Kelly Shue

Textbooks

Corporate Finance, 2025 Release with Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan, 2025 McGraw Hill

Research in Progress

AI Personality Extraction from Faces: Labor Market Implications, with Marius Guenzel, Shimon Kogan, and Marina Niessner

Abstract: Human capital---encompassing cognitive skills and personality traits---is critical for labor market success, yet the personality component remains difficult to measure at scale. Leveraging advances in artificial intelligence and comprehensive LinkedIn microdata, we extract the Big 5 personality traits from facial images of 96,000 MBA graduates, and demonstrate that this novel ``Photo Big 5'' predicts school rank, compensation, job seniority, industry choice, job transitions, and career advancement. Using administrative records from top-tier MBA programs, we find that the Photo Big 5 exhibits only modest correlations with cognitive measures like GPA and standardized test scores, yet offers comparable incremental predictive power for labor outcomes. Unlike traditional survey-based personality measures, which typically cover limited samples, the Photo Big Five is readily scalable and can broaden the scope of academic research. However, its use in labor market screening raises important ethical concerns regarding statistical discrimination and individual autonomy.

Categorical Thinking about Interest Rates, with Richard Townsend and Chen Wang

SFS Arthur Warga Award for Best Paper in Fixed Income 2025

Abstract: We document a widespread misconception that expected future movements in short-term interest rates predict corresponding future movements in long-term interest rates. In particular, people forecast similar shapes for the paths of long and short rates over the next four quarters. However, long rates should already incorporate public information about future short rates and do not positively comove with expected changes in short rates. We hypothesize that people group short- and long-term interest rates into the coarse category of ``interest rates,'' leading to overestimation of their comovement. We show that this categorical thinking persists even among professional forecasters and distorts the real behavior of borrowers and investors. Expectations of rising short rates drive households and firms to rush to lock in long-term debt before further increases in long rates, reducing the effectiveness of monetary policy. Investors sell long-term bonds because they anticipate future increases in long rates. The resulting increase in supply and decrease in demand for long-term debt cause long rates to overreact to changes in short rates, and can help explain the excess volatility puzzle in long rates.

Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms, with Samuel Hartzmark, R&R Journal of Finance

Summary: Yale Insights, Coverage: Freakonomics Radio, Bloomberg, Man Institute,  Financial Times
Q-Group Jack Treynor Prize 2023; Charles Brandes Prize 2023; International Centre for Pension Management Runner-Up Prize 2023; Driehaus Center 2nd Prize for Behavioral Finance Research, 2023

Abstract: We develop a new measure of impact elasticity, defined as a firm's change in environmental impact due to a change in its cost of capital. We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best. In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green. We further show that brown firms face very weak incentives to become more green. Due to a mistaken focus on percentage reductions in emissions, the sustainable investing movement primarily rewards green firms for economically trivial reductions in their already low levels of emissions. 

Noisy Experts? Discretion in Regulation, with Sumit Agarwal, Bernardo Cruz Morais, and Amit Seru

Reliance on human discretion is a pervasive feature of institutional design. Kahneman, Sibony, and Sunstein (2021) warn, however, that costly noise can arise in systems that rely on human discretion. We evaluate the consequences, determinants, and trade-offs associated with human discretion in high-stake regulatory rating decisions assessing bank safety and soundness. Using detailed data on the supervisory ratings of US banks spanning more than two decades, we find that professional bank examiners exercise significant personal discretion—their decisions deviate substantially from algorithmic benchmarks and can be predicted by examiner identities and past experiences, holding bank fundamentals constant. Exploiting the quasi-random assignment of examiners to banks, we find that human discretion has a large and persistent causal impact on future bank capitalization and supply of credit, leading to increased volatility and uncertainty in bank outcomes, and a conservative anticipatory response by banks. Disagreement in ratings across examiners can be attributed to high average weight (50%) assigned to subjective assessment of banks’ management quality, as well as heterogeneity in weights attached to more objective issues such as capital adequacy. Replacing human discretion with a simple algorithm leads to worse predictions of bank health, while moderate limits on discretion can translate to more informative and less noisy predictions.

