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Crisis rescue via direct purchase: Evidence from China

Author

Listed:
  • Li, Lu
  • Liu, Chunbo
  • Xu, Yongxin
  • Zhang, Xiaoyan
  • Zheng, Gaoping

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.

Suggested Citation

  • Li, Lu & Liu, Chunbo & Xu, Yongxin & Zhang, Xiaoyan & Zheng, Gaoping, 2024. "Crisis rescue via direct purchase: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 165(C).
    • Handle: RePEc:eee:jbfina:v:165:y:2024:i:c:s0378426624001407
    DOI: 10.1016/j.jbankfin.2024.107223
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    More about this item

    Keywords

    Stock market rescue; Margin trading; Liquidity crisis; Policy uncertainty;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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