Research
Published Papers:
1. The Information Content of Insider Sudden Silence (with Weikai Li)
Journal of Financial and Quantitative Analysis, 2019
What is it about? When an insider who trades own-company stock routinely in the same calendar month each year suddenly stops doing so, does his silence signal forthcoming news? We show that such insider silence predicts firm returns and fundamentals (e.g., ROA, cash flows, and analyst forecast revisions) just as well. A long-short strategy that exploits insiders' strategic silence behavior generates abnormal returns of 6% to 10% annually.
2. The Effect of a Government Reference Bond on Corporate Borrowing Costs: Evidence from a Natural Experiment (with Mark J. Flannery and Baolian Wang)
Management Science, 2022
What is it about? We study the special case of China’s 2017 issuance of two sovereign bonds denominated in U.S. dollars (USD). We find that USD-denominated Chinese corporate bonds experienced a decline in yield spreads, bid-ask spreads, and price volatility around the time of this sovereign issues’ announcement. The yield spread changes are particularly large for corporate bonds with maturities similar to those of the USD sovereigns. We conclude that these new bonds serve as useful reference instruments, helping investors to price and hedge the risks impounded in Chinese corporate bonds.
3. FinTech Platforms and Mutual Fund Distribution (with Xiaomeng Lu and Jun Pan)
Management Science, 2024
What is it about? The emergence of FinTech platforms in intermediating financial products has been a new and exciting development. In China, FinTech platforms are allowed to distribute mutual funds since 2012, and have quickly grown into a formidable presence. In this paper, we utilize the staggered entrance of mutual funds onto the platforms to identify the casual effect of FinTech platforms on the behaviors of fund investors, fund managers, and fund families. We also provide direct evidence using proprietary data from a top FinTech platform in China.
Working Papers:
1.Inflation Forecasting from Cross-Sectional Stocks (with Jun Pan and Shiwen Tian)
What is it about? This paper examines the inflation forecastability of cross-sectional stocks. To differentiate the cross-sectional inflation exposures, we make the important observation that cross-sectional stock returns exhibit persistent sensitivity to headline inflation shocks during the calendar month of CPI, and to core inflation news on CPI announcement days. Examining the relative pricing between stocks with high- and low-inflation exposures, captured either by the headline- or core-focused inflation beta, we find active price discovery on inflation and its core component in cross-sectional stocks. The core-focused forecasting portfolio emerges as a unique and unparalleled predictor for core inflation, especially during the inflation surge of 2021 and 1973, when its predictive power and economic significance increase dramatically. Moreover, our stock-based predictors can uniquely forecast the foresting errors made by economists, especially during 2021-22, and its predictability is especially strong under Fed’s QE and when the Fed is behind-the-curve in fighting inflation.
2. Financial Inclusion via FinTech: From Digital Payments to Platform Investments (with Xiaomeng Lu and Jun Pan) R&R
What is it about? We study household finance in the age of FinTech, where digital payments are integrated with various financial services through all-in-one super-apps. We hypothesize that increased FinTech adoption via digital payments can help break down households’ participation barriers, particularly the psychological ones, ultimately leading to higher participation in the financial market. Taking advantage of an individual-level FinTech dataset, we find that higher FinTech adoption, both at the individual-level and the county-level instrumented by distance-from-Hangzhou, results in higher participation and more risk-taking in mutual-fund investments.
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3. Financial Intermediaries and Contagion in Market Efficiency: The Case of ETFs (with Weikai Li, Jiang Luo, and Avanidhar Subrahmanyam) R&R
What is it about? Capital constraints of financial intermediaries can affect liquidity provision. We investigate whether these constraints spillover and consequently cause contagion in the degree of market efficiency across assets managed by a common intermediary. We provide evidence of strong comovement in pricing gaps between ETFs and their constituents for ETFs served by the same lead market maker (LMM).
4. What Can Macro-Active Bond Funds Tell Us About Monetary Policy Changes? (with Jun Pan and Shiwen Tian)
What is it about? We examine the anticipation of monetary policy changes through the angle of actively managed government bond funds. Consistent with their ability to forecast monetary policy decisions, we find significant and persistent outperformance by macro-active government bond funds on pre-scheduled FOMC announcement days. Moreover, the pre-FOMC changes in their portfolio duration can predict the post-FOMC monetary policy shocks. We also document incidents when fund managers strongly disagree with FOMC decisions and incur large FOMC-day losses. Interestingly, such disparities reflect positively on fund mangers’ ability to predict future macro conditions. Consistently, we find that monetary policy shocks can predict macro fundamentals only when the fund managers and the Fed are in agreement. To the extent that there is a Fed information effect, it disappears when the macro-active fund managers disagree with the Fed.
5. Debt Maturity Structure and Corporate Investment (with Kewei Hou and Thien Tung Nguyen)
What is it about? Firms with longer debt maturity structure also invest more. This result is stronger for firms with high leverage, profitability, and growth potential. We rationalize these results in a model where maturity structure is determined by the trade-off between the liquidity cost and the repayment flexibility of long-term debt. In our model, highly productive firms invest more and prefer to use long-term debt to free up funds for future investment. This mechanism is supported by the data. Our paper highlights the importance of debt maturity structure in understanding corporate investment decisions.
6. Freedom of Choice in Pension Plans: Evidence From a Quasi Natural Experiment
What is it about? Employee pension plans in most countries, including in the US, restrict participant choice to a pre-selected 'menu' of funds. Would investors be better off if they are allowed to choose funds outside such a limited menu? This paper exploits a unique opportunity to study this counterfactual, using the launch of the Hong Kong Employee Choice Arrangement (ECA) in November 2012. I find that funds charge lower fees after the enforcement of ECA. Meantime, they adopt a less active investing strategy and gross return deteriorates. Consistent with funds' strategy to compete on price, flow exhibits stronger sensitiveness to fee than activeness. The findings show that freedom of choice affects investors' wealth indirectly through the endogenous response of funds, not directly through investors' capital allocation decisions.
7. Do Foreign Institutional Investors Deter Insider Trading? (with Weikai Li and Qifei Zhu)
What is it about? Do foreign institutional investors have a disciplinary effect on opportunistic insider trading? Using a novel global insider trading data set containing 35,557 firms from 26 countries over the period 2000-2015, we find that greater foreign institutional ownership significantly reduces the profitability of insider trading, above and beyond the effect of domestic institutional ownership. The impact of foreign investors is stronger in countries with weak insider trading regulations and poor institutional environments, and operates mainly through the monitoring channel, rather than the channel of improved information environments.