1. Political Connection, Corruption, and Demand-Driven Stock Returns (Job Market Paper)

Abstract: I examine how firm-level political connections impact stock returns through institutional demand. I find that demand shifts by mutual funds significantly contribute to the decline in concurrent stock returns: mutual funds generally reduce holdings of stocks with higher political connections, especially those headquartered in provinces with elevated corruption indices, following the 2012 Chinese anti-corruption campaign announcement. Overall, while political connections have an insignificant direct effect on stock returns as an additional pricing factor, they significantly and negatively impact stock returns through the fund demand channel. Under a characteristic-based demand asset pricing framework, I further investigate the aggregate price impact for stocks with different political connections. I show that stocks with stronger political connections experience greater price impacts, particularly among the least liquid stocks and around the announcement of the 2012 anti-corruption campaign. This demand-based approach offers a novel perspective to understand the decrease in stock returns, isolates the effects of political connections from those of corruption, and emphasizes the demand-side effects on increased volatility during periods marked by unexpected political events.

2. Environmental Regulatory Risk and Investor Demand (with Linxiang Ma and Yuyang Zhang)

Abstract: We investigate the impact of environmental regulatory risk on stock prices through the channel of institutional investors' demand. Our findings reveal significant heterogeneity in how different types of institutions respond to firm-level environmental regulatory risk. Specifically, banks, insurance companies, and pension funds tend to increase their demand for stocks associated with higher environmental regulatory risk over time, while investment advisors and mutual funds shift towards firms with lower regulatory risk. Since environmental regulatory risk arises from uncertainty about future policies, with Democrats typically favoring stricter environmental regulations than Republicans, unexpected election outcomes can alter institutions' expectations regarding such risks. Using the 2016 U.S. presidential election as a political shock to environmental regulations, we find that institutional demand across all types of institutions shifts in opposite directions in response to changes in firms' regulatory risk. Notably, only the shift in demand from mutual funds significantly affects stock prices. Overall, our evidence suggests that institutions consider environmental regulatory risk when constructing investment portfolios, and their demand shifts can have real effects on stock prices.

1. Geopolitical Risk, Institutions, and Asset Prices (with Shuang Chen and Qi Zeng)

2. New Exchanges and Market Quality (with Carole Comerton-Forde and Patrick Kelly)