academia to contribute with analysis and proposals. The Direction of the CID has considered it important to involve faculties and researchers to respond to this call.This document is the result of this effort. As always, the authors had complete freedom of approach and theoretical position.

A Cross-Platform Analysis of the Equity Crowdfunding Italian Context: The Role of Intellectual Capital
Battaglia, Francesca,Busato, Francesco,Manganiello, Maria
Does intellectual property positively affect the success of the equity crowdfunding campaigns? By using a unique dataset of 191 equity crowdfunding campaigns, gathered from the Italian platforms over the period 2014-2018, we answer this question, focusing on the effect of patents on funding success. In particular, patents may serve as signals of the unobservable quality of equity crowdfunding campaigns. Then, following the literature on success factors for crowdfunding, we also analyze the signaling role played towards external investors by the share of equity retained by founders and by the size of their social networks. Our results show that intellectual property (i.e. patents), the amount of equity retained by entrepreneurs and their social capital have a positive and significant impact on funding success and are interpreted as quality signals of crowdfunding campaigns by external investors.

A Stochastic LQR Model for Child Order Placement in Algorithmic Trading
Shen, Jackie
Modern Algorithmic Trading ("Algo") allows institutional investors and traders to liquidate or establish big security positions in a fully automated or low-touch manner. Most existing academic or industrial Algos focus on how to "slice" a big parent order into smaller child orders over a given time horizon. Few models rigorously tackle the actual placement of these child orders. Instead, placement is mostly done with a combination of empirical signals and heuristic decision processes. A self-contained, realistic, and fully functional Child Order Placement (COP) model may never exist due to all the inherent complexities, e.g., fragmentation due to multiple venues, dynamics of limit order books, lit vs. dark liquidity, different trading sessions and rules. In this paper, we propose a reductionism COP model that focuses exclusively on the interplay between placing passive limit orders and sniping using aggressive takeout orders. The dynamic programming model assumes the form of a stochastic linear-quadratic regulator (LQR) and allows closed-form solutions under the backward Bellman equations. Explored in detail are model assumptions and general settings, the choice of state and control variables and the cost functions, and the derivation of the closed-form solutions.

Adaptive Filter Design for Stock Market Prediction Using a Correlation-based Criterion
J.E. Wesen,V.VV. Vermehren,H.M. de Oliveira

This paper presents a novel adaptive-filter approach for predicting assets on the stock markets. Concepts are introduced here, which allow understanding this method and computing of the corresponding forecast. This approach is applied, as an example, through the prediction over the actual valuation of the PETR3 shares (Petrobras ON) traded in the Brazilian Stock Market. The first-rate choices of the window length and the number of filter coefficient are evaluated. This is done by observing the correlation between the predictor signal and the actual course performed by the market in terms of both the window prevision length and filter coefficient values. It is shown that such adaptive predictors furnish, on the average, very substantial profit on the invested amount.

Alleyway of Corporate Governance Under the Purview of Kotak Committee Report
Pandey, Praveen,Agarwal, Nimmi,Pandey, Prashant
The SEBI appointed committee which had the aim to provide the recommendations for the purpose of effective implementation of good corporate governance and this committee proposed the separation of roles of Managing Director and the Chairperson of the company, increment in the powers of directors, and called for the superior focus on the concepts such as ‘transparency’ and ‘disclosure of information’ for the same. Moreover, the committee proposed the eligibility criteria for the independent directors, schedules for conducting board meetings and its procedure to take the level of transparency and disclosure to the superior level and includes the intention to improve the quality of governance. After all the analysis, it can be said either which way the scope of this report is implemented into the mechanism of corporate, but the report will undeniably impact the traditional system of family business. This can be said on the grounds that this report endeavors to install the system which will provide balance in the interests of the owner (or, in terms of the ancient kingdoms, Raja) and the stakeholders (or, in terms of the ancient kingdoms, Praja). Therefore, if the recommendations of the report are being followed by the corporation with full consideration, then, in that case, it will provide the best results to the stakeholders and the directors and owner itself. Consequently, this report can be considered as the prominent step for having a sound and prosperous corporate governance structure.

An Empirical Investigation of the Price Relationship Between Open-End Mutual Funds and Amman Stock Exchange Index
Salameh, Hussein
This study examines the short and long-run price relationship between mutual funds (Jordinvest First Trust Fund, Growth Fund, Horizon Fund, and Jordan Securities Fund) and Amman Stock Exchange Index over the time period from March, 2005 till the end of November, 2009. The study findings are obtained with respect to various testing methods utilized, including Error Correction Model and Granger causality tests. These tests were applied on series of data for the monthly returns of mutual funds and Amman Stock Index. The empirical results show a long-run relationship of Amman Stock Index on mutual funds. However, the study also reveals no long-run relationship of mutual funds on Amman Stock Index. Furthermore, the empirical findings show that the relationship of Amman Stock Index on mutual funds is significantly more established than the relationship of mutual funds on Amman Stock Index. Finally, the results find a significant causal relationship in one way manner from mutual funds, with the exception of Jordinvest First Trust Fund, to Amman Stock Index.

Application of Asset Pricing Models: Evidence From Saudi Exchange
Salameh, Hussein
The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity.

Are the COVID19 restrictions really worth the cost? A comparison of estimated mortality in Australia from COVID19 and economic recession
Neil W Bailey,Daniel West

There has been considerable public debate about whether the economic impact of the current COVID19 restrictions are worth the costs. Although the potential impact of COVID19 has been modelled extensively, very few numbers have been presented in the discussions about potential economic impacts. For a good answer to the question - will the restrictions cause as much harm as COVID19? - credible evidence-based estimates are required, rather than simply rhetoric. Here we provide some preliminary estimates to compare the impact of the current restrictions against the direct impact of the virus. Since most countries are currently taking an approach that reduces the number of COVID19 deaths, the estimates we provide for deaths from COVID19 are deliberately taken from the low end of the estimates of the infection fatality rate, while estimates for deaths from an economic recession are deliberately computed from double the high end of confidence interval for severe economic recessions. This ensures that an adequate challenge to the status quo of the current restrictions is provided. Our analysis shows that strict restrictions to eradicate the virus are likely to lead to at least eight times fewer total deaths than an immediate return to work scenario.

