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Opportunity and Parental Investment: Evidence From China, with Pei Gao, and Xin Zhou    Download PDF 

Reject and Resubmit at American Economic Journal: Economic Policy 

When a better opportunity presents itself, whether and how would people grasp it? We answer this question by focusing on how parental investment responds to changes in their children's educational opportunities. We find that people in the disadvantaged area increased child-specific but not adult-specific spending after the improvement in educational opportunities. Importantly, the increase in education-related spending is greater among low-income parents, while this pattern is opposite for child-enrichment spending. A model in which parents respond to both opportunities and competition is consistent with the finding that parental investment does not decline in the previously-advantaged area.

Unveiling Investors’ Substitution Behavior: Stock Trading Decisions in Response to Housing Market Dynamics, with Bin Zhao, and Ning Zhu    Download PDF 

Accepted at Journal of Corporate Finance

Utilizing positive quasi-random shocks to local housing prices in Shanghai, we show that stock investors who experienced significant returns from the real estate market traded less actively, took less risk, and spent less effort trading. We confirm the effect of housing price changes on investors’ trading behavior in a national sample. Our findings suggest a substitution effect between the real estate and stock market and highlight the importance of understanding investors’ trading behavior in light of intertemporal variations in other asset market.

The Effect of Home Ownership on Consumption: Evidence from Housing Lotteries in China, with Wang Su   Download PDF 

This paper studies the impact of home ownership on consumption by exploiting housing lotteries in China that randomize participants’ eligibility to buy newly-built condos. Using bankcard transaction data, we find that in one year following a lottery, home ownership leads to a reduction in expenditures on non-durable goods and services and an increase in home-related durable goods consumption. We show substantial heterogeneity in total consumption and disaggregate consumption categories across homebuyers with varying lottery discounts, down payment sizes, and ownership of other properties. Overall, our findings imply a renovation effect, a pure wealth effect, and a liquidity constraint effect of home ownership on consumption. In particular, we find a higher marginal propensity to consume nondurable goods and services out of housing wealth among homebuyers without other properties or with higher debt burdens after home purchase. Finally, evidence suggests that repeat lottery participants are less financially constrained.

Browsing Stimulation and Attention Capture, with Xin Zhou    Download PDF 

This paper studies how attention allocation affects asset choices of investors with limited attention. Utilizing investors’ browsing activities on a mutual fund trading APP, we leverage a novel quasi-experiment involving a sudden change in portfolio disclosure frequency for certain mutual funds. We show that after the adoption of the policy, investors allocate more attention to treated funds. Prompting attention to these funds causes an expansion in investors’ consideration set, crowds out their attention to other assets in the set, and intensifies their pursuit of attention-grabbing funds. We further show inferior performance outcomes of asset choices relative to those in the consideration sets. Notably, these patterns are observed in buy but not sell trades. Overall, our findings on attention allocation help uncover the decision-making process leading to actual trades.

Corporate Governance

Director Job Security and Corporate Innovation, with Po-Hsuan Hsu, Hong Wu, and Yuhai Xuan    Download PDF 

Journal of Financial and Quantitative Analysis, 2021

In this paper, we show that firms can become conservative in innovation when their directors face job insecurity. We find that after the staggered enactment of majority voting legislation that strengthens shareholders' power in director elections, firms produce fewer patents, particularly exploratory patents, and fewer forward citations. This effect is stronger for directors facing higher dismissal costs or threats and for firms with greater needs for board expertise and is mitigated by institutional investors' expertise in innovation. Overall, our results suggest that heightened job insecurity induces director myopia, which leads to a reduction in investment in risky, long-term innovation projects.

Managerial Response under Shareholder Empowerment, with Vicente Cunat, and Hong Wu    Download PDF

Accepted at Journal of Financial and Quantitative Analysis

This paper studies how managers react to shareholder empowerment that makes votes on shareholder proposals regarding majority-voting in director elections binding. Exploiting staggered legislative changes that introduce such empowerment, we find that managers become more responsive to shareholder requirements by initiating majority voting through either management proposals or governance guidelines. Further results suggest compromised implementation: managers adopt provisions that give them greater control over the channel of implementation and allow them to retain directors who fail in elections. 

How do Professional Rankings affect Analyst Behavior? Evidence from a Regression Discontinuity Design, with Michael Jung, and Hong Wu, and Yuhai Xuan    Download PDF 

Revise and resubmit at Management Science

We study how winning a significant industry award affects the behavior of finance professionals based on the Institutional Investor rankings of sell-side equity analysts. Employing a regression discontinuity design that compares the research outputs of third-place, all-star analysts and runner-up analysts who barely miss the distinction, we find that winning an award makes analysts more optimistic in their forecasts and recommendations and enables them to move the markets. Winning analysts obtain higher priority during earnings conference calls and have better career outcomes. The broader inference is that finance professionals who win a significant award may become more, rather than less, strategic.

Director Reelection Pressure and Earnings Management, with Jeffrey Ng, Qingyu Meng, and Hong Wu    Download PDF

Revise and resubmit at European Accounting Review

Reelection pressure creates incentives to portray better performance to encourage the electorate to maintain the status quo. Using different U.S. states' staggered adoption of a legislative change that strengthens shareholders' power in director elections, we find more income-increasing earnings manipulation. We further document that these actions are more pronounced when directors face greater employment risk and when CEOs have stronger ties with board members. Finally, we find that after the legislative change, CEOs and CFOs receive higher short-term incentive pay and higher earnings-per-share performance targets. 

Pay for Future Performance, with Moqi Groen-Xu    Download PDF       

Managers should be rewarded for their contribution to future performance. Yet, the literature on the pay-performance sensitivity of CEO compensation has almost entirely focused on observable measures of past performance. We present a strategy to estimate CEO pay sensitivity to next-year performance, using discretionary changes in base salary, which is not mechanically related to observable measures. We document a positive link between salary raises and future performance between 1994 and 2008. A portfolio long in firms with CEO salary raises and short in those without yields an annual return of 6%. The return predictability declines after the 2008 mandate to let shareholders vote on compensation. 

Informing Adaptation under Booms and Busts    Download PDF    

Leading employees to adapt to changing market conditions is an important concern for managers. This paper considers a contracting problem in which a principal is privately informed of market conditions and wants to induce an agent to choose the adaptive project that best fits these conditions. The principal faces a trade-off: A contract that reveals the market conditions fosters adaptation, but it may demotivate the agent. In a dynamic setting, the equilibrium contracts never fully reveal the market conditions, resulting in insufficient adaptation. My model predicts that adaptation will be inefficiently delayed in booms but happen early in busts. Both cases exhibit organizational inertia.

Explaining Downward-rigid CEO Compensation: An Information Asymmetry Perspective    Download PDF    

CEO compensation rarely gets cut, and almost every component of it increased in early 2000. I consider a two-period contracting problem in which a board privately knows its CEO’s matching quality with the firm that changes over time. The board faces a trade-off: Revealing good information makes the CEO work harder, but it is costly. To save the information revelation cost, the board commits to a back-loaded compensation plan that features only upward adjustments in fixed and performance-based pay.