Consistent Good News and Inconsistent Bad News, with Rick Harbaugh and John Maxwell

Abstract: Good news is more persuasive when it is more consistent, and bad news is less damaging when it is less consistent. We show when Bayesian updating supports this intuition so that a biased sender has “mean-variance news preferences” where more or less variance in the news helps the sender depending on whether the mean of the news exceeds expectations. We apply the result to selective news distortion of multiple projects by a manager interested in enhancing the perception of his skill. If news from the different projects is generally good, boosting relatively bad projects increases consistency across projects and provides a stronger signal that the manager is skilled. But if the news is generally bad, instead boosting relatively good projects reduces consistency and provides some hope that the manager is unlucky rather than incompetent. We test for evidence of such distortion by examining the consistency of reported segment earnings across different units in firms. As predicted by the model, managers appear to shift discretionary cost allocations to report more consistent earnings when overall earnings are above rather than below expectations. The mean-variance news preferences that we identify apply in a range of situations beyond our career concerns application, and differ from standard mean-variance preferences in that more variable news sometimes helps and better news sometimes hurts.

Whom Do Consumers Trust with Their Data? US Survey Evidence with Olivier Armantier, Sebastian Doerr, Jon Frost, and Andreas Fuster, Coverage: FT 

Publications

“Potential” and the Gender Promotion Gap, with Alan Benson and Danielle Li, forthcoming American Economic Review

Summary: Yale Insights, Coverage: BBC, MSNBC, Bizwomen, SHRM

Abstract: We show that the increasingly popular use of subjective assessments of employee "potential" contributes to gender gaps in promotion and pay.  Using data on management-track employees from a large retail chain, we find that women receive substantially lower potential ratings despite receiving higher job performance ratings. Differences in potential ratings account for 30-50% of the gender promotion gap. Women's lower potential ratings do not appear to be based on accurate forecasts of future performance: women outperform male colleagues with the same potential ratings in terms of their future performance ratings, both on average and conditional on promotion.  Yet, even in these cases, women's subsequent potential ratings remain low, suggesting that firms persistently underestimate the potential of female employees.

The Drivers and Implications of Retail Margin Trading, with Jiangze Bian, Zhi Da, Zhiguo He, Dong Lou, and Hao Zhou, forthcoming Journal of Finance

This subsumes an older working paper, "Leverage-Induced Fire Sales and Stock Market Crashes"

Summary: Yale Insights, Coverage: Bloomberg

Abstract: Using granular data covering both regulated (brokerage-financed) and unregulated (shadow-financed) margin accounts in China, we provide novel evidence on retail investors’ margin trading behavior and its price implications. First, we show that retail investors’ decisions to lever up in stock trading despite the hefty borrowing cost is related to their lottery preferences. We then show that margin borrowing affects investors’ trading behavior: investors are more likely to liquidate their holdings as they inch closer to margin calls. Third, we show that margin-induced trading aggregates to affect asset prices and contributes to shock spillovers across stocks (for example, from lottery stocks to non-lottery stocks).

Do Managers Do Good With Other Peoples' Money?, with Ing-Haw Cheng and Harrison Hong, Review of Corporate Finance Studies, 2023, 12(3): 443-487.

Summary: Society for Financial Studies, HLS Forum

Abstract: We show that spending on corporate social responsibility (CSR) is due partly to agency problems. Using the 2003 Dividend Tax Cut, which increased after-tax insider ownership, we find that firms with moderate levels of insider ownership cut CSR by more than firms with low levels (where the tax cut has no effect) and high levels (where agency is less of an issue). Moderate insider-ownership firms experienced larger increases in valuation. Similar insights hold in a regression-discontinuity design of close votes on shareholder-governance proposals. Individuals did not offset CSR cuts with private giving, suggesting a trade-off between governance and public goods.

The Gender Gap in Housing Returns, with Paul Goldsmith-Pinkham, Journal of Finance, 2023, 78(2): 1097-1145.

Wharton School - WRDS award for the Best Empirical Finance Paper, WFA 2020

Coverage: The Economist, New York Times, NPR, CNBC, Barron's, Bizwomen, RISMedia, Domain, TheRealDeal, MReport, REALTOR, Register, Smart Cities Dive, Culturemap, Washington Post

Abstract: Using detailed transactions data across the US, we find that single women earn 1.5 percentage points lower annualized returns on housing relative to single men. 45% of the gap is explained by transaction timing and location. The remaining gap arises from a 2% gender difference in execution prices at purchase and sale. Consistent with a negotiation channel, women list for less and experience worse negotiated discounts. The gender gap also shrinks in tight markets, where negotiation is replaced by quasi-auctions. Overall, gender differences in housing explain up to 30% of the gender gap in wealth accumulation for the median household.

