Research

Research Interests

Social Networks, Insider Trading, M&As


Publications

Insider trading conveys insiders’ private information to outsiders. This private information potentially benefits rival firms, which may reduce the competitive advantage of the insiders’ firms. Using a composite proprietary cost measure, we find proprietary costs are negatively associated with insiders’ purchases, especially when their trades are more likely to be informative to rivals. Consistent with proprietary costs increasing the costs of insider purchases and, hence, the expected benefits required to trade, insiders earn significantly higher abnormal profits when proprietary costs are higher. Exploiting settings with exogenous and event-driven variation in proprietary costs, we find insiders significantly reduce their purchases when noncompete agreement enforceability is high and before new product launches. Moreover, firms with higher proprietary costs are more likely to impose window-based insider trading restrictions and insiders with greater equity holdings reduce their purchases more strongly in the presence of proprietary costs. Finally, we provide evidence of real effects of insider trading on rivals’ investment decisions. We find that investments are associated with insiders’ purchases at rival firms, and these associations are stronger when proprietary costs at rivals are higher. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information, and respond accordingly.


This paper identifies an externality of a firm’s unionization that affects the financing decisions of non-unionized firms within a local labor market. We find that non-unionized firms increase their leverage ratios and hold less cash reserves following a union victory at other firms. This “shadow union” effect manifests through the heightened threat of unionization following shadow union organizing. Specifically, the effect is more pronounced when the probability of unionization rises by a larger margin and non-union firms face higher union rents conditional on being unionized. The threat appears credible enough to shape corporate financing decisions: shadow unions raise employees’ wages and the likelihood of subsequent union victories in the local labor market. Additional results indicate that the shadow union effect is distinct from leverage-mimicking behavior. Overall, our findings suggest that shadow labor market institutions create a strategic incentive for non-unionized firms to adopt less conservative financial policies to combat the union threat.


This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.

 

Working Papers

Media:  The FinReg Blog of the Duke Financial Economics Center

Presentations:  AFA Annual Meeting, AAA Annual Meeting, MIT Asia Conference, XJTLU AI and Big Data in Accounting and Finance Research Conference, KAA International Conference, HARC, CAFM, City University of Hong Kong, Peking University HSBC Business School, Arizona State University, Korea University-KAIST Joint Workshop, Sogang University

This paper investigates whether employees in conjunction with their professional networks function as information intermediaries. Collectively, employees have access to value-relevant information that can be disseminated through both their direct and indirect professional contacts. We find that firms with more highly connected (executive and non-executive) employees have lower market reactions to earnings surprises. Using brokerage firm mergers, we provide evidence supporting a causal effect. Further analyses indicate that employees primarily disseminate information about positive earnings news and the firm-specific component of earnings news. Supporting employees’ role as information intermediaries, we find that the stock prices of more connected firms incorporate information about forthcoming earnings on a timelier basis throughout the quarter as well as exhibit lower post-earnings announcement drift. Overall, our results suggest that more connected firms have more efficient stock prices because employees, in conjunction with their professional networks, act as information intermediaries.


Grant: General Research Fund from the Research Grants Council of Hong Kong (Project No. 21502018)

Presentations:  WAPFIN@Stern, Kelley Junior Finance Conference, UA-ASU Junior Finance Conference, 3rd Future of Financial Information Conference, FIRS, NFA, MFA, CICF, Boca Corporate Finance and Governance Conference, Society of Labor Economists annual meeting, KIF-KAEA-KAFA Conference, Hawaii Accounting Research Conference,  FMA Napa/Sonoma Conference, Business Identity and Networks (BINS) Conference, AAA Annual Meeting, AFA Annual Meeting,  Arizona State University, Nanyang Technological University, Peking University HSBC Business School, Sungkyunkwan University, Bilkent University, Toulouse School of Economics

We show that the social capital embedded in employees’ networks contributes to firm value and provide evidence on the mechanisms. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection is a more valued contact. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being valued by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors.


Media:  Columbia Law School Blue Sky Blog

Presentations:  AAA annual meeting, FARS Midyear Meeting, Korean Accounting Association (KAA) Annual Global Meeting, Arizona State University, Korea Advanced Institute of Science and Technology (KAIST)

This study explores an interesting phenomenon in which some acquirers buy and own targets for a relatively short period of time and then “flip” or resell these targets to other companies for profit. We show that acquisition flippers engage in earnings management to improve the appeal of flipped targets. In particular, subsequent acquirers of flipped targets are more likely to restate earnings downward post-acquisition than acquirers of non-flipped targets. Additional analyses show that acquiring flipped targets is detrimental to subsequent acquirers, as the acquirers experience larger declines in operating performance, have a higher likelihood of goodwill impairment, and are less likely to acquire flipped targets in the future than acquirers of non-flipped targets. Cross-sectional tests reveal more (less) pronounced effects among targets flipped by serial flippers and professional investors (among subsequent acquirers with high-quality M&A advisors).


Best Paper Award: 2017 Auckland Finance Meeting

Presentations: NFA, FMA, Auckland Finance Meeting, CityU-NTU-SHUFE Joint Accounting Symposium, EFMA, Arizona State University

We show that serial acquirers are likely to repeat (avoid) strategies that produced good (bad) outcomes in the past. Serial acquirers with positive (negative) return experiences are more likely to subsequently initiate value-destroying (value-enhancing) mergers, as shown by announcement returns and post-merger operating performance. This behavior is consistent with reinforcement learning heuristics and cannot be explained by rational learning or managerial self-attribution bias. We also discover that, following successful acquisitions, higher institutional ownership mitigates excessive acquisitiveness of serial acquirers; after bad outcomes, financial expertise on corporate boards helps identify value-enhancing deals.