Research

Publications


Abstract: Motivated by the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the effects of capital income tax cuts are investigated in an economy with heterogeneous households and a representative, mature firm. Dividend tax cuts, contrary to capital gains tax cuts, lead to a decrease in investment and capital. This is because they increase the market value of existing capital and households require a higher return to hold this additional wealth. In line with empirical evidence, the model predicts substantial increases in dividends and stock prices. Overall, the tax cuts lead to a welfare reduction equivalent to a consumption drop of 0.5%.


Abstract:  We study the effect of corporate board independence on firm performance under different product market conditions. Using customer-supplier links to identify exogenous downstream demand shocks, we find that firm performance is positively associated with board independence when the firm-specific product demand drops. The results are stronger for smaller and firms with high growth and more volatile stock returns. The findings prevail if the firm faces a medium level of product market competition or a medium level of downstream demand shock. We provide suggestive evidence for the board’s monitoring function driving the effectiveness of board independence in bad times of idiosyncratic risks, rather than its advisory function.


Abstract: I develop a continuous-time model to examine how the interaction between competition and financial constraints affects firms’research and development (R&D) strategies.The model integrates two key characteristics of R&D investment: accelerability (i.e., higher R&D intensity leads to faster discovery) and scalability (i.e., higher R&D intensity leads to higher project payoff). I find that firms react strategically to their rivals’financial constraints when making investment decisions in a duopoly R&D race. In particular, firms respond positively to the R&D intensity of an unconstrained rival, while they respond in a hump-shaped fashion to the R&D intensity of a constrained rival. As a result, a constrained firm can pre-empt an unconstrained competitor in market equilibrium. Accelerability is necessary for such pre-emption to occur, and scalability generally reduces its likelihood. Comparison with a monopoly benchmark shows that the economic mechanism differs from over-investment induced by financial constraints alone. The model also generates new implications regarding how project characteristics and cashflow risks impact R&D decisions.


Working Papers


Abstract: This study examines whether merger announcements and subsequent purchase price allocations (PPAs) transfer value-relevant information about the target’s peers. We find that analysts following peer firms revise their earnings estimates upward after acquisition announcements when there is an accompanying conference call. The magnitude of analyst revision is more pronounced when the ex-ante information asymmetry of target peer firms is higher. To provide more direct evidence on the information content of the merger announcements, we further analyze the textual characteristics of conference call transcripts and find that analysts revisions after acquisition announcements (1) increase with the amount of new information released during the merger announcement, (2) increase with the amount of product-, value-, or growth-related information, and (3) decrease with the amount of uncertainty-related information released in conference calls. We also find greater analyst revisions when PPAs report more write-ups and less goodwill. These results show that disclosures related to mergers and acquisitions reveal value-relevant information about targets’ peer firms.


Abstract: We use a real options model to study the dynamic strategic interactions of an alleged infringing firm (the challenger) and a patent-owning firm (the incumbent) when they face a patent dispute. We find that a close willingness to continue financing litigation by the two firms facilitates settlement. As a result, features of the product market and legal rules together determine the settlement likelihood, as well as the terms and timing of settlement. In particular, the challenger's profit gain relative to the incumbent's loss of profit due to the alleged infringement (the "gain-to-loss ratio") and their relative saving of litigation cost by settling (the "relative-cost-saving'') determine the outcome of patent disputes. In addition, we argue the English rule of loser pays shifts the effective bargaining power from the incumbent to the challenger in a patent dispute, compared to the American rule of each party pays. Such a shift offers an explanation for the observed differences in dispute resolution across countries. Our model also generates new testable implications regarding litigation rate, settlement rate, and terms from a finance perspective.


Abstract: We apply a regression discontinuity design to investigate the causal impact of a firm's environmental and social (ES) risk on its peer firms' bank loan cost. We find that the passage of ES-related proposals by a narrow margin leads to an increase in the all-in-drawn spread on corporate bank loans for peer firms in the next year. This spillover effect of raising the bank loan cost is more pronounced for closer peers in terms of bank lender similarity, smaller and more financially constrained peers, and peers operating in a more competitive industry. Furthermore, we show that the spillover is driven by loans issued or led by banks that do not have positive environmental and social scores, and the spillover occurs when there is a high degree of tone misalignment between the proponent's statement and the opponent's statement associated with the proposal. Such evidence suggests banks' information transmission works as the economic mechanism for the spillover. Our findings imply that banks learn about corporate ES risks through their loan relations and reprice the peer firms' corporate loans accordingly.


Abstract: We use a multi-stage real options model of duopoly to study the value of patents for innovative firms. We view patents as a portfolio of options, among which the most important for a producing firm is the option to litigate and the option to offer a settlement. This model has the potential to offer a new understanding of the incentive for corporate innovation in the form of patenting, and the entry incentive to a market with imperfect patent protection.