Can the Market Multiply and Divide? Non-Proportional Thinking in Financial Markets, with Richard Townsend, Journal of Finance, 2021, 76(5): 2307-2357.

First Prize AQR Insight Awards, 2019

Coverage: Quartz, Barron's, The Irish Times, Charles Schwab Choiceology

Abstract: We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower-priced stocks. Consistent with such non-proportional thinking, we find a doubling in price is associated with a 20-30% decline in volatility and beta (controlling for size and liquidity). To identify a causal effect of price, we show that volatility increases sharply following stock splits and drops following reverse splits. Lower-priced stocks also respond more strongly to firm-specific news of the same magnitude. Non-proportional thinking helps to explain a variety of asset pricing patterns such as the size-volatility/beta relation, the leverage-effect puzzle, and return drift and reversals.

Promotions and the Peter Principle, with Alan Benson and Danielle Li, Quarterly Journal of Economics, 2019, 134(4): 2085-2134.

Best Paper Prize, 2017 FIRCG Conference

Summary: Econimate, Yale Insights, Coverage: BBC Business Daily, BBC Worklife, CFO, Harvard Business Review, Quartz, Time, The Economist, Financial Times, Forbes, New York Times, NPR Hidden Brain, The Times (UK), Wall Street Journal (1), Wall Street Journal (2), KUOW, Fee.org

Abstract: The best worker is not always the best candidate for manager.  In these cases, do firms promote the best potential manager or the best worker in her current job? Using microdata on the performance of sales workers at 214 firms, we find evidence consistent with the ``Peter Principle,'' which predicts that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance.  We estimate that the costs of promoting workers with lower managerial potential are high, suggesting either that firms are making inefficient promotion decisions or that  the benefits of promotion-based incentives are great enough to justify the costs of managerial mismatch.

A Tough Act to Follow: Contrast Effects in Financial Markets, with Samuel Hartzmark, Journal of Finance, 2018, 73(4): 1567-1613.

First Prize AQR Insight Awards, 2016

Finalist Hillcrest Behavioral Finance Award 2015

Exeter Prize, best paper in Experimental Economics, and Behavioral Economics and Decision Theory 2019

Coverage: Alpha Architect, AQR, Freakonomics Radio

Abstract: A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements. 

How Do Quasi-Random Option Grants Affect CEO Risk-Taking?, with Richard Townsend, Journal of Finance, 2017, 72(6): 2551-2588.

(Earlier version: "Swinging for the Fences: Executive Reactions to Quasi-Random Option Grants")

Abstract: We examine how an increase in stock option grants affects CEO risk-taking. The overall net effect of option grants is theoretically ambiguous for risk-averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multi-year compensation plans, which generate two distinct types of variation in the timing of when large increases in new at-the-money options are granted. We find that, given average grant levels during our sample period, a 10 percent increase in new options granted leads to a 2.8–4.2 percent increase in equity volatility. This increase in risk is driven largely by increased leverage.

Growth through Rigidity: An Explanation of the Rise in CEO Pay, with Richard Townsend, (Lead Article) Journal of Financial Economics, 2017, 123(1): 1-21. Online Appendix

Journal of Financial Economics Jensen Prize 2017 for best paper in the areas of corporate finance and organizations, second place 

Coverage: San Antonio Express News, Bloomberg, MarketWatch, PBS, CNN Money, ASU

Abstract: The dramatic rise in CEO compensation during the 1990s and early 2000s is a long-standing puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other forms of CEO compensation did not adjust to offset the dramatic growth in the value of option pay. Number-rigidity in options can also explain the increased dispersion in pay, the difference in growth between the US and other countries, and the increased correlation between pay and firm-specific equity returns. We present evidence that number-rigidity arose from a lack of sophistication about option valuation that is akin to money illusion. We show that regulatory changes requiring transparent expensing of the grant-date value of options led to a decline in number-rigidity and helps explain why executive pay increased less with equity returns during the housing boom in the mid-2000s.

