Published Research:
Abstract: We provide evidence that dividend-paying stocks are less exposed to return extrapolation than non-dividend-paying stocks. In particular, social media sentiment and analyst price targets of dividend-paying stocks are significantly less sensitive to past returns. Our findings indicate that this difference stems from price changes playing a larger role in extrapolation and dividends diverting attention away from price changes for dividend-paying stocks. Consistent with models of return extrapolation, dividend-paying stocks earn lower momentum and long-term reversal returns. The value premium, however, is similar among both groups. Collectively, our findings suggest that return extrapolation is an important source of some anomaly returns.
Bounded support: Success and limitations of liquidity support during times of crisis (with Richard Ogden), Financial Management, 2023
Abstract: Our paper sheds light on the complexity of liquidity injection programs by showing unintended consequences that arise when firm heterogeneity is overlooked. Utilizing firm-level data from the Paycheck Protection Program, we find government lending effectively reduced closures, particularly if received during the first two weeks. However, we find significant heterogeneity in the effectiveness of funds, resulting from broad-brush eligibility guidelines and differences in how firms process information. The implementation relied on the banking system, which exacerbated the distributional effects by favoring firms with stronger customer capital. Our findings highlight the importance of thoughtful liquidity distribution design to maximize its benefits.
Valuation of a Pharmaceutical Licensing Contract (with Richard Shockley), Journal of Applied Corporate Finance, 2017
Abstract: It is quite common for boutique pharma companies, biotech firms, and university labs to license their intellectual property (a new compound) to large pharmaceutical companies. In such cases, the big pharma companies finance and manage the R&D process and, if successful, market the drugs. In exchange for use of their intellectual property, the outlicensing organizations receive licensing contracts that promise some combination of fixed payments, event-specific milestone payments, and revenue- or profit-based royalties.
The authors show how to estimate the expected present value of the future cash flows promised by such licensing deals. The complicating factor in such valuations is that the licensing contracts are essentially derivative contracts written on drugs in development, which as the authors showed in a paper published in this journal a year ago, are themselves compound options on marketed drugs. The authors use the valuation example from the earlier paper, along with a proposed licensing deal, and walk the reader through the process of valuing the licensing deal's cash flows.
Valuation of a Developmental Drug as a Real Option (with Richard Shockley), Journal of Applied Corporate Finance, 2016
Abstract: Valuing a capital investment as a real option (or series of options) has advantages over standard DCF valuation when the investment creates the future flexibility to delay, abandon, or expand an element of the project based on the resolution of a major source of uncertainty. The uncertainty is generally dealt with using a “volatility” term that aims to reflect the variability in the future value of the underlying asset. But there are certain situations in which the uncertainty has a second dimension. For example, drugs in development can be abandoned either because of bad technical outcomes (the drug doesn't work) or unfavorable resolutions of market risk (though the drug works, its market potential turns out to be too limited).
In an article published earlier in this journal, the authors illustrated the valuation of an early-stage pharma R&D investment using a real options approach in which the market and technical risks were folded together into the volatility parameter. In this article, the authors explain why they have concluded that this is an incorrect approach and then show how to handle market and technical risk as two separate dimensions of risk in valuing an R&D program. The potential use of this technique extends beyond pharma and biotech R&D to any situation in which the outcome of an important uncertainty is independent of the resolution of market risk associated with the underlying asset.
Working Papers:
Bank Branching Deregulation and the Deposit Channel of Credit Dislocation (with Brad Cannon)
Summary: https://youtu.be/qNTaQbeshqY
Abstract: We show that interstate bank branching deregulation in the U.S. led to a substantial and persistent decline in small business lending, driven by a reallocation of deposits away from local relationship lenders and toward large, out-of-state entrants. Lending to small businesses fell by over 5% in affected areas, with dynamic estimates revealing declines of 10-20%. The sharpest declines occurred in counties with larger deposit bases and stronger housing markets, suggesting that entering banks prioritized deposit acquisition and mortgage lending over relationship-based small business credit. This funding disruption triggered lasting real effects: the number of small firms declined by approximately 5% relative to pre-deregulation levels and employment at the smallest firms fell significantly. Our findings highlight a deposit channel through which deregulation can dislocate credit and reshape local business landscapes, even when aggregate banking activity ultimately stabilizes.
