Research

Abstract: This study investigates whether passive ownership has weakened the positive association between adjusted book-to-price ratios and future stock returns, known as the value effect. Using firm-level panel data over the past 30 years, I document a strong negative association between passive ownership and the value effect. To corroborate the association results, I exploit the Pension Protection Act (PPA) of 2006, which spurred investments in index funds through Target Date Funds (TDFs). I find that the attenuation of the value effect intensifies with exposure to TDF flows, which are unlikely to reflect active firm-level fundamental analysis. Moreover, the negative relation between passive ownership and the value effect emerged with the PPA in 2006, preceding the 2008 financial crisis. In cross-sectional analyses, I find that the decline of the value effect is more pronounced for firms with low information production activity in capital markets and limited shareholder payouts. Finally, passive ownership weakens the value effect more strongly when non-index funds are net sellers, suggesting that withdrawals from actively managed funds reinforce the attenuation of the value effect. Collectively, the findings suggest that the relatively fundamentals-agnostic nature of passive ownership has eroded the value effect in the U.S. stock market.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5529782 

Dissertation Committee: Kalash Jain, Sehwa Kim, Doron Nissim, and Shiva Rajgopal

Acknowledgment: The study benefited from the comments provided by David Einhorn (Greenlight Capital) and Mike Green (Simplify Asset Management) during their conversation with Barry Ritholtz on Bloomberg's Masters in Business podcast. I thank Barry for conducting an in-depth interview with David and Mike, asking the questions I would have liked to ask, but in a much more