My Research
WORKING PAPERS
“Mutual Fund Trading, Greenwashing, and ESG Clientele" (with Yrjo Koskinen and Raffaele Santioni). First version (with slightly different title) August 2021. Online appendix. Revise and Resubmit at Journal of Financial and Quantitative Analysis.
Best Paper Award, Portuguese Finance Network Conference, Funchal, Madeira, July 2023.
This paper provides evidence consistent with ESG mutual funds' discretionary trading being partly responsible for the soft landing of ESG stocks in a market downturn.
“Price elasticity of demand and risk-bearing capacity in sovereign bond auctions” (with José Miguel Cardoso-Costa and José Afonso Faias). First version March 2022. Online appendix. Forthcoming at Review of Financial Studies.
BME Award 2022 to the best paper on Fixed Income Markets at the XXIX Finance Forum of the Spanish Finance Association.
This paper studies prime dealers' bidding in auctions of sovereign bonds to infer their risk-bearing capacity, an important metric for aggregate risk.
“How large is the pay premium from executive incentive compensation?" (with Ana Albuquerque, Mary Ellen Carter, and Qi (Flora) Dong). This version April 2023. (online appendix) Forthcoming at The Accounting Review.
Using detailed compensation data from Incentive Lab and simulation analysis, we estimate a risk premium from pay at risk that represents 15% of total pay. The premium correlates positively with proxies for CEO risk aversion. Our estimates of the pay premium can serve as a benchmark to compensation consultants.
“Market Timing, Farmer Expectations, and Liquidity Constraints" (with Bruno de Araújo, Luis Marques, Geravásia Mosse, Pippy de Vletter, and Helder Zavale). First version May 2021. (online appendix) Forthcoming at Journal of Development Economics.
This paper connects farmer expectations of produce prices to storage decisions in a context where the farmer is liquidity constrained. The evidence is consistent with the hypothesis that farmers sell right after the harvest season at low prices, knowing that prices will be higher in the future, due to the presence of liquidity constraints. (Link to paper with detailed survey information. Link to NCBA CLUSA paper based on our research.)
“Strategic Corporate Purpose" (with Luís Cabral). First version September 2021. (Paper first circulated under the title "Strategic Leadership in Corporate Social Responsibility".) Revise and Resubmit at Journal of Economics and Management Strategy.
In an industry-equilibrium model, we provide a rationale for firms to become CSR leaders. CSR solves a coordination problem by an appropriate change of the firm's objective function.
“Liquidity Provision in the Secondary Market for Private Equity Fund Stakes" (with Johan Cassel, Ludovic Phalippou, and Enrique Schroth). First version May 2018.
This paper finds that asset owners (e.g., pension funds, endowments, banks), not funds specialized in the secondary market (i.e., secondary funds), provide liquidity in times of aggregate liquidity shortages, and that younger and smaller funds are the most exposed to shortages of liquidity.
“Skewness in Stock Returns, Periodic Cash Payouts, and Investor Heterogeneity,” March 2010. First version: November 2009.
Models the effect of firm announcements on conditional heteroskedasticity and trading volume.
“Corporate Governance and Asset Prices in a Two-Country Model,” (with Neng Wang) July 2004.
Provides a model to explain the evidence in Jonson, Boone, Breach and Friedman (2000, JFE) who show that during the East Asian crisis, countries with better investor protection went through a lower depreciation of their currency’s exchange rate relative to the U.S. dollar.
PUBLISHED ARTICLES
29. "Value Creation in Shareholder Activism," (with Vyacheslav Fos and Enrique Schroth). (Previously circulated with the title "Value Creation in Shareholder Activism: A Structural Approach") Journal of Financial Economics 145, pp. 153-178, 2022.
Journal of Financial Economics Editor’s Choice.
This paper decomposes average Schedule 13D filing announcement returns into value creation (74.8%), stock picking (13.4%), and selection (11.8%) components. Higher value creation predicts improvements in firm performance and lower proxy contest probabilities, whereas abnormal announcements returns do not, suggesting that our estimate identifies more effective activism campaigns. Online appendix.