Overreaction in Hedge Fund Flows: Diagnostic Expectations Versus Rational Learning (with Brad Cannon and Rui Gong)
Abstract: Using hedge fund flows, we study whether institutional investors' response to returns is more consistent with rational learning or a behavioral overreaction. Through both structural and reduced-form approaches, we find robust evidence of overreaction. A structural estimation incorporating diagnostic expectations shows that hedge fund investors overweight returns relative to a Bayesian benchmark. Reduced-form regressions similarly reveal an exaggerated return-flow relationship, especially in fund styles where returns are less predictive of future performance. Together, our findings challenge the view that institutional investors are fully rational arbitrageurs and highlight the role of belief distortions as a driver of fund flows.
The Value of a Neighbor: The Real Impact of Neighboring Firm Valuations (with Brad Cannon and Joshua Thornton)
Abstract: Firm investment responds to the mispricing of its geographic neighbors. We provide evidence that this relationship operates in part through a credit-supply channel. The investment and debt issuance of financially constrained firms increase with neighboring firm mispricing, while unconstrained firms exhibit no such response. Consistent with a supply-driven channel, loan spreads (insignificantly) decrease in neighbor mispricing. The investment and financing effects are more pronounced for neighboring valuations that are more informative or more salient. Overall, our findings highlight a novel feedback effect from regional stock valuations, which operates through lenders and may be amplified by attention to salient regional valuations.
Up or Out: Markup, Growth and Startup Valuation (with Hongyu Shan and Shen Zhang)
Abstract: Startups face a delicate trade-off between short-term profitability and customer acquisition, a tension central to entrepreneurial success. This study develops a dynamic equilibrium model in which entrepreneurs optimally balance product markups and customer base expansion. The model predicts that startups should lower markups below the level that maximizes short-term profits to accelerate customer growth - an equilibrium strategy that leads to higher firm valuations, particularly in competitive markets. We empirically test these predictions in two ways. First, using the daily number of Twitter followers as a proxy for customer base size, we find that faster customer growth is associated with higher valuations, and that this relationship strengthens in competitive markets. Second, in a sub-sample with observed product pricing, we show that startups tend to strategically lower prices prior to funding events, which increases both the likelihood and the size of venture capital (VC) financing in the subsequent six months. Together, our results provide new theoretical and empirical evidence on the economic rationality of entrepreneurs’ pricing and customer involvement behaviors in early-stage ventures.
Skewness Managed Portfolios (with Rui Gong and Richard Ogden)
Abstract: We show that the returns to many prominent cross-sectional anomalies are driven by a small number of extreme, positively skewed stock returns. Consistent with this, we propose a skewness-managed strategy that predicts ex-ante skewness using firm characteristics and modifies each anomaly portfolio by selecting high-skewness stocks in the long leg and low-skewness stocks in the short leg. Applied to 15 well-known anomalies, the strategy improves returns for every anomaly by at least 4.7 percentage points annually, with an average improvement of 8.2. Sharpe ratios also increase consistently, with an average gain of 0.23. Despite closely tracking the original factors, these skewness-managed portfolios deliver significant alphas even relative to models constructed from the same characteristics, suggesting that modern asset pricing models may systematically overlook higher-order moments.
Perception Matters: How Executive Vocal Masculinity Influences CEO Selection and Compensation (with Brad Cannon and Amin Shams)
Abstract: The lack of female CEOs and the persistent gender pay gap, especially at higher income levels, have become popular topics both in academics and society. Most studies focus on the differences between males and females that perpetuate this ``glass ceiling," while few look at within-gender traits that can help mitigate its effects. In this paper, I use novel measures of CEO and CFO vocal masculinity and language complexity to gain insight into how these individual-level traits influence executive status and compensation both within and across genders. I find that vocal masculinity, within females, positively impacts their likelihood of becoming a CEO while the opposite is true for males. When it comes to communication, CEOs speak with greater complexity than CFOs while both female CEOs and CFOs use more complex language and speak longer during earnings calls than their male counterparts. Differences in CEO-CFO language complexity are greater at low entrenchment firms while differences in masculinity are greater at high entrenchment firms. Additionally, while boards with greater female representation hire more female CEOs, they surprisingly seem to place a greater emphasis on female masculinity, while male masculinity plays a larger role at firms with male-dominated boards. Finally, for both male and female CEOs, compensation is positively related to masculinity, while increased language complexity only matters for females. These results help provide insight into the determinants of CEO status and compensation and may help explain how boards view and reward perceived competency across genders.