KERRY XIAO

Soft Information for Sale: Evidence from Investment Research (with Amy Zang)

Economic theory views information as a public good, yet a billion-dollar market exists for sell-side research. We argue that soft information—textual and context-dependent—provides the required exclusivity, enabling private value for paying institutions and analysts. We find that institutions trade on and profit from the textual tone of written reports, while retail investors do not. Notably, top clients trade more aggressively on tone and earn larger profits, consistent with access to analysts' unwritten context via high-touch services. These patterns are absent for hard information. Our findings suggest soft information resolves the public goods puzzle in information markets.  

• Funded by General Research Fund

• Presented at HKUST, Conference on Asia-Pacific Financial Markets 2025, Analyst Research Conference 2026

Hardening Soft Information: Evidence on Analyst Integration Costs (with Amy Zang)

We examine how the cost of transforming qualitative information into precise numerical estimates—a form of integration cost—creates a structural friction in expectations formation. To isolate this integration cost from the costs of information awareness and acquisition, we exploit sell-side analyst reports, in which the same forecaster simultaneously produces textual narratives and numerical forecasts. Because the information underlying the text has already been acquired, any systematic gap between the two outputs can be attributed to integration costs. We document systematic quantification inefficiency: an analyst’s textual tone negatively predicts her contemporaneous forecast errors and positively predicts her subsequent numerical revisions, revealing that analysts leave part of their qualitative insights unquantified until further evidence arrives. Consistent with this integration-friction explanation, this inefficiency intensifies when reports are linguistically vaguer, environmental uncertainty is higher, or analysts’ processing capacity is more constrained, and it persists where strategic and behavioral explanations are weaker. Our findings provide direct, large-sample evidence that integration costs constitute a distinct economic friction, explaining why soft information carries value-relevant content beyond contemporaneous hard numbers.

• Previously titled "Hardening Soft Information: Analyst Conservative Bias"

• Presented at HKUST, HKU, Tsinghua, CEIBS, CUHK Textual Analysis Conference 2017, Utah Winter Accounting Conference 2018, EAA 2018, AAA 2024, The Mediterranean Accounting Conference 2025

Vague Knowledge: Information without Transitivity and Partitions

I relax the standard assumptions of transitivity and partition structure in economic models of information to formalize vague knowledge—non-transitive indistinguishability over states. I show that vague knowledge, while failing to partition the state space, remains informative by distinguishing some states from others. Moreover, it can only be faithfully expressed through vague communication with blurred boundaries. My results provide microfoundations for the prevalence of natural language communication and qualitative reasoning in the real world, where knowledge is often vague.

• The theoretical foundation for Hardening Soft Information: Evidence on Analyst Integration Costs

Regulating Markets: Evidence from the PCAOB

How do regulators act to regulate markets? This study presents an economic framework with descriptive evidence. I argue that regulators, constrained by their powers and resources, utilize a regulatory portfolio across stakeholders and policy tools to influence markets. Analyzing the full spectrum of its activities, I find that the PCAOB employs diverse tools to target the entire financial reporting ecosystem, including auditors, audit committees, investors, preparers, and the public, rather than solely regulating auditors. Moreover, the PCAOB actively manages its regulatory portfolio by selecting specific activities. Overall, my findings suggest that regulators operate in a market-oriented and endogenous manner. 

• Policy-oriented research

• Presented at ABR-Fudan Joint Conference 2025