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Ms. Yu Shi, Robert M. Townsend, and Wu Zhu

documented subsidiary firms with a common shareholder hedging risks with each other. Little attention has been paid to the transmission of shocks from the corporate shareholder to their subsidiaries. In this paper, we show that internal capital markets in business groups can propagate corporate shareholders’ credit supply shocks to their subsidiaries, using rich firm-level data from China. We focus on the credit supply shocks from the banking sector, as banks are still dominating the financial market in China. Controlling for local credit market and macroeconomic

Jorge A. Chan-Lau

direct stock ownership. Regulatory changes passed by mid-1999 were aimed at facilitating the implementation of performance-based compensation by easing and extending the use of stock options to include also subsidiary firms and non-regular employees. Partly reflecting this change, the number of companies using stock options plans increased from 49 in 1997 to 182 in 1999. By 1999 eight percent of all listed companies in the Tokyo Stock Exchange used or planned to use stock options to compensate managers. The market for corporate control operates through friendly

Ms. Yu Shi, Robert M. Townsend, and Wu Zhu
Using business registry data from China, we show that internal capital markets in business groups can propagate corporate shareholders’ credit supply shocks to their subsidiaries. An average of 16.7% local bank credit growth where corporate shareholders are located would increase subsidiaries investment by 1% of their tangible fixed asset value, which accounts for 71% (7%) of the median (average) investment rate among these firms. We argue that equity exchanges is one channel through which corporate shareholders transmit bank credit supply shocks to the subsidiaries and provide empirical evidence to support the channel.
Ms. Yu Shi, Robert M. Townsend, and Wu Zhu
Mr. Reint Gropp and Ms. Kristina Kostial

by investing abroad. By contrast, FDI outflows in credit countries should be less sensitive to taxes, because they cannot escape domestic taxation entirely, at least insofar as profits are eventually repatriated. In Chart 3 , total FDI outflows are divided into two components: debt and equity investment and reinvested earnings of foreign subsidiaries. Firms resident in a country that asserts the right to tax worldwide income and gives a credit for only the foreign tax paid have a larger incentive to reinvest their earnings abroad (rather than repatriate them) than

International Monetary Fund

’s view, managing foreign exchange constitutes a sizeable obstacle for small firms to establish themselves on the export market, as they lack both the competence and the financial resources to manage foreign exchange and can seldom choose to delegate production to a subsidiary firm in a country with an advantageous exchange rate. Therefore, the introduction of the euro would allow small firms access to a much larger market and raise profits, employment and investment, which is vital for Sweden because future employment growth is expected to be concentrated in firms of

Hui He, Hanya Li, and Jinfan Zhang
The paper analyses the effect of the stock market on firm innovation through the lens of initial public offering (IPO) using uniquely matched Chinese firm-level data. We find that IPOs lead to an increase in both the quantity and quality of firm innovation activity. In addition, IPOs expand a firm’s scope of innovation beyond its core business. The impact of IPOs on firm innovation varies across financial constraints, corporate governance, and ownership structures. Our results further illustrate that IPOs induce a firm to increase the number of inventors and enable better retention of existing inventors after the IPO. Finally, we show that the enhanced innovation activity resulting from IPOs increases a firm’s Tobin’s Q in the long run.
Hui He, Hanya Li, and Jinfan Zhang

between the treatment and control groups. We construct the treatment and control groups of firms using the PSM algorithm. Specifically, the treatment group includes all IPO firms and their subsidiary firms for the period 1999–2006 with non-missing matching variables in the pre-IPO year (t-1) and the post-IPO year (t+1) . We further require that the subsidiary firms must maintain their subsidiary status from IPO year t to year t+3 and they must be established no later than t-3 . We use the PSM algorithm to identify matches between IPO firms and firms that do