Research

Working Papers

Decoding the Pricing of Uncertainty Shocks

with Zhanhui Chen, Michael Gallmeyer

Revise and Resubmit, Management Science

Uncertainty affects business cycles and asset prices. We estimate firm-level productivity and decompose total uncertainty risk measured as cross-sectional productivity dispersion into macro uncertainty (an aggregate component) and micro uncertainty (an idiosyncratic component). We find that macro uncertainty is strongly counter-cyclical and priced among stocks, but micro uncertainty is acyclical and not priced. Moreover, we show that the expected investment growth factor proposed in Hou et al. (2020) captures macro uncertainty risk, which helps us understand the success of the q5-model. 

Presented at 2021 Annual meeting of AFA, 2019 Hong Kong Joint Finance Research Workshop Research, 2019 UBC Summer Finance Conference

Fundamental skewness, Creative destruction, and Post-earnings-announcement drift (PEAD) 

with Zhanhui Chen

Fundamental skewness affects business cycles and asset prices. We estimate the cross-sectional fundamental skewness shock from firm-level total factor productivity (TFP) and decompose total skewness into right-tail and left-tail skewness, respectively. We find that the left-tail skewness is mostly captured by the existing factors, but the right-tail skewness is negatively priced among stocks and not captured by other pricing factors. Moreover, we show that the right-tail skewness explains most of the post-earnings-announcement drift (PEAD). Last, we show that the right-tail skewness is strongly driven by technological innovation shock, i.e., the displacement risk of Kogan et al. (2017).

Presented at 2023 Conference on Asia-Pacific Financial Markets (CAFM), 2023 Australasian Finance and Banking Conference (AFBC), National Chengchi University 

Yesterday's enemy is today's friend: Innovation externalities, follow-on innovation, and insider sales

with Yunju Cha, Konan Chan

We examine whether insider sales following the negative externality of innovation distinguish follow-on innovators from left-behind firms. We find that insiders make abnormal profits by selling their shares to avoid negative externality from innovation by competitors. The profits are stronger if product market is more competitive, insiers' income risk is higher, and focal firms are more left behind. Employing the 2008 Federal Circuit (FC) ruling that shifted invention property rights to employers as an exogenous shock, we find the profitability increases when competitors with new patents are headquartered in the FC states. Next, we identify follow-on innovators (left-behind firms) if insider sales are silence (executed) against negative externality. We find that innovation by competitors decreases sales growth only for left-behind firms. The follow-on innovators increase the patent disclosure and trade secrecy when innovation by competitors is more valuable. We provide the knowledge spillover as economic mechanism. Also, we find that the predictability of insider silence is stronger for more competitive product market, and growth firms. Our paper highlights how firms exposed to negative externality make the follow-on innovation via positive externality. 

Presented at Chulalongkorn university, 2025 Asian FA, 2025 Taiwan FA

Intangibles, productivity, and stock prices

As intangible capital has become important production factor, I estimate firm productivity ($TFP^{IC+}$) by adding intangible capital together with physical capital. I find that $TFP^{IC+}$ is negatively priced, and subsumes the pricing of productivity ($TFP^{IC-}$), estimated by omitting intangible capital. I provide the displacement risk channel. First, the investment-specific shock is more negatively related to low $TFP^{IC+}$ firms. Second, the innovation by competitors will more decrease future fundamentals for low $TFP^{IC+}$ firms. Lastly, intangible investment is more costly than physical investment for low $TFP^{IC+}$ firms. Overall, these suggest that high $TFP^{IC+}$ firms provide hedging against displacement risk.

Presented at 2024 Sydney Banking and Financial Stability Conference (SBFS), 2025 Asian FA & the best paper award, 2025 Taiwan FA

Knowledge spillover, market efficiency, and innovation disclosure: Role of insider trading

with Yunju Cha

We examine whether insiders exploit the information friction of knowledge spillover in their transactions, and how their transactions affect the knowledge spillover and innovation disclosure. Using the past returns of technology-linked peers (techret), insiders earn higher abnormal profits from purchase transactions. Employing the 2008 Federal Circuit (FC) ruling that shifted invention property rights to employers as an exogenous shock, we find the profitability increases when the peers with new patents are headquartered in the FC states. The profitability is larger when peer firms disclose less trade secrecy, when peer firms are closely located, when insiders have the education ties, and when the knowledge capital is large. Information asymmetry and legal risk increase the profitability. The trading volume and opportunistic trading increase when techret increases. Further, the purchase transactions following techret increases the knowledge dissemination and the market efficiency by subsuming the return predictability of techret, and predicting future stock returns. Lastly, the purchase transactions affect the strategic disclosure by reducing the trade secrecy and increasing the patent quality.

Presented at 2025 Society of Interdisciplinary Business Research (SIBR) & the best paper award

Fundamental Risk Sources and Pricing Factors 

with Zhanhui Chen

Motivated by production-based asset pricing models, we study the pricing power of fundamental risks to understand the prevailing pricing factors. We find that six aggregate productivity components trace 13 of 15 prevailing pricing factors, including all factors proposed in Fama-French six-factor model (Fama and French, 2018), q-factor model (Hou et al., 2015), and the mispricing models (Stambaugh and Yuan, 2017; Daniel et al., 2018), except for the expected investment growth factor (Hou et al., 2018) and the post-earnings-announcement drift (Daniel et al., 2018). However, the first productivity component is not captured by these factor models, which represents the labor risk.

Presented at 2019 Asian Bureau of Finance and Economic Research (ABFER) 7th Annual Conference, Nanyang Technological University, National Chengchi University, Xiamen University