Asymmetry, Tail Risk and Time Series Momentum
Liu, Zhenya,Lu, Shanglin,Wang, Shixuan
Similar to the cross-sectional momentum crashes, the time series momentum experiences deep and persistent drawdowns in the stressed time of slumps in the upward momentum, rebounds in the downward momentum, and long time sideways market. We measure the upside and downside risk using the upper and lower partial moments, which are derived from the individual asset’s daily return. The time series momentum reversals are partly forecasted by the asymmetric structure of the tail-distributed upside and downside risk. An implementable systematic rule-based decision function is designed to manage the signals given by the time series momentum. Its empirical application on the Chinese commodity futures markets documents improvements in terms of both the Sharpe ratio and the Sortino ratio from 2008 to 2019. These results are robust across the time series momentum with different looking back windows.

Bank Syndicates and Liquidity Provision
Santos, João A. C.,Viswanathan, S.
We provide evidence that credit lines offer liquidity insurance to borrowers. Borrowers are able to extensively use their credit lines in recessions and ahead of credit line cuts. In fact draw-downs and changes in draw-downs predict internal credit rating downgrades and credit line cuts. Credit line cuts are concentrated on borrowers who do not use credit lines, and when they occur they still leave borrowers with funds to draw down. Further, lead banks often increase their credit line investments in response to the failure of syndicate members, reducing borrowers' risk exposure to bank failures. Building on this evidence, we develop a model where syndicates faced with liquidity shocks continue to support credit line commitments due to the continuation value of their relationship with borrowers. Our model yields a set of additional predictions that find support in the data, including the substantial increase in the lead bank's retained loan share and in the commitment fees on the credit lines issued during the financial crisis of 2008-2009.

Bowling Alone, Buying Alone: The Decline of Co-borrowers in the US Mortgage Market
Jakucionyte, Egle,Singh, Swapnil
Using the universe of mortgage applications data and detailed credit performance data, we document three facts about the US mortgage market: (1) since the early 1990s there was a significant decline in the share of mortgages with co-borrowers; (2) the presence of co-borrowers on the mortgage deed can reduce the mortgage default probability by more than 50 percent; and, (3) the decline in the share shows significant spatial heterogeneity which partially explains differences in mortgage default rates, house price growth and credit growth across local mortgage markets in the US during the financial crisis. These results imply that the decrease in the share of mortgages with co-borrowers made the US mortgage market more vulnerable to the financial crisis and contributed to the divergence in economic outcomes across different regions.

Breaking the Silence: Secret and Overt Information Acquisition in Financial Markets
Xiong, Yan,Yang, Liyan
This paper studies the effects of transparency of investors' information acquisition on information production and market qualities. Two strategic effects arise when the act of acquiring information becomes overt: (i) more information acquisition reduces an investor's trading profits by inducing market makers to raise the price impact, but (ii) it gains the investor a competitive advantage by forcing the rival investors to acquire less information. If the former pricing effect (the latter competition effect) prevails, less (more) information is produced when information acquisition becomes overt. Furthermore, if investors could choose whether to make information acquisition overt or secret, they might involve in a prisoner's dilemma type of coordination failure on the transparency decisions. This analysis also provides insights into the related policy and empirical observations.

Can Volatility Solve the Na\"ive Diversification Puzzle?
Michael Curran,Ryan Zalla

We investigate whether sophisticated volatility estimation improves the out-of-sample performance of mean-variance portfolio strategies relative to the na\"{\i}ve 1/N strategy. The portfolio strategies rely solely upon second moments. Using a diverse group of econometric and portfolio models across multiple datasets, we show that a majority of models achieve significantly higher Sharpe ratios and lower portfolio volatility relative to the na\"{\i}ve rule, even after controlling for turnover costs. Our results suggest that there are benefits to employing more sophisticated econometric models than the sample covariance matrix, and that mean-variance strategies often outperform the na\"{\i}ve portfolio across multiple datasets and assessment criteria.

Capital Structure Determinants and Financial Performance Analytical Study in Saudi Arabia Market 2004-2009
Salameh, Hussein
Finance Scholars argue that developed market firms performance are affected by leverage, but little is empirically known about such implications in emerging economies such as Saudi Arabia. Moreover, little is empirically known about the relationship between capital structure determinants and financial performance in developed markets as well as the emerging ones. The results show that there is no relationship between capital structure determinants, leverage ratio and ROE. In addition, there is no relationship between some of the capital structure determinants (Tangibility & Risk) and ROA. This is basically due to the nature of the economy in Saudi Arabia which prevents debt and interest because of the Quranic law of economics (Shari’ah principle) which prohibited activities or elements such as usury (riba).

Climate Change News Risk and Corporate Bond Returns
Huynh, Thanh,Xia, Ying
We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

Credit Supply Driven Boom-Bust Cycles
Arslan, Yavuz,Guler, Bulent,Kuruscu, Burhanettin
We study quantitatively how far shifts in the credit supply can generate a boom-bust cycle, similar to the one observed in the US around 2008. For this purpose, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks’ leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macro-economy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. Finally, a comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks.

