Mehmet Ihsan Canayaz

Assistant Professor of Finance
Smeal College of Business
Pennsylvania State University

Please find my CV here.
Please find my GitHub page here.

Academic Publications

[1] Choose Your Battles Wisely: The Consequences of Protesting Government Procurement Contracts, Management Science. Forthcoming.
(with Jess Cornaggia and Kimberly Cornaggia)
Replication Files: https://github.com/mehmetcanayaz/bidprotests

[2] Country Reputation and Corporate Activity, Management Science. 2023;  70(3), 1483-1504.
(with Alper Darendeli)
Replication Files: https://github.com/mehmetcanayaz/countryreputation

[3] Fake Products, Real Effects: Evidence from Special 301 Actions, Journal of Financial and Quantitative Analysis. 2023; 58(5):2024-2063.
(with Umit Gurun)

Working Papers

China's Belt and Road Initiative (BRI) aims to reshape the global economy by creating economic corridors that encompass two-thirds of the world's population and 40% of the global GDP. This paper uses the inauguration of a railway tunnel between Europe and Asia as a quasi-natural experiment to investigate the financial implications of the BRI for countries along its economic corridors. It demonstrates that countries gaining access to the BRI's main freight corridor along the Ancient Silk Road issue significant amounts of high-yield debt instead of utilizing Chinese loans, which are known to result in asset seizures if not repaid. Surprisingly, the borrowed funds are used for collective consumption instead of investments needed to address freight infrastructure deficits and achieve the BRI's promised efficiency gains. Furthermore, the supply of BRI-induced public debt is primarily absorbed within domestic markets, diverting capital away from local businesses. The paper provides evidence on economic mechanisms based on political alliances with China, exposure to China's trade policy uncertainty, and topographic fit for freight infrastructure based on Orient Express routes from the early 1900s. Overall, this paper presents the first analysis of the BRI's financial implications, revealing how the initiative's potential to boost global trade and income is undermined by the financial decisions made by corridor countries.
Presentations: Fifth Conference on Law and Macroeconomics, 2022 New Zealand Finance Meeting,  CMU-PSU-Pitt Finance Conference, MFA 2023 Annual Meeting, 2023 FMA Annual Meeting, Federal Reserve Board, Center for Global Business Studies.
The adoption and commercialization of new technologies rely heavily on universally accepted principles, known as standards. Surprisingly, the role of standards in shaping business outcomes is largely unexplored. This paper provides a first examination of how  standardization of artificial intelligence (AI) influences business outcomes. By leveraging hand-collected data on global AI standards, we provide insights into their creation, content, and shed light on the countries leading or lagging in global AI standardization efforts. Our findings reveal that establishing universal rules and guidelines for AI has a first order impact on corporate investment. Standardization of machine learning methods, programming languages, protocols for big data,  guidelines for data interchange, and interoperability of industrial data fuel capital and R&D investments. Conversely, frameworks for ethical, societal, and privacy considerations in AI have distortionary effects. Overall, AI standards have a positive 'ripple effect' on firm value, gradually amplifying as the standards mature and their impact on firms deepens. 
Presentations: 2024 Next Generation of Antitrust, Data Privacy & Data Protection Scholars Conference, Asian Bureau of Finance and Economic Research 11th Annual Conference, 2024 Columbia & RFS AI in Finance Conference.

When Protectionism
Kills Talent

with Isil Erel and Umit Gurun

We examine the repercussions of protectionist policies implemented in the United States since 2018 on the composition of workforce and career choices within the semiconductor industry. Using a unique dataset of 1.6 million active engineers and scientists working in the chip manufacturing industry worldwide, we find that the shift towards protectionism, aimed at reviving domestic manufacturing and employment, paradoxically resulted in a significant drop in hiring domestic talent. The effect is stronger for entry-level and junior positions, indicating a disproportionate impact on newcomers to the workforce. Additionally, we trace the trajectories of undergraduate and graduate cohorts possessing chip-related skills over time, and document significant shifts away from the chip industry. Our findings highlight the challenges in achieving the goals of initiatives like the 2022 CHIPS and Science Act, emphasizing the need to address talent shortages to sustain the semiconductor industry's intended growth. 
Presentations:  2024 CSEF-RCFS Conference on Finance, Labor and Inequality*.* denotes presentation by co-author
Awards: Best Paper Award at 2024 CSEF-RCFS Conference on Finance, Labor and Inequality.Media: VoxEU, NPR’s Marketplace, Naked Capitalism.

An Anatomy of Cryptocurrency Sentiment 

with Charles Cao, Giang Nguyen, and Qiang Wang

We investigate the impact of market sentiment on cryptocurrency returns. To accomplish this, we use a novel dataset that captures a multitude of attitudes, moods, and emotions extracted from a vast amount of news and social media content. Our findings indicate that social media sentiment significantly predicts crypto returns, while sentiment from news media does not. Additionally, we observe that fundamental events play a role in shaping sentiment, but market exuberance---sentiment unrelated to fundamental events---is a strong and robust predictor of returns. Furthermore, we find that market exuberance is positively related to momentum return but does not positively predict volatility. This suggests that sentiment influences returns through price perception and demand shocks rather than the risk premium channel. Overall, our research highlights the importance of sentiment in understanding and predicting cryptocurrency market dynamics.

Presentations:  Penn State University*, CMU-PSU-Pitt Finance Conference*, 2023 Early Career Women in Finance Conference*, 2023 FMA Annual Meeting*, 2024 WFA Meeting.* denotes presentation by co-authorMedia: Les Affaires.

Start-Ups Judging Judges

with Matt Gustafson

We find that shifts toward more liberal (i.e., less pro-business) courts predict reductions in local small business activity. A one standard deviation increase in liberal ideology predicts a 1% reduction in firm count, relative to bordering counties in different federal court jurisdictions. This effect has doubled since 2000 and manifests primarily among young businesses. Consistent with a litigation risk mechanism, there is a simultaneous shift away from litigation-sensitive industries. In sum, we offer the first evidence that small business start-ups consider an area's litigation risk when deciding whether or where to operate.
Presentations: Iowa State University*, Third Annual Conference on Law and Macroeconomics, University of Miami*,  MFA 2021 Annual Meeting, University of Bath*, Vrije Universiteit Amsterdam, 2021 American Law and Economics Association (ALEA) Annual Meeting in Chicago, 2023 FMA Annual Meeting, 15th Florida State University Truist Beach Conference.* denotes presentation by co-author

Macro Sentiment
& Hedge Fund Returns 

with Mustafa Caglayan, Timothy T. Simin and Le Zhao

In heterogeneous agent models, systematic excess demand for risky assets, generated by sentiment, can lead to a sentiment risk premium for sophisticated arbitrageurs. Utilizing media-based sentiment on economic growth, inflation, unemployment, and sociopolitical conditions, we create a macro sentiment index (MSI) and show that hedge funds with negative exposure to MSI generate higher returns than funds with positive exposure to MSI. The predictive power of MSI betas remains after controlling for various hedge fund characteristics and other risk and uncertainty factors proven to impact hedge fund returns. The negative relation is most pronounced among directional and semi-directional hedge fund strategies and remains for up to four months. We show that a tradable version of the MSI meets the necessary criteria to be considered a state variable in the ICAPM for hedge funds and actively managed mutual funds but not for unmanaged passive industry portfolios or individual stocks. Overall, our results suggest that the expected returns of hedge fund portfolios and actively managed mutual fund portfolios reflect a sentiment risk premium. Presentations: 2022 FMA Annual Meeting in Atlanta*,  EFA 2024 Annual Meeting*.
* denotes presentation by co-author