My research centers on theoretical and empirical corporate finance, intersecting with innovation economics, industrial organization, corporate governance, and law and economics. I study
The impact of financial constraints, competition, and market dynamics on corporate innovation.
The spillover effects in M&A, especially related to disclosure on intangible assets, and in bank lending, with an emphasis on social and environmental risks.
Intellectual property (IP) strategies, such as commercialization, licensing, litigation, and acquisition.
" Accelerability vs. Scalability: R&D Investment under Financial Constraints and Competition", Management Science. Vol 69, Issue 7, July 2023, P 3759 - 4361. Link on SSRN. Link to the Online Appendix.
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.
"The Effect of Board Structure on Firm Performance - New Evidence From Product Market Conditions" (with Xiaoyuan Hu and Onur Tosun), European Journal of Finance, Vol 29, Issue 4, 2023, P 363 - 392. Link on SSRN
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.
"Dividends and Capital Gains Taxation under Incomplete Markets" (with Alexis Anagnostopoulos and Eva Carceles-Poveda), Journal of Monetary Economics, Vol 59, Issue 7, November 2012, P 599-611. Link on SSRN
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%.
"Commercialise or Sleep? Capturing Value from Patenting" (with Du Liu) - R&R at Research Policy
Abstract: This paper investigates how firms manage sleeping patents within patent thickets and their impact on patent disputes and competition. We explore how firms gain value from patents in scenarios involving patent disputes and competition in bargaining games. The model considers the entry of a firm with a sleeping patent, which can either commercialize the patent or sell it to a firm with disputed patents or an alleged infringer. The model shows that potential benefits from patent litigation drive firms to sell or acquire sleeping patents. Moreover, the relative win rate in patent litigation influences the choice of patent buyers and commercialization decisions. Holding sleeping patents promotes cooperative patent strategies and enhances innovation incentives. The research offers a comprehensive examination of companies' patent deployment, taking market dynamics into consideration, and provides policy insights for effective patent management.
"How Do Firms Resolve Patent Disputes? Insights from Competitive Dynamics and Market Uncertainty" (with Du Liu and A. Elizabeth Whalley) - - R&R, Journal of Corporate Finance
- Link to the paper (Previously circulated with the title "A Real Options Model of Patent Litigation")
Abstract: We develop a real options model to examine the determinants of patent dispute outcomes between two producing firms. By focusing on the dynamic strategic interactions between a patent-owning incumbent and an allegedly infringing challenger, we find that competitive pressure from new market entry plays a crucial role in determining whether firms settle their disputes, the timing of settlements, and the terms of any royalties. Greater competition, higher market volatility, and a larger divergence in the firms' willingness to continue paying litigation costs reduce the likelihood of settlement. Our model provides insights into litigation and settlement patterns and post-dispute market structures, illustrating how innovation-driven competition, market uncertainty, patent protection, and legal frameworks collectively shape the landscape of patent disputes.
"The Spillover of Corporate ES on Bank Loan Cost" (with Siti Farida and Biao Yang) - R&R at Management Science Link on SSRN, Slides
Best Paper Award (in banking) at the 2024 Sydney Banking and Financial Stability Conference
Abstract: We examine how corporate environmental and social (ES) risks influence the bank loan costs of peer firms. Utilizing a regression discontinuity approach based on shareholder votes on ES-related proposals in U.S. public companies from 2005 to 2021, we find that the approval of these proposals leads to an average 38 basis-point increase in peer firms' loan costs over the following year. This effect is more pronounced when the proposal is more salient for banks, and when peers have higher ex-ante ES risk and weaker bargaining power. Surprisingly, we find that the spillover is primarily driven by banks with less expertise or weaker ex-ante incentives to price ES risks. These findings suggest that corporate ES risks extend beyond individual firms and influence the loan costs of broader peer borrowers by shaping banks' loan pricing practices.
"The Spillover of Value Relevant Information about Target Peers During Acquisitions" (with Congcong Li and MaryJane Rabier) - R&R, Journal of Business Finance and Accounting, Link on SSRN
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) increase with the tone of the information released in conference calls. We also find greater analyst revisions when PPAs report more write-ups. These results show that disclosures related to mergers and acquisitions reveal value-relevant information about targets’ peer firms.
"Not just the option to exclude: Valuing patents as a portfolio of options" (with Du Liu and A. Elizabeth Whalley)
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.
(in preparation): "Finance, Innovation, and Growth"
Book Title “Economic Development and Growth – Foundations and Frontiers”, ISBN: 978-1-83634-436-0, ISSN: 2753-894X, Part of the Book Series "Business, Management and Economics".