Crisis rescue via direct purchase: Evidence from China

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

Journal of Banking & Finance, 2024, vol. 165, issue C

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: Stock market rescue; Margin trading; Liquidity crisis; Policy uncertainty (search for similar items in EconPapers)
JEL-codes: G18 G38 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:165:y:2024:i:c:s0378426624001407

DOI: 10.1016/j.jbankfin.2024.107223

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