Charlie X. Cai

The role of venture capitalists in small and medium-sized enterprise initial public offerings: evidence from China

Despite the rapid growth and importance of small and medium-sized enterprises and the venture capital (VC) industry in China, this is the first article to examine comprehensively the role of VCs in public firms listed on the Small and Medium Enterprise Board and the Growth Enterprise Board. Supporting monitoring and certification hypotheses, the study finds that VC-backed initial public offerings have higher premiums, lower initial underpricing and higher subsequent market reaction. The grandstanding motive is documented for younger VCs which offer higher levels of initial underpricing to enhance their positions in the industry, but no evidence is found to support grandstanding by foreign VCs.

Informed Trading and Market Structure

We examine London Stock Exchange trading around information releases and link market quality dimensions with market structure during periods with heightened interaction between informed and uninformed traders. We find support for both the hypothesis that automated electronic markets minimise trading costs for liquid stocks and the hypothesis that adverse selection costs are minimised with intermediated trading. We examine how news affects both dealer and electronic systems and find that electronic markets are prone to greater stealth trading and post‐trade volatility, both consistent with the proliferation of algorithmic trading and short‐term volatility events such as the May 6, 2010 ‘flash crash.’

Influence of Cultural Factors on Price Clustering and Price Resistance in China's Stock Markets

This paper builds on prior research by analysing the impact of cultural factors on both price clustering and price resistance in Chinas stock markets. The results support the presence of cultural factors impacting on price clustering with the digit 8 showing a higher propensity for clustering and the digits 4 and 7 showing a lower propensity in the A-share market, where stock is denominated in renminbi and traded by mainland Chinese. These results are further supported by an analysis of the B-share market, where cultural factors have no (or less) impact on the price of Chinese stocks traded by foreign investors in US dollars (or in Hong Kong dollars). A range of measures for price resistance show the digits 0 and 5 to be significant resistance points in the A-share market. Although digit 8 cannot be considered as a resistance point, its resistance level is highest among the remaining numbers. In conclusion, cultural factors help to explain not only price clustering in the Chinese stock markets but price resistance levels as well, albeit at a weak level.

Trading Frictions and Market Structure: An Empirical Analysis

Market structure affects the informational and real frictions faced by traders in equity markets. Using bid-ask spreads, we present evidence which suggests that while real frictions associated with the costs of supplying immediacy are less in order-driven systems, informational frictions resulting from increased adverse selection risk are considerably higher in these markets. Firm value, transaction size and order location are all major determinants of the trading costs borne by investors. Consistent with the stealth trading hypothesis of Barclay and Warner (1993), we report that informational frictions are at their highest for medium size trades that go through the order book. Finally, while there is no doubt that the total costs of trading on order-driven systems are lower for very liquid securities, the inherent informational inefficiencies of the trading format should not be ignored. This is particularly true for the vast majority of small to mid-size stocks that experience infrequent trading and low transaction volume.

Chinese investment goes global: the China Investment Corporation

Purpose - The purpose of this paper is to provide a detailed overview of the China Investment Corporation (CIC) and its structure, investment activities and possible future investments. Design/methodology/approach - This paper uses a case study approach and builds up a picture of sovereign wealth globally and then focuses on the CIC and issues surrounding the fund. Findings - The key implications from the research are that Asian sovereign wealth is going to be increasingly important in global investment. The CICs investment strategy is evolving and becoming evermore sophisticated. As the fund grows this will result in increased demand for local financial services and expertise and so where representative offices are located will impact on those financial centers. Research limitations/implications - Future research should expand the scope of the analysis to include other sovereign wealth funds and try to map out a comprehensive picture of sovereign wealth around the world. Originality/value - This is one of the first papers to look at sovereign wealth and is believed to be the first paper to analyze Asian sovereign wealth and the CIC.

Trading frequency and the compass rose

The paper uses market microdata to examine how the frequency with which share trading takes place affects the appearance of the compass rose. The results show that, for a share traded with a given frequency, there will be an optimum frequency of observation to produce the best compass rose.

Understanding Asset Pricing Anomalies Across the Globe: The Role of Newswatchers

The asset pricing literature documents a puzzle that developed markets have more pricing anomalies than emerging markets. Applying the latest q- and 5 factor models, we study 16 extensively documented anomalies in 45 countries across the globe for the period between 1980 and 2013. Although these models provide explanatory power for some of the anomalies, the developed – emerging puzzle still remains. Furthermore, the difference is more pronounced in equal-weighted than in value-weighted anomaly returns. Building on Hong and Stein’s (1999) model of newswatchers and momentum traders, we hypothesize and show that very slow information diffusion in emerging market stocks, especially small stocks, provides an explanation for the puzzle.

Value‐Enhancing Learning from Industry‐Wide Diversification Experience

Diversification is an important strategic decision and a rare event. By definition, when undertaking a new diversification, a firm will not have direct internal experience of the venture. In this regard, external experience of similar diversifications provides a valuable lesson pool for the focal manager. While there are many studies of internal learning in organizational learning literature, research on external learning is still scarce. This paper proposes a theoretical framework for external experiential learning and applies it to a study of the effect of industry experience on diversification value. It reports the novel finding of a cubic relationship between external learning from industry experience and diversification value. This indicates that industry experience matters to the outcomes of strategic decisions, but that the effect of this external experience on learning is conditional upon certain characteristics of the experience: namely, specificity and heterogeneity.

Are Market-Based Rankings of Global Systemically Important Financial Institutions Useful for Regulators?

We analyze whether four market-based measures of the global systemic importance of financial institutions offer early warning signals during three financial crises. The tests based on the 2007/2008 crisis show that only one measure (∆CoVaR) consistently adds predictive power to conventional early warning models. However, the additional predictive power remains small and it is not normally confirmed for the Asian and the 1998 crises. We conclude that it is problematic to identify a market-based measure of systemic importance that remains valid across crises with different features. The same criticism also applies to several conventional proxies of systemic importance, of which size is the most consistent performer.

Monitoring the foreign exchange rate benchmark fix

ABSTRACT We develop a Manipulation Index (ManIx) that captures the potential manipulation intention of dealers during the World Markets/Reuters (WMR) benchmark (London Close) period at 4 pm London time through a unique algorithm and simulation. The application of this model (using a dataset with dealers’ identities) can identify banks that are prone to potential manipulative behavior. The results concerning the identified banks are validated by the regulatory investigations. Implementation of this algorithm allows regulators better direct their limited resources towards more targeted in-depth investigation.