Jie Gan

Transparency, Price Informativeness, and Stock Return Synchronicity: Theory and Evidence

This paper argues that, contrary to the conventional wisdom, stock return synchronicity (or R2) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be less “surprise†(i.e., less new information is impounded into the stock price). Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in 3 settings: namely, firm age, seasoned equity offerings (SEOs), and listing of American Depositary Receipts (ADRs).

Banking Market Structure and Financial Stability: Evidence from the Texas Real Estate Crisis in the 1980s

A protective covering for protecting motor leads of a motor. The protective covering includes a first portion that is fixedly securable to a housing of a motor, and a covering portion connected to the first portion that, when the protective covering is secured to a motor housing, extends substantially outwardly from the motor to partially shield the motor leads from various elements present in the operating environment. The covering portion extends substantially above the motor leads, and also further extends downwardly substantially along an external sides of the motor leads so as to partially shield the motor leads. Portions of the protective covering may have a substantially U-shaped cross-section, wherein legs of the U-shaped cross-section extend to further shield the motor leads.

Monopoly and Information Advantage in the Residential Mortgage Market

Information advantage and entry deterrence incentives are investigated as they affect lending outcomes and competitive structure of the U.S. residential mortgage market. In the model, when assessing a loan applicant, the incumbent monopoly lender employs a proprietary screening technology to produce a privately observed estimate of loan credit quality. When faced with potential competitive entry, the incumbent signals poor credit quality by charging high prices to better credit quality borrowers. Market structure and loan pricing strategy are derived endogenously, where the incumbent deters entry by, first, segmenting consumers into prime and sub-prime loan markets and, second, charging prime market borrowers a uniform rate that is higher than the risk-based monopoly rate. Empirical implications of the model are identified, and evidence is presented that is consistent with predictions.

Privatization in China: Experiences and Lessons

This chapter provides a descriptive analysis of China’s privatization, by far the largest one in human history. Unlike the mass privatization in other transitional economies, China has adopted multiple approaches to privatizing its state-owned enterprises (SOEs). These approaches included share issue privatization (SIP), joint ventures with foreign firms, management buy-outs (MBO), and sales to outsiders. I examine how these different approaches may affect the incentive and ability of the new owners to restructure the firms and thus influence the outcomes of privatization programs.

Poor Institutions and Private Incentives: Evidence from Dividend Policies

The existing literature on law and finance generally assumes that firms are passive recipients of the influence of investor protections on their ability to raise external financing. In this paper, we empirically identify a commitment mechanism, i.e., dividend payouts, which firms use to establish a reputation for better treatment of outside shareholders in order to compensate for country-level weak protection of shareholders and to obtain better access to equity markets. We show that, in weak-protection countries, firms with growth prospects tend to initiate dividends earlier and pay a higher level of dividends not only as compared to their counterparts in strong protection countries but also as compared to low-growth firms in the same legal regime. As evidence of better access to capital markets, in weak-protection countries, growth firms with a good dividend history (e.g., three years of consistently high dividend payouts) attain higher stock market valuation and raise more equity financing. JEL Classification:The existing literature on law and finance generally assumes that firms are passive recipients of the influence of investor protections on their ability to raise external financing. This view ignores the role of private incentives. In this paper, we empirically identify a commitment mechanism, i.e., dividend payouts, which firms use to establish a reputation for better treatment of outside shareholders in order to compensate for country-level weak protection of shareholders and to obtain better access to equity markets. We show that, in weak-protection countries, firms with growth prospects tend to initiate dividends earlier and pay a higher level of dividends not only as compared to their counterparts in strong protection countries but also as compared to low-growth firms in the same legal regime. As evidence of better access to capital markets, in weak-protection countries, growth firms with a good dividend history (e.g., three years of consistently high dividend payouts) attain higher stock market valuation and raise more equity financing.

What do Bank Capital Requirements do when They are not Binding

This paper provides a new interpretation of the role of capital regulation, recognizing that banks may not operate at the maximal leverage levels allowed, i.e., capital requirements are, in most cases, not binding. I show that the seemingly unbinding capital requirements are actually a necessary device to induce banks to choose leverage levels above the requirements. I develop a stylized model that intends to capture the basic ideas as simple as possible. Banks can invest in both real loans and marketable securities. As bank loans are special and essentially illiquid, banks earn rents on real loans. The supply of profitable lending opportunity is, however, limited because the loan production process exhibits decreasing return to scale. If banks can only invest in real loans, the trade-off between preserving rents (franchise-value incentive) and exploiting government insurance value (risk-shifting incentive) means that banks do not necessarily choose their leverage levels and asset risks to be at the boundaries imposed by regulatory rules. The resulting interior solution, however, is only a local optimum. Marketable securities, despite yielding zero present value in themselves, are attractive in the presence of government guarantee. Moreover, they are in unlimited supply. By investing in marketable securities, banks can leverage up indefinitely to exploit the government insurance. Therefore, a global optimum corresponding to maximal leverage and risk, from the bankers point of view, always dominates the local optimum. Because banks do not internalize any social costs of bank failures, the global optimum is not socially optimal. This underscores an interesting and probably unintended role that capital regulation plays. For a fixed amount of capital, capital requirements limit the banks ability to leverage and thus impose an upper limit on the maximal gain from leveraging and risk taking. When they are properly set at a level such that the gain from operating at the boundary is lower than that at the local optimum, the bank chooses to stay at the local optimum. Hence, capital regulation is not meant to just prevent a few banks from going across the boundary, but rather, serves as a necessary device that induce the majority of banks to settle at their local optima. The macroeconomic implications are also discussed.