Description:
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 un-rescued firms, rescued firms have significantly lower liquidity after the rescue. Policy uncertainty about subsequent interventions explains the reduction in liquidity better than rescue-induced liquidity dry-up. Inconsistent with potential moral hazards associated with government bailouts, investment policies of the rescued firms become more conservative after the rescue. Our evidence raises the caution of unintended consequences of direct-purchase rescue