Crowdfunding Issuers in the United States
Schwartz, Andrew A.
Startup companies can now legally sell shares of stock, bonds, or other securities to the broad public using equity crowdfunding, a new type of online capital market modeled on Kickstarter and other reward crowdfunding websites. Through equity crowdfunding, entrepreneurs can go directly to the broad public (the “crowd”) for investment, without having to go through the usual (and costly) process of an initial public offering (IPO). Equity crowdfunding thus offers a chance for all entrepreneurs, regardless of their physical location, gender, or anything else, to solicit investors and raise capital.In 2012, new federal legislationâ€"the Jumpstart Our Business Startups (JOBS) Actâ€"amended the original Securities Act of 1933 to allow for equity crowdfunding. Three years later, in late 2015, the Securities and Exchange Commission (SEC) promulgated a set of rules and regulations that companies must follow, known as “Regulation Crowdfunding,” and a corresponding official form through which offerings are filed (Form C). Equity crowdfunding officially commenced in America in May 2016.Which types of companiesâ€"“issuers” in the parlance of securities lawâ€"are actually using Regulation Crowdfunding? Are they early-stage startups or more mature issuers? What is their legal form? How many of them are women-led? Where are they based? Using an original data set collected by the author and his research assistant from all of the Forms C filed with the SEC from 2016 to 2018, this Article provides answers to these questions and more.According to our data, crowdfunding issuers are overwhelmingly early-stage companies with just a couple of employees and little to no revenue or assets. Most are corporations, though many are LLCs, and almost none are public benefit corporations. There is significant geographic diversity among the issuers, although California and New York still lead the pack. Finally, but perhaps most significantly, we found that twenty-eight percent of equity crowdfunding issuers have a woman on their executive team, a much higher percentage than in the traditional forms of startup finance, namely venture capital and angel investing.

Differential Machine Learning
Brian Huge,Antoine Savine

Differential machine learning (ML) extends supervised learning, with models trained on examples of not only inputs and labels, but also differentials of labels to inputs.

Differential ML is applicable in all situations where high quality first order derivatives wrt training inputs are available. In the context of financial Derivatives risk management, pathwise differentials are efficiently computed with automatic adjoint differentiation (AAD). Differential ML, combined with AAD, provides extremely effective pricing and risk approximations. We can produce fast pricing analytics in models too complex for closed form solutions, extract the risk factors of complex transactions and trading books, and effectively compute risk management metrics like reports across a large number of scenarios, backtesting and simulation of hedge strategies, or capital regulations.

The article focuses on differential deep learning (DL), arguably the strongest application. Standard DL trains neural networks (NN) on punctual examples, whereas differential DL teaches them the shape of the target function, resulting in vastly improved performance, illustrated with a number of numerical examples, both idealized and real world. In the online appendices, we apply differential learning to other ML models, like classic regression or principal component analysis (PCA), with equally remarkable results.

This paper is meant to be read in conjunction with its companion GitHub repo, where we posted a TensorFlow implementation, tested on Google Colab, along with examples from the article and additional ones. We also posted appendices covering many practical implementation details not covered in the paper, mathematical proofs, application to ML models besides neural networks and extensions necessary for a reliable implementation in production.

Digital Currencies Choices: Challenges for Financial Supervision and Monetary System
Singh, Manoj Kumar
With the emergence of multiple design alternatives, digital currencies are seen as new force disrupting the traditional financial markets, which would also have an impact on how these markets are currently being supervised. The paper examines the impact of digital currency choices, along with various possible scenarios, including the ones based on emergence on central bank digital currencies (CBDCs) that will influence the allocation of supervisory resources, in one-way or the other. It may be too early to predict the final outcome, however, various possible alternatives, like creation of a global governance standard are already taking shape even though it may not be an easy task to arrive at a consensus due to frictions in international monetary systems. While ‘same-risk, same activity, same treatment’, would make prudential regulation and supervision entity-neutral, it needs to be further debated whether the supervisory approach should also be tech-neutral, considering that differences in the design features in technology can be an independent source of risk (just like any business- risk) and hence should not be treated as merely a part of operational risk.

Do Cryptocurrencies Increase the Systemic Risk of the Global Financial Market?
Li, Shiyun,Huang, Yiping
The advance of cryptocurrencies has sparked wide concern over their interplay with the existing global financial market. This paper analyzes the risk spillover relation between cryptocurrencies and major financial assets, and unravels how cryptocurrencies could influence global financial systemic risk. We find that cryptocurrencies function as a separate risk source from traditional assets. Major legislative, financial and technological events in the cryptocurrency market may affect risk spillover dynamics. Although the overall penetration of cryptocurrencies is not yet deep, introducing cryptocurrency can significantly increase the systemic risk to traditional markets during low risk level episodes.

Do Firms Manipulate Earnings after Winning Public-Private Partnership Bids? Evidence from China
Majeed, Muhammad Ansar,Yan, Chao,Zhong, Huijie
We examine whether and how firms manipulate their reported earnings after winning investment project bids. China’s adoption of the public-private partnership (PPP) provides a unique setting for our analysis. Using the PPP announcements to identify the firms participating in PPP projects, we find that firms use both accrual-based and real earnings management methods to improve their short-term performance after PPP participation. The findings survive in a difference-in-differences design with propensity score matching. We document that PPP-participating firms have abnormal expenditure and greater short-term performance pressure than non-PPP-participating firms. The auditors respond by charging a higher auditing fee due to the increased risk. Moreover, earnings management lessens for firms with more government subsidies as they ease the performance pressure, while high quality of internal control is only effective in reducing real earnings management of PPP-participating firms. Overall, this study suggests that a promising long-term investment project can lead to firms’ short-term opportunistic behavior.

Do Interest Rate Liberalization and Fintech Mix? Impact on Shadow Deposits in China
Chan, Stephanie,Ji, Yang
In this paper we attempt to characterize the stability of shadow deposits in China with interest rate liberalization and fintech developments. We emphasize that shadow banks provide higher but riskier returns and such characteristics affect the stability of shadow deposits. In our setting, the stability of shadow deposits is influenced by two offsetting effects, namely: the patience effect, which makes investors more willing to wait because of the potentially higher returns; and the uncertainty effect, which makes investors more likely to withdraw as a result of higher risk. Under liberalized interest rates, the patience effect will erode and the uncertainty effect will be heightened because the post‐liberalization higher return of traditional banks undermines the importance of the extra return of shadow deposits to depositors, while preserving the importance of the risk aspect. Fintech development is modeled as a reduction in the withdrawal cost that facilitates runs. This affects the stability of shadow deposits because of their wider fintech reliance. Regulators should be cautious in pushing interest rate liberalization and fintech application alongside building a safety net for shadow banking.

Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation
Howell, Sabrina,Lerner, Josh,Nanda, Ramana,Townsend, Richard
Although late-stage venture capital (VC) activity did not change dramatically in the first two months after the COVID-19 pandemic reached the U.S., early-stage VC activity declined by 38%. The particular sensitivity of early-stage VC investment to market conditions--which we show to be common across recessions spanning four decades from 1976 to 2017--raises questions about the pro-cyclicality of VC and its implications for innovation, especially in light of the common narrative that VC is relatively insulated from public markets. We find that the implications for innovation are not benign: innovation conducted by VC-backed firms in recessions is less highly cited, less original, less general, and less closely related to fundamental science. These effects are more pronounced for startups financed by early-stage venture funds. Given the important role that VC plays in financing breakthrough innovations in the economy, our findings have implications for the broader discussion on the nature of innovation across business cycles.

Geographic Spread of Currency Trading: The Renminbi and Other Emerging Market Currencies
Cheung, Yin-Wong,McCauley, Robert N.,Shu, Chang
This paper studies the ongoing diffusion of renminbi (RMB) trading across the globe, the first of such research of an international currency. It analyses the distribution in offshore RMB trading in 2013 and 2016 using comprehensive data from the Triennial Central Bank Survey of foreign exchange markets. In 2013, Asian centers favored by the policy of RMB internationalization had disproportionate shares in global RMB trading. Over the following three years, RMB trading seemed to converge to the spatial pattern of all currencies, with a half‐life of seven to eight years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall, the RMB's internationalization is tracing an arc from the influence of administrative measures to the working of market forces.

Heterogeneity in Corporate Debt Structures and the Transmission of Monetary Policy
Holm-Hadulla, Federic,Thürwächter, Claire
We study how differences in the aggregate structure of corporate debt financing affect the transmission of monetary policy. Using high-frequency financial market data to identify monetary policy shocks in a panel of euro area countries, we find that: bond finance dampens the overall response of firm credit to monetary policy shocks in economies with a high initial share of bond- relative to bank-based finance; this effect weakens, and may even reverse, in economies with a low share of bond financing; and the dampening effect of a larger bond financing share also attenuates the ultimate impact of monetary policy on economic activity. These findings point to corporate bond markets acting as a “spare tire” in situations when bank lending contracts.

Incentive Schemes, High Skilled Labors, and Technological Innovation in an Emerging Market
Deng, Xiaohu,Wang, Cong,Wang, Jimin
We study the real effect of employee compensation by examining how employee stock options affect firm innovation. Using exogenous variation in the use of employee stock options generated by regulation change in China as well as the System GMM approach to address endogeneity, we document a positive effect of employee stock options on technological innovation. We provide evidence suggesting that granting employee options facilitates technological innovation by encouraging risk taking, and the positive effect is more pronounced for non-government owned firms. In addition, offering stock options to employees who are more important to innovation, such as the core technology engineers and inventors, is a plausible channel through which stock options offerings facilitate technological innovation.

Intellectual Property Protection in M&A Negotiations
Schubert, Richard
This paper shows that a major share of the value of target firms’ intellectual property can be protected from expropriation by acquirers through negotiating a compensating bidder termination fee (BTF), in case acquirers abandon deals under their control. I apply a capitalization model for intangible capital stocks to estimate the component of intellectual property in target firms’ market values. The results suggest that, on average, for every dollar of target firm’s R&D capital stock, roughly 16 cents of protective share is priced in the BTF. I strengthen my causal interpretation with an instrument variables approach that exploits exogenous industry-level variation in R&D worker quota. The relation between target firm’s innovation activity and BTF size is more pronounced, if the target is a pioneer in its technology sector, if the target operates in an industry that sells unique products, if the target is assigned to the hightech or healthcare industry, and if the target mentions “trade secrets” in its 10-K report filed with the SEC prior to deal announcement. The effect is further increasing in the degree of technological proximity as well as product market rivalry between acquirer and target. Extending prior research at the intersection of innovation, law, and M&A, this paper concludes that BTFs serve as an efficient contract mechanism that provide target firms compensation for revelation of sensitive information in M&A negotiations if acquirers terminate deals. The option to include BTFs in M&A contracts thereby increases acquirers’ incentives to close the deal and increases firms’ ex-ante incentives to innovate, especially if they plan to exit as a means to enable entrepreneurial liquidity.

Intraday Momentum and Return Predictability: Evidence from the Crude Oil Market
Wen, Zhuzhu,Xu, Gong,Ma, Diandian,Xu, Yahua
Intraday return predictability has firstly been identified in the equity markets, and we extend the analysis to the crude oil market by using high-frequency United States Oil Fund data from 2006 to 2018. We find a different intraday prediction pattern in the oil market, where only the first half-hour returns positively predict the last half-hour returns. A market timing strategy based on the findings generates substantial profits. We further decompose the first half-hour return into the overnight and the open half-hour components, and find that the former contains more predictive information. Economic mechanisms of the infrequent portfolio rebalancing and the presence of late-informed investors explain our findings. Notably, unlike equity markets, the oil market exhibits a unique intraday trading volume pattern, caused by the release of two routine oil inventory announcements. However, the information contained in the inventory announcements does not offer predictability to the last half-hour returns.

Intraday Momentum in Chinese Commodity Futures Markets
Zhang, Wei,Wang, Pengfei,Li, Yi
In this paper, we study whether the intraday momentum exists in Chinese commodity futures markets. We first construct an open-interest-weighted index with the high-frequency data of all commodity futures traded and then examine the predictability of the last half-hour return with both in-sample and out-of-sample tests. Consistent with findings in other markets, we show that the first half-hour return can readily predict the last half-hour return. We further demonstrate that the magnitude of this intraday momentum varies with volatility, trading volume, trade size, the sign of the first half-hour return, the type of commodity futures, and the launch of night trading. Additionally, this intraday momentum does not result from data snooping but has economic significance and remains robust under different index weighting and predictor calculation methods.