28. "The Price Effects of Liquidity Shocks: A Study of SEC’s Tick-Size Experiment," (with Shiyun Song and Chen Yao) Journal of Financial Economics 138, pp. 700-724, 2020. Online appendix.
This paper provides causal evidence of the impact of the tick size on stock prices. We document a large liquidity premium. We believe we are the first to offer such evidence in a long literature! We benefit from a unique field experiment conducted by the SEC.
27. "Resiliency of environmental and social stocks: an analysis of the exogenous COVID- 19 market crash" (with Yrjo Koskinen, Shuai Yang, and Chendi Zhang) (Appeared as working paper in the COVID Economics issue 11, CEPR Press. Originally with the title: "Love in the Time of COVID-19: The Resiliency of Environmental and Social Stocks") The Review of Corporate Finance Studies 9, pp. 593–621, 2020.
We present evidence that stocks with high ES ratings have significantly higher returns and lower return volatilities than other stocks. Firms with high ES ratings and high advertising expenditures perform especially well during the crash. This paper highlights the importance of ES policies in making firms more resilient during a time of crisis. Online appendix.
26. "Citizens United v. FEC and Corporate Political Activism," (with Zicheng Lei, Jörg Rocholl, and Chendi Zhang) Journal of Corporate Finance 60, February 2020. Online Appendix
Analyzes the response of politically active firms to the U.S. Supreme Court decision on Citizens United v. FEC. We estimate that the value of a political connection decreases by $6.9 million after Citizens United. Our evidence supports the hypothesis that independent political spending crowds out political connections.
25. "Incentive Pay and Systemic Risk," (with Luis Cabral and Jose Guedes). Review of Financial Studies 32, 4304–4342, 2019.
Shows that the presence of relative performance evaluation in compensation contracts and of correlated projects creates systemic risk. Caps on incentive pay and on total pay are not ineffective in reducing systemic risk.
24. "International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions," (with Miguel Ferreira, Luis Marques and Pedro Matos) Recipient of the CICF Best Paper Award at the 2014 China International Conference in Finance, Chengdu, China. Review of Financial Studies 32, 738–770, 2019.
Documents that foreign direct investment is a vehicle for governance improvements in host countries.
Data: Governance Index.
23. “Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence,” (with Yrjo Koskinen and Chendi Zhang) Management Science 65, 4451-4469, 2019. (lead article)
Recipient of a BSI Gamma Foundation grant in 2011, the Best Paper Award at the Geneva Summit on Sustainable Finance in 2013, and the ECGI Finance Best Paper Award for 2013.
Presents a model of how CSR affects firm systematic risk and provides evidence consistent with the model.
22. “Valuation Risk and Asset Pricing” (with Martin Eichenbaum, Victor Luo and Sergio Rebelo) Slides for presentation at Bundesbank from May 2012 (under old title of “Understanding the Equity-premium Puzzle and the Correlation Puzzle”) Journal of Finance 71, 2861-2903, 2016.
Identifies a novel component of the equity premium due to time preference shocks. The model accounts for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.
21. “Long-run Bulls and Bears” (with Martin Eichenbaum, Dimitris Papanikolaou and Sérgio Rebelo) Journal of Monetary Economics 76 (supplement), S21-S36, 2015.
We find that there is a high correlation between stock returns and fundamentals across bull and bear stock market episodes.
20. “The Value of Control and the Costs of Illiquidity,” (with Enrique Schroth) Journal of Finance 70, 1405-1455, 2015. Awarded a KPMG Global Valuation Institute grant on 2011. Online appendix.
First estimates of the marketability discount in large controlling blocks.
19. "Investment Analysis of Autocallable Contingent Income Securities," (with Raquel Gaspar and Allen Michel) Financial Analysts Journal71, 61-83, 2015.
Presents a systematic analysis of the return properties of a structured product of growing relevance in the US market and shows the weaknesses of using the geometric Brownian motion model to value structured products.
18. “Trade Credit and Cross-Country Predictable Firm Returns,” (with Tarun Ramadorai and Sumudu Watugala) Journal of Financial Economics 115, 592-613, 2015. Recipient of the 2012/2013 Inquire Third Prize at the Autumn Seminar in Istanbul.
