Crisis rescue via direct purchase: evidence from China

Lu Li; Chunbo Liu; Yongxin Xu; Xiaoyan Zhang; Gaoping Zheng

doi:10.1016/j.jbankfin.2024.107223

Crisis rescue via direct purchase: evidence from China

Lu Li, Chunbo Liu, Yongxin Xu, Xiaoyan Zhang, Gaoping Zheng

Banking & Finance

Research output: Contribution to journal › Article › Research › peer-review

Abstract

During the 2015 stock market crisis, the Chinese government used hundreds of billions of dollars to purchase shares directly in the secondary market. We find that compared with non-rescued firms, rescued firms have significantly lower liquidity after being rescued. Policy uncertainty regarding subsequent interventions better explains the reduction in liquidity than the liquidity dry-up and bad firm signaling hypotheses. Inconsistent with the potential moral hazards associated with government bailouts, the investment policies of rescued firms become more conservative after being rescued. Our evidence warns of the unintended consequences of direct purchase rescue programs.

Original language	English
Article number	107223
Number of pages	17
Journal	Journal of Banking and Finance
Volume	165
DOIs	https://doi.org/10.1016/j.jbankfin.2024.107223
Publication status	Published - Aug 2024

Keywords

Liquidity crisis
Margin trading
Policy uncertainty
Stock market rescue

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10.1016/j.jbankfin.2024.107223

Cite this

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title = "Crisis rescue via direct purchase: evidence from China",

abstract = "During the 2015 stock market crisis, the Chinese government used hundreds of billions of dollars to purchase shares directly in the secondary market. We find that compared with non-rescued firms, rescued firms have significantly lower liquidity after being rescued. Policy uncertainty regarding subsequent interventions better explains the reduction in liquidity than the liquidity dry-up and bad firm signaling hypotheses. Inconsistent with the potential moral hazards associated with government bailouts, the investment policies of rescued firms become more conservative after being rescued. Our evidence warns of the unintended consequences of direct purchase rescue programs.",

keywords = "Liquidity crisis, Margin trading, Policy uncertainty, Stock market rescue",

author = "Lu Li and Chunbo Liu and Yongxin Xu and Xiaoyan Zhang and Gaoping Zheng",

note = "Funding Information: We are grateful for helpful comments and suggestions from the Editor, Geert Bekaert, an anonymous Associate Editor, and two anonymous referees, Philip Dybvig, Yi Huang and seminar participants at CFRC 2019, University of Victoria of Wellington, Shanghai University of Finance and Economics, Central University of Finance and Economics and Southwestern University of Finance and Economics. We remain responsible for all errors and omissions. Chunbo Liu acknowledges the financial support from the Ministry of Education of China Humanities and Social Science Research Grant (grant no. 23YJC790079). Publisher Copyright: {\textcopyright} 2024",

year = "2024",

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doi = "10.1016/j.jbankfin.2024.107223",

language = "English",

volume = "165",

journal = "Journal of Banking and Finance",

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AU - Li, Lu

AU - Liu, Chunbo

AU - Xu, Yongxin

AU - Zhang, Xiaoyan

AU - Zheng, Gaoping

N1 - Funding Information: We are grateful for helpful comments and suggestions from the Editor, Geert Bekaert, an anonymous Associate Editor, and two anonymous referees, Philip Dybvig, Yi Huang and seminar participants at CFRC 2019, University of Victoria of Wellington, Shanghai University of Finance and Economics, Central University of Finance and Economics and Southwestern University of Finance and Economics. We remain responsible for all errors and omissions. Chunbo Liu acknowledges the financial support from the Ministry of Education of China Humanities and Social Science Research Grant (grant no. 23YJC790079). Publisher Copyright: © 2024

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Y1 - 2024/8

N2 - During the 2015 stock market crisis, the Chinese government used hundreds of billions of dollars to purchase shares directly in the secondary market. We find that compared with non-rescued firms, rescued firms have significantly lower liquidity after being rescued. Policy uncertainty regarding subsequent interventions better explains the reduction in liquidity than the liquidity dry-up and bad firm signaling hypotheses. Inconsistent with the potential moral hazards associated with government bailouts, the investment policies of rescued firms become more conservative after being rescued. Our evidence warns of the unintended consequences of direct purchase rescue programs.

AB - During the 2015 stock market crisis, the Chinese government used hundreds of billions of dollars to purchase shares directly in the secondary market. We find that compared with non-rescued firms, rescued firms have significantly lower liquidity after being rescued. Policy uncertainty regarding subsequent interventions better explains the reduction in liquidity than the liquidity dry-up and bad firm signaling hypotheses. Inconsistent with the potential moral hazards associated with government bailouts, the investment policies of rescued firms become more conservative after being rescued. Our evidence warns of the unintended consequences of direct purchase rescue programs.

KW - Liquidity crisis

KW - Margin trading

KW - Policy uncertainty

KW - Stock market rescue

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DO - 10.1016/j.jbankfin.2024.107223

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VL - 165

JO - Journal of Banking and Finance

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M1 - 107223

ER -

Crisis rescue via direct purchase: evidence from China

Abstract

Keywords

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