Investors and Housing Affordability
Garriga, Carlos,Gete, Pedro,Tsouderou, Athena
We study the impact of a new class of investors on the dynamics of U.S. housing affordability after 2009. Using a novel instrumental variable and processing 85 million housing transactions, we find that institutional investors' purchases increase the price-to-income ratio, especially in the bottom price-tier, the entry point for first-time buyers. Investors cause a short-run reduction in the vacancy rate of owner-occupied units and a medium-run positive response of construction. These responses mitigate the effect on affordability. In highly elastic areas investors affect rents more than prices, whereas in areas that are highly inelastic investors have the opposite effect.

Investors' Assessment of the Dilution and Solvency Effects of Hybrid Instruments
Linsmeier, Thomas,Partridge, Clay,Shakespeare, Catherine
The current financial reporting model requires dichotomous classification of financial claims as either liabilities or equity. Classifying financial claims is challenging when instruments have attributes of both liabilities and equity (i.e., hybrid instruments). In this study, we examine under what conditions that common equity investors assess one class of hybrid instruments â€" preferred stock â€" similar to liabilities or equity. Preferred stock is similar to liabilities because it is senior to common equity and thus reduces the claims of common shareholders on the net assets of the firm (a dilution perspective). Preferred stock also is similar to equity because it cannot cause insolvency (a solvency perspective). We extend capital structure theory to identify entity-level economic characteristics important to determining when the dilution or solvency perspective is most consistent with investors’ assessments of preferred stock. We predict and find that investors assess preferred stock similar to liabilities when expected financial distress costs are low. We predict and find that investors assess preferred stock similar to equity when expected financial distress costs are high. Further, our results indicate that investors do not assess preferred stock instruments consistent with current U.S. GAAP classifications that are based on instruments’ contractual provisions.

Loss Averse Depositors and Monetary Policy Around Zero
Stettler, Christian
Recent experience from Europe and Japan shows that commercial banks generally pass negative short-term policy rates on to wholesale depositors, such as insurances and pension funds. Yet, they refrain from charging negative rates to ordinary retail customers. This paper asks whether the existing evidence on the inverse relationship between market experience and the degree of loss aversion can explain this transmission pattern. To this end, I allow for loss averse depositors within a simple two-period differentiated products duopoly with switching costs. It turns out that if depositors are especially averse to negative deposit rates, banks keep deposit rates at zero as policy rates decline, while accepting squeezed and possibly negative deposit margins. The lowest current policy rate at which the banking-system is willing to shield depositors from a negative deposit rate decreases with increasing: i) degrees of loss aversion; ii) levels of switching costs; and iii) market expectations about the future policy rate. A calibration of the model indicates how low central banks could effectively go without taking steps to make paper currency more costly.

Markov Chain Monte Carlo Methods for Estimating Systemic Risk Allocations
Takaaki Koike,Marius Hofert

We propose a novel framework of estimating systemic risk measures and risk allocations based on Markov chain Monte Carlo (MCMC) methods. We consider a class of allocations whose jth component can be written as some risk measure of the jth conditional marginal loss distribution given the so-called crisis event. By considering a crisis event as an intersection of linear constraints, this class of allocations covers, for example, conditional Value-at-Risk (CoVaR), conditional expected shortfall (CoES), VaR contributions, and range VaR (RVaR) contributions as special cases. For this class of allocations, analytical calculations are rarely available, and numerical computations based on Monte Carlo (MC) methods often provide inefficient estimates due to the rare-event character of the crisis events. We propose an MCMC estimator constructed from a sample path of a Markov chain whose stationary distribution is the conditional distribution given the crisis event. Efficient constructions of Markov chains, such as Hamiltonian Monte Carlo and Gibbs sampler, are suggested and studied depending on the crisis event and the underlying loss distribution. The efficiency of the MCMC estimators is demonstrated in a series of numerical experiments.

Measuring VC Measures
Agarwal, Charu
VC funds screen the targets based on certain decision rules. These decision rules could be implicit or explicit. The explicit rules are target industry, investment size, entrepreneurial team experience, competition etc. The implicit or tacit rules are embedded in the knowledge and experience of VC partners. The study uses the basic micro-economic framework to analyze the VC deals and reproduces some of the tacit decision rules.

Monetary Policies Versus Regulatory Policies: Management of Peer to Peer Market Interest Rates
Li, Cangshu
This paper studies how monetary and regulatory policies manage peer to peer (P2P) interest rates. Based on selected representative monetary and regulatory policies, this paper finds that easy monetary policies reduce the demand for online loans, thus reducing the market's interest rates. Monetary policies may increase the supply of online loans through rational expectation channels or reduce the demand for online loans through bank risk‐taking channels. Normative market‐based regulatory policy enables the P2P market to return to rationality, eliminates high‐risk investors and borrowers, and subsequently reduces market interest rates. Risk disposal‐based regulatory policy reduces market supply to some extent, resulting in a small increase in interest rates. Both easy monetary policies and regulatory policies have a great impact on the normal platforms. The interest rate of high‐risk platforms is less affected by the relevant policies, which is evidence that such platforms do not behave in accordance with the financial rules in general. Monetary policies mainly affect platforms with interest rates in a relatively normal range, while regulatory policies mainly focus on platforms with abnormal interest rates.