Shows that international costumer-producer linkages lead to cross-return predictability especially when firms have high trade credit.
17. “The Marketability Discount of Controlling Blocks of Shares,” (with Enrique Schroth) June 2014. KPMG Global Valuation Institute (white paper series). KPMG GVI web site.
Managerial version of “The Value of Control and the Costs of Illiquidity.”
16. “Advance Information and Asset Prices,” (with Jianjun Miao) Journal of Economic Theory 149, 236-275, 2014.
Momentum in stock returns arises when information about future earnings drives both stock returns and liquidity trades by some investors.
15. “CEO Power, Compensation, and Governance,” (with Jianjun Miao) Annals of Economics and Finance 14, 417-452, 2013.
Studies the agency problem that arises when CEOs are the main promoters of governance mechanisms.
14. “Skewness in Stock Returns: Reconciling the Evidence on Firm versus Aggregate Returns,” Review of Financial Studies 25, 1630-1673, 2012. Online appendix with proof that firm returns are positively skewed.
Proposes a theory for why firm stock returns are positively skewed and aggregate stock returns are negatively skewed based on the properties of firm announcement events.
13. “Quantifying private benefits of control from a structural model of block trades,” (with Enrique Schroth) Journal of Financial Economics 96, 33-55, 2010.
Presents the first estimates of private benefits of control and associated deadweight losses.
12. “Comment on: Optimal taxation in the presence of bailouts,” Journal of Monetary Economics 57, 117-119, 2010.
11. “Global Private Information in International Equity Markets,” (with Greg Bauer and Martin Schneider) Journal of Financial Economics 94, 18-46, 2009.
First paper documenting a global return chasing pattern in stock returns by US investors and presents theory that rationalizes this and other properties of international equity flows and returns.
10. “Economic News and International Stock Market Co-Movement,” (with Clara Vega) Review of Finance 13, 401-465, 2009 (lead article).
Documents co-movement across markets based on economic fundamentals.
9. “Marketwide Private Information in Stocks: Forecasting Currency Returns,” (with Eva de Francisco and Luis Marques) The Journal of Finance 63, 2297-2343, 2008.
Documents a component of equity order flow that is due to marketwide private information.
8. “Agency Conflicts, Investment, and Asset Pricing,” (with Neng Wang) The Journal of Finance 63, 1-40, 2008 (lead article). Smith Breeden Distinguished Paper Award for 2008.
Models the investment and asset pricing consequences of having controlling shareholders.
7. “The Forward Premium Puzzle in a Model of Imperfect Information: Theory and Evidence” Economics Letters 99, 461-464, 2008.
Shows that time fixed-effects can explain the forward premium anomaly and provides a rationale for the fixed-effects.
6. “International Equity Flows and Returns: A Quantitative Equilibrium Approach”, (with Greg Bauer and Martin Schneider) The Review of Economic Studies 74, 1-30, 2007. Appendix to “International Equity Flows and Returns” here.
First calibrated model explaining international portfolio allocation and returns.
5. “Optimal Currency Hedging”, Global Finance Journal 18, 16-33, 2007.
Proves that forward contracts are better hedges of downside risk than option contracts when exposure is certain.
4. “World Market Integration Through the Lens of Foreign Direct Investors,” (with Norman Loayza and Luis Servén) Journal of International Economics 66, 267-295, 2005 (lead article).
First paper to document globalization trends using foreign direct investment flows.
3. “Optimal Lending Contracts and Firm Dynamics”, (with Hugo Hopenhayn) The Review of Economic Studies 71, 285-315, 2004.
Models investment and dividend policies in the presence of endogenous financial frictions.
2. “The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment,” Journal of International Economics 61, 353-383, 2003.
Paper presents new evidence that foreign direct investment is linked to a country's degree of financial constraints and explains why foreign direct investment is less volatile than other flows.
1. “On the Dynamics of Trade Reform,” (with Sergio Rebelo) Journal of International Economics 51, 21-47, 2000.
Models the implication of fixed costs in delaying the effects of trade reforms.,Volume 32, Issue 11, November 2019, Pages 4304–4342.