Publications
Trefftzs Award for the best student paper, WFA.
SAC Capital for the PhD Candidate Award for Outstanding Research, WFA.
Research Output Prize, HKU.
A standard real options model predicts a strong positive interaction effect between research and development (R&D) investment and product market competition. R&D-intensive firms tend to be riskier and earn higher expected returns than R&D-weak firms, particularly in competitive industries. Also, firms in competitive industries earn higher expected returns than firms in concentrated industries, especially among R&D-intensive firms. Intuitively, R&D projects are more likely to fail in the presence of more competition because rival firms could win the innovation race. Empirical evidence largely supports the model׳s predictions.
Investment-based asset pricing research highlights the role of irreversibility as a determinant of firms’ risk and expected return. In a neoclassical model of a firm with costly scale adjustment options, we show that the effect of scale flexibility (i.e., contraction and expansion options) is to determine the relation between risk and operating leverage: risk increases with operating leverage for inflexible firms, but decreases for flexible firms. Guided by theory, we construct easily reproducible proxies for inflexibility and operating leverage. Empirical tests provide support for the predicted interaction of these characteristics in stock returns and risk.
This paper examines how accounting transparency and corporate governance interact. Firms with better governance are associated with higher abnormal returns, but even more so if they also have higher transparency. The effect is largely monotonic — it is small and insignificant for opaque firms and large and significant for transparent firms — and survives numerous robustness tests. We find supportive evidence for firm value and operating performance. Hence governance and transparency are complements. This complementarity effect is consistent with the view that more transparent firms are more likely takeover targets, because acquirers can bid more effectively and identify synergies more precisely.
We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in the affected state. This effect is more pronounced when human capital is more important to startups, VC investment is more uncertain, and VCs’ monitoring cost is higher. Employees’ reduced innovation productivity is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups and syndicate with other VCs more. Our paper sheds new light on the real effects of labor market frictions.
We establish that stock liquidity is conducive to less corporate diversification. Two potential channels are identified: the financial constraint channel and the corporate governance channel. Specifically, we find that the negative effect of liquidity on diversification is stronger among financially-constrained firms, since higher liquidity helps firms improve external capital markets and thus reduces the need to broaden the internal capital markets through diversification. Moreover, we find that the effect of liquidity on diversification is strengthened among firms with severe information asymmetry, since enhanced price informativeness caused by increased liquidity promotes market monitoring on managers' decisions. Meanwhile, we rule out the alternative explanation that liquidity deters diversification by facilitating blockholder control. Our results suggest that stock liquidity plays a positive role in corporate decision making.
Firms' inflexibility in adjusting output prices to economic shocks exacerbates information asymmetry about firms' profits, but public information on firms' cost structure mitigates this problem. We construct a novel form of public information from economic statistics disclosed by the government and find such public information significantly reduces inflexible-price firms' bid-ask spread, the probability of informed trading, and analyst forecast dispersion, but these results do not hold for flexible-price firms. Security analysts inquire about more cost-related information during conference calls of inflexible-price firms, but such a phenomenon is less observed if the firm's input cost is more publicly available. In addition, the stock market reacts more strongly to earning news announced by inflexible-price firms and managers of inflexible-price firms tend to issue more earnings guidance, consistent with our intuition.
Working Papers
-- Featured in Harvard Law School Forum
We study how transparency affects takeover probability and hence stock returns. If transparency helps acquiring firms to determine target value or synergy, then it can increase takeover vulnerability. Estimated takeover probabilities produce results consistent with this view and offer better fit over 25 years of takeover data. We find that the relation between takeover likelihood and stock returns is stronger when takeover likelihood is more precisely estimated by our augmented model. A new takeover factor constructed with the new takeover probability better captures variation in the cross-section of stock returns and is associated with higher premium.
Firms' inflexibility to adjust their scale persistently explains capital structure variations in a comprehensive sample and randomly-selected sub-samples. Higher inflexibility leads to lower financial leverage, potentially due to higher default risk and lower value of tax shields. Contraction inflexibility determines leverage more than expansion inflexibility. Moreover, inflexibility explains financial leverage on top of operating leverage variability and cash flow variability. Interestingly, the substitution effect between financial and operating leverage is much weaker among flexible firms. In addition, inflexible firms increase leverage more than flexible firms following a positive credit supply shock. Analyses employing instrumental variables estimation confirm our main finding.
Firms with higher inflexibility to adjust their scale hold more cash than flexible firms due to precautionary considerations. We develop this implication from a neoclassical model of a firm with costly scale adjustment options and empirically confirm this with various empirical analysis. Consistent with the precautionary motive, inflexible firms spend more cash than flexible firms following the recent COVID-19 outbreak. Moreover, we find the well-known secular uptrend in corporate cash is much more pronounced among inflexible firms. The role of increasing cash flow volatility and intangible capital in explaining the cash uptrend is weaker among flexible firms. By examining variations in excess stock returns, we show that the marginal value of cash increases with inflexibility. Our paper sheds new lights on the determinants of corporate cash policy and highlights the role of inflexibility in corporate decisions.
This paper documents novel evidence that private debt contains value-relevant nonpublic information with significant economic value. We extract banks' private information from term loan spreads. Abnormal loan spreads significantly predict firms' future operating performance and uncertainty measures. Equity analysts and investors are not privy to banks' private information. Firms with higher abnormal loan spreads experience more negative earnings surprises over the next several quarters. Their stocks underperform on average by about 0.5% per month with no reversals in longer horizons. This result is concentrated among loans associated with better borrower-lender relationship, indicating that relationship banking facilitates valuable information acquisition. The abnormal loan spreads also negatively predict stock returns of borrowers' peer firms.
Existing literature shows that women tend to be more pro-social than men; thus, the presence of female CEOs is associated with better corporate sustainability practices. We document opposite evidence in the setting of China, where women are explicitly discriminated against in the labor market, and this finding is more pronounced in regions with severe gender discrimination. We posit that gender discrimination triggers female CEOs' career concerns, forcing them to make decisions against their gender-based, pro-social preferences. We also find that female CEOs invest more in green projects when their anxiety over gender discrimination is potentially alleviated by the staggered launch of high-speed railroad. Moreover, differences in risk-taking preferences cannot explain our findings. Our study sheds light on how social stereotypes against women (i.e., gender discrimination) shape CEO decisions.
We investigate the type of information text sentiment uncovers using earnings conference call transcripts and find that text sentiment fails to explain returns during intraday calls, while average trading volume and return volatility are higher during the call. This finding indicates that intraday calls do convey value-relevant information to the market, but text sentiment cannot capture it. However, text sentiment explains overnight returns extremely well. Since overnight periods are dominated by fundamental news from earnings releases, this finding suggests that text sentiment more forcefully captures firms' fundamental information. In addition, we show that a Lasso-based sentiment measure explains returns significantly better than a dictionary-based sentiment, suggesting that Lasso approach has superior ability to capture information in textual analysis.