Mortgage Contracts and Selective Default
Yerkin Kitapbayev,Scott Robertson

We analyze recently proposed mortgage contracts which aim to eliminate selective borrower default when the loan balance exceeds the house price (the "underwater" effect). We show that contracts which automatically reduce the outstanding balance in the event of local house price decline remove the default incentive, but may induce prepayment in low price states. However, low state prepayments vanish if borrower utility from home ownership, or outside options such as rental costs, are too high. We also show that capital gain sharing features, through prepayment penalties in high house price states, are ineffective, as they virtually eliminate prepayment in such states. For typical foreclosure costs, we find that contracts with automatic balance adjustments become preferable to the traditional fixed rate mortgage at contract rate spreads of approximately 50-100 basis points, depending on how far prices must fall before adjustments are made. Furthermore, these spreads rapidly decrease with the borrower utility from home ownership. Our results are obtained using American options pricing methods, in a model with diffusive home prices, and either diffusive or constant interest rates. We determine the contract, default and prepayment option values with optimal decision rules. We provide explicit solutions in the perpetual case with constant interest rates; and numerically compute the prepayment and default boundaries in the general case.

Motivations for Loan Herding by Chinese Banks and its Impact on Bank Performance
Fang, Hao,Lee, Yen-Hsien,Shen, Chung-Hua,Chung, Chien‐Ping
This study uses a dynamic herding model that considers intertemporal and cross‐sectional correlation to confirm that loan herding occurs among joint‐stock commercial banks (JSCBs) and city commercial banks (CCBs). We clarify the motivations for bank loan herding. We find that loan herding by both JSCBs and CCBs results more from following the behavior of other same‐type banks than different‐type banks because of characteristic herding or reputational concerns. Loan herding by JSCBs is motivated by investigative herding, whereas loan herding by CCBs results from informational cascades. Moreover, loan herding has a significantly harmful impact on the operating performance of CCBs but not JSCBs, which may be explained by the irrational behavior of CCBs. Our results will help Chinese bank supervisors develop appropriate policies for handling loan herding.

Multi-scale analysis of lead-lag relationships in high-frequency financial markets
Takaki Hayashi,Yuta Koike

We propose a novel estimation procedure for scale-by-scale lead-lag relationships of financial assets observed at high-frequency in a non-synchronous manner. The proposed estimation procedure does not require any interpolation processing of original datasets and is applicable to those with highest time resolution available. Consistency of the proposed estimators is shown under the continuous-time framework that has been developed in our previous work Hayashi and Koike (2018). An empirical application to a quote dataset of the NASDAQ-100 assets identifies two types of lead-lag relationships at different time scales.

No arbitrage SVI
Claude Martini,Arianna Mingone

We fully characterize the absence of Butterfly arbitrage in the SVI formula for implied total variance proposed by Gatheral in 2004. The main ingredient is an intermediary characterization of the necessary condition for no arbitrage obtained for any model by Fukasawa in 2012 that the inverse functions of the -d1 and -d2 of the Black-Scholes formula, viewed as functions of the log-forward moneyness, should be increasing. A natural rescaling of the SVI parameters and a meticulous analysis of the Durrleman condition allow then to obtain simple range conditions on the parameters. This leads to a straightforward implementation of a least-squares calibration algorithm on the no arbitrage domain, which yields an excellent fit on the market data we used for our tests, with the guarantee to yield smiles with no Butterfly arbitrage.

Non-Performing Loans and State Aid Rules
Galand, Christophe,Dutillieux, Wouter,Vallyon, Emese
Impaired assets such as non-performing loans (“NPLs”) continue to pose significant problems across the EU. When possible solutions are being considered, “bad banks” or similar impaired asset relief measures are oſten discussed. However, if they involve support by the State such measures need to be compliant with a set of EU law provisions. This article aims to clarify which interventions are considered to be State aid, and to give an overview of the compatibility conditions that apply to State aid measures. A brief explanation is also given concerning the recent changes brought about by the EU’s new recovery and resolution framework introduced by the Banking Recovery and Resolution Directive (“BRRD”).The authors are respectively Head of Unit, Case Handler, and Blue-Book Trainee at the European Commission’s Directorate-General for Competition’s Task Force Financial Crisis. They have written this contribution in a personal capacity. For this reason, the views expressed in this article are solely those of the authors and do not represent a position of the Directorate-General for Competition or the European Commission.

On unbalanced data and common shock models in stochastic loss reserving
Benjamin Avanzi,Phuong Anh Vu,Gregory Clive Taylor,Bernard Wong

Introducing common shocks is a popular dependence modelling approach, with some recent applications in loss reserving. The main advantage of this approach is the ability to capture structural dependence coming from known relationships. In addition, it helps with the parsimonious construction of correlation matrices of large dimensions. However, complications arise in the presence of "unbalanced data", that is, when (expected) magnitude of observations over a single triangle, or between triangles, can vary substantially. Specifically, if a single common shock is applied to all of these cells, it can contribute insignificantly to the larger values and/or swamp the smaller ones, unless careful adjustments are made. This problem is further complicated in applications involving negative claim amounts. In this paper, we address this problem in the loss reserving context using a common shock Tweedie approach for unbalanced data. We show that the solution not only provides a much better balance of the common shock proportions relative to the unbalanced data, but it is also parsimonious. Finally, the common shock Tweedie model also provides distributional tractability.

Quantifying the Economic Impact of COVID-19 in Mainland China Using Human Mobility Data
Jizhou Huang,Haifeng Wang,Haoyi Xiong,Miao Fan,An Zhuo,Ying Li,Dejing Dou

To contain the pandemic of coronavirus (COVID-19) in Mainland China, the authorities have put in place a series of measures, including quarantines, social distancing, and travel restrictions. While these strategies have effectively dealt with the critical situations of outbreaks, the combination of the pandemic and mobility controls has slowed China's economic growth, resulting in the first quarterly decline of Gross Domestic Product (GDP) since GDP began to be calculated, in 1992. To characterize the potential shrinkage of the domestic economy, from the perspective of mobility, we propose two new economic indicators: the New Venues Created (NVC) and the Volumes of Visits to Venue (V^3), as the complementary measures to domestic investments and consumption activities, using the data of Baidu Maps. The historical records of these two indicators demonstrated strong correlations with the past figures of Chinese GDP, while the status quo has dramatically changed this year, due to the pandemic. We hereby presented a quantitative analysis to project the impact of the pandemic on economies, using the recent trends of NVC and V^3. We found that the most affected sectors would be travel-dependent businesses, such as hotels, educational institutes, and public transportation, while the sectors that are mandatory to human life, such as workplaces, residential areas, restaurants, and shopping sites, have been recovering rapidly. Analysis at the provincial level showed that the self-sufficient and self-sustainable economic regions, with internal supplies, production, and consumption, have recovered faster than those regions relying on global supply chains.