Decision-Making under the Gambler’s Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires, with Daniel Chen and Tobias Moskowitz, Quarterly Journal of Economics, 2016, 131(3): 1181-1241. Online Appendix

Best Paper Prize 2015 BYU Red Rock Conference, Finalist 2017 Exeter Prize

Coverage: US News, BigThink, Yahoo, Bloomberg, NPR, PBS, Washington Post, CBS, Freakonomics Radio, BBC, Wired

Abstract: We find consistent evidence of negative autocorrelation in decision-making that is unrelated to the merits of the cases considered in three separate high-stakes field settings: refugee asylum court decisions, loan application reviews, and major league baseball umpire pitch calls. The evidence is most consistent with the law of small numbers and the gambler’s fallacy – people underestimating the likelihood of sequential streaks occurring by chance – leading to negatively autocorrelated decisions that result in errors. The negative autocorrelation is stronger among more moderate and less experienced decision-makers, following longer streaks of decisions in one direction, when the current and previous cases share similar characteristics or occur close in time, and when decision-makers face weaker incentives for accuracy. Other explanations for negatively autocorrelated decisions such as quotas, learning, or preferences to treat all parties fairly, are less consistent with the evidence, though we cannot completely rule out sequential contrast effects as an alternative explanation.

Screening Peers Softly: Inferring the Quality of Small Borrowers, with Rajkamal Iyer, Asim Ijaz Khwaja, and Erzo F.P. Luttmer, Management Science, 2015, 62(6): 1554-1577.

Abstract: This paper examines the performance of new online lending markets that rely on non-expert individuals to screen their peers’ creditworthiness. We find that these peer lenders predict an individual’s likelihood of defaulting on a loan with 45% greater accuracy than the borrower’s exact credit score (unobserved by the lenders). Moreover, peer lenders achieve 87% of the predictive power of an econometrician who observes all standard financial information about borrowers. Screening through soft or nonstandard information is relatively more important when evaluating lower quality borrowers. Our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency. 

No News is News: Do Markets Underreact to Nothing?, with Stefano Giglio, Review of Financial Studies, 2014, 27(12): 3389-3440.

Lead Article and Editor's Choice Article; UBS Global Asset Management Award for Research in Investments, FRA 2012

Coverage: Bloomberg, RFS Blog

Abstract: As illustrated in the tale of “the dog that did not bark,” the absence of news and the passage of time often contain information. We test whether markets fully incorporate this information using the empirical context of mergers. During the year after merger announcement, the passage of time is informative about the probability that the merger will ultimately complete. We show that the variation in hazard rates of completion after announcement strongly predicts returns. This pattern is consistent with a behavioral model of underreaction to the passage of time and cannot be explained by changes in risk or frictions.

Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers, Review of Financial Studies, 2013, 26(6): 1401-1442. Online Appendix

Wharton School-WRDS Award for the Best Empirical Finance Paper, WFA 2012

Coverage: Wall Street Journal, Inequality.org

Abstract: Using the historical random assignment of MBA students to sections at Harvard Business School, I explore how executive peer networks can affect managerial decision-making and firm policies. Within an HBS class, firm outcomes are significantly more similar among graduates from the same section than among graduates from different sections, with the strongest effects in executive compensation and acquisitions strategy. Both compensation and acquisitions propensities have elasticities of 10-20% with respect to the mean characteristics of section peers. I demonstrate the important role of ongoing social interactions by showing that peer effects are more than twice as strong in the year immediately following staggered alumni reunions. A variety of other tests suggest that peer influence can operate through direct reactions to peer outcomes in ways that do not necessarily contribute to firm productivity.

Who Misvotes? The Effect of Differential Cognition Costs on Election Outcomes, with Erzo F.P. Luttmer, American Economic Journal: Economic Policy, 2009, 1(1): 229-257.

Abstract: If voters have negligible cognition costs, ballot layout should not affect election outcomes. We explore deviations from rational voting using quasi-random variation in candidate name placement on ballots from the 2003 California recall election. We find that minor candidates’ vote shares almost double when their names are adjacent to the names of major candidates. All else equal, vote share gains are larger in precincts with higher percentages of poorly educated, poor, or third-party voters. A major candidate that disproportionally attracts voters from such precincts faces an electoral disadvantage. We also explore which voting technology platforms and brands mitigate misvoting.