Renminbi Internationalization in the New Normal: Progress, Determinants and Policy Discussions
Li, Cheng,Zhang, Xiaojing
In the present paper we explore the internationalization of the renminbi with reference to the experiences of other monetary powers, and discuss its determinants, prospects and implications for China's development in the "new normal." Specifically, after summarizing the major progress made thus far, we conduct a regression analysis, showing that economic size and financial conditions are significant determinants of the international currency status, while inertia and other unobserved factors also play important roles. These empirical findings enable us to undertake a scenario analysis focusing on the renminbi's potential to become a global reserve currency. Based on this quantitative research, we then revisit China's policy initiatives designed to promote its currency overseas. In our view, the internationalization of the renminbi, along with financial deepening and liberalization, should be regarded as a means to achieve China's goal of reaching a more sustainable and balanced model of development.

Renter Protection and Entrepreneurship
Xiao, Steven Chong,Xiao, Serena Wenjing
This study investigates the hypothesis that renter protection encourages entrepreneurship by reducing household vulnerability in home-rental markets. We show that the staggered passage of just cause eviction ordinance in five California cities increases the number of new firms by 6.9%. This finding is unlikely explained by local demand shocks, landlord investments, or financing supply shocks. These firms tend to survive in the long run, with some turning into transformational businesses that receive VC financing and go public. Our evidence suggests that policies that insulate renters from the risk of unjust evictions have a surprising benefit to the local economy.

Revisiting the Rating Process
Agarwal, Charu
A system of rating or evaluation catering to investors, employers, and multilateral agencies plays a vital role in disbursing the information in a useful format. The effectiveness of the system hinges on the credibility of the system. A number of studies are conducted to suggest ways to safeguard the system from potential pitfalls and to improvise it as per the evolving needs. This paper employs the effort in the similar direction and brings useful insights using simple mathematical models supported by empirical evidence.

Robust Portfolio Selection with Regime Switching R-Vine Copulas
Su, Xiaoshan,Bai, Manying,Han, Yingwei
This paper develops a robust portfolio optimization model based on regime switching R-Vine copulas, where regime switching R-Vine copulas capture asymmetric dependence and regime switching in financial markets. We consider the uncertainty in hidden economic states and define WSCVaR as CVaR in the worst mixture regime to capture extreme risk in times of crisis. We compare our model with the models without regime switching or robustness in an empirical study of thirteen market indices. The results show that our model can select assets with smaller lower tail dependence and outperforms other models in dynamic investments. In particular during periods of crisis, our model performs most robustly in terms of the highest return and smallest risk. This also shows that regime switching R-Vine copulas can capture extreme tail dependence in times of crisis and WSCVaR with respect to regime switchig copulas can assess extreme risk in times of crisis adequately.

Should Investors Join the Index Revolution? Evidence from Around the World
Buehlmaier, Matthias M. M.,Wong, Kit Pong
Over the past fifteen years, passive investing has seen 1.5 trillion dollars of fund inflows while active investing has seen 500 billion of outflows. These numbers are in line with the tenets of passive investing, which assert it is close to impossible to consistently outperform the market. We therefore ask in this paper whether there are truly no viable alternatives to indexing and passive investing. We devise a simple actively-managed strategy based on a new version of the minimum variance portfolio that outperforms comparable stock indices around the world with on average 20.2% higher raw returns, 46.7% higher risk-adjusted returns, and 28.4% smaller drawdowns. Furthermore, it exhibits 32.4% lower portfolio turnover than the 1/N strategy of DeMiguel et al. (2009) around the world. Not only does this actively-managed portfolio have higher returns at lower risk (the well-known risk-return puzzle), it also displays higher returns at higher skewness levels (i.e. lower downside risk) and thus presents a novel skewness-return puzzle. Moreover, the portfolio also has lower recession risk. Our evidence thus suggests that the principles of passive investing should be questioned and that more effort in the actively-managed fund industry should be devoted to the exploration and application of similar strategies to overcome the industry's decades-long underperformance.

Social Cost of Carbon: What Do the Numbers Really Mean?
Nikolay Khabarov,Alexey Smirnov,Michael Obersteiner

The Social Cost of Carbon (SCC) is estimated by integrated assessment models and is widely used by government agencies to value the climate impacts of rulemakings, however, the core discussion around SCC so far was focused on validity of obtained numerical estimates and related uncertainties while largely neglecting a deeper discussion of the SCC applicability limits stemming from the calculation method. This work provides a conceptual mathematical background and the economic interpretation that is behind the SCC calculation in the three widely used integrated assessment models. Policy makers need to be aware of the difference between the commonly implied and the actual meaning of SCC that substantially limits its applicability in practice. The presented results call for a critical revision of the SCC concept and the SCC calculation methods in integrated assessment models.

The Caring Economy: Balancing Profit and Impact
Schoenmaker, Dirk
This paper examines how governments and corporates can be jointly empowered to have a positive impact on the sustainable development goals (SDGs). The current economic system is largely geared towards increasing economic growth. But this could come at the expense of rising social inequality and environmental degradation. This paper argues in favour of a new economic system that cares about the society and the environment.In this paper, we examine the link between economic system outcomes and corporate sustainability outcomes. We provide evidence that governments and companies can reinforce each other in their pursuit of sustainable development. Sustainable development comprises three dimensions - economic, social and environmental. These dimensions should be assessed and balanced in an integrated way. The paper suggests that a caring economy, in which governments and corporates balance profit and impact, is best placed to achieve the sustainable development goals.

The Changing Landscape of Treasury Auctions
Amin, Shehryar,Tédongap, Roméo
Recent literature attributes the temporary decrease in secondary Treasury prices before a Treasury auction to primary dealers’ limited risk-bearing capacity. However, after documenting a decline of more than 45% in the Treasury Inflation-Protected Securities (TIPS) auction amount allocated to primary dealers over the years, we show that these dealers are mostly active in the inflation-derivatives market rather than the TIPS market. We attribute this temporary price pressure to slow-moving capital, where some direct and indirect bidders reduce their demand before the auction. Our results imply an issuance cost to the US Treasury of over $300 million for TIPS in 2019.

The Dual Effect of Financial Reporting Quality on Stock Pricing and Return
Fong, Robert
Financial reporting quality affects both investors’ expected return and stock pricing efficiency. The relation of financial reporting quality with realized return thus captures its relations with both expected return and the mispricing-related component. The sign of the relation of financial reporting quality with the mispricing-related component is indeterminate. We find that the relation of financial reporting quality with the mispricing-related component dominates its relation with expected return. We thus cannot draw any reliable inference about the relation of financial reporting quality with expected return from its estimated relation with realized return. Moreover, we show that the ostensibly inconsistent and puzzling results concerning the relation of financial reporting quality with realized return stem from neglecting the effect of financial reporting quality on stock pricing efficiency.

The Myth of the Lead Arranger’s Share
Blickle, Kristian,Fleckenstein, Quirin,Hillenbrand, Sebastian,Saunders, Anthony
We make use of Shared National Credit Program (SNC) data to examine syndicated loans in which the lead arranger retains no stake. We find that the lead arranger sells its entire loan share for 27 percent of term loans and 48 percent of Term B loans, typically shortly after syndication. In contrast to existing asymmetric information theories on the role of the lead share, we find that loans that are sold are less likely to become non-performing in the future. This result is robust to several different measures of loan performance and is reflected in subsequent secondary market prices. We explore syndicated loan underwriting risk as an alternative theory that may help explain this result.

Universal Demand Laws and Compensation
Humphery-Jenner, Mark,Islam, Emdad,Nanda, Vikram K.,Rahman, Lubna
How do firms respond to a regulatory induced increase in managerial entrenchment? We use the staggered passage of Universal Demand (UD) laws as a natural experiment with which to answer this question. Universal demand laws insulate managers from derivative litigations, thereby entrenching them from a form of external discipline, which would facilitate shirking and reduces managerial discipline. We hypothesize and show that firms respond to this by increasing risk-taking incentives. This effect is stronger in firms with more institutional investors (who might pressure for compensation changes) but weaker in high competition industries (where competition itself can mitigate a deterioration in governance). Institutional investors also help to prevent entrenched managers taking advantage of UD laws’ insulating effect. We take steps to mitigate endogeneity, identification, and other econometric concerns.

Who Influences the Asianâ€"Pacific Real Estate Markets: The Us, Japan or China?
Liow, Kim Hiang,Huang, Yuting,Song, Jeong Seop
As rapid economic growth in China has led to significant appreciation of urban real estate market values, this study examines China's influence on Asian–Pacific real estate markets by focusing on their respective market integration with the US, Japan and China during the period January 2005 to December 2017. Market integration is examined by unconditional and time‐varying conditional correlations, nonlinear Granger causality and dynamic connectedness effects. Overall, although the US and Japanese real estate markets have significantly influenced return and volatility in the regional markets, China has emerged as another major regional real estate volatility leader with rising influence over volatility integration, especially during the 2007–2011 crisis period. Financial crises have strengthened China's volatility connectedness effects and market integration with other Asian–Pacific real estate markets. Our results imply that the benefits of regional portfolio diversification may be declining as volatility integration across the Chinese and Asian–Pacific real estate markets becomes stronger. Therefore, diversified global investors should pay greater attention to these real estate markets.

Who presents and where? An analysis of research seminars in US economics departments
Asier Minondo

Using a large dataset of research seminars held at US economics departments in 2018, I explore the factors that determine who is invited to present at a research seminar and whether the invitation is accepted. I find that high-quality scholars have a higher probability of being invited than low-quality scholars, and researchers are more likely to accept an invitation if it is issued by a top economics department. The probability of being invited increases with the size of the host department. Young and low-quality scholars have a higher probability of accepting an invitation. The distance between the host department and invited scholar reduces the probability of being invited and accepting the invitation. Female scholars do not have a lower probability of being invited to give a research seminar than men.

Zombie Firms and Debt Accumulation: A Theoretical Framework and Chinese Experience
Zhu, He,He, Fan,Wang, Shennan,Ye, Qianlin,Liang, Chen
In recent years, as China has grappled with rising debt and broad economic restructure, the prevalence of zombie firms has become a critical problem. This paper provides a theoretical framework illustrating the rationale behind the occurrence of zombie firms from the perspective of banks. We develop differential equations to model a bank's expectation and the ex ante estimate that underlies its decision to refinance an insolvent borrower. An optimistic expectation is essential in zombie lending and is intrinsic to the countercyclical pattern of zombie firms. Our model also predicts that debt can build up to an unsustainable level if recovery of profitability is sluggish or the initial debt burden is too high. Examining the Chinese experience of zombie firms over 2007–2017, this paper highlights two findings. First, the share of zombie firms among Shanghai and Shenzhen A‐share listed companies demonstrates a countercyclical pattern. Second, the positive correlation between zombie share and debt accumulation across manufacturing sectors sheds light on the link between zombie firms and the rising corporate debt in China. To deal with the "zombie" problem, the government should carefully weigh its policies to avoid further distortions because the occurrence of zombie firms may be inevitable and impossible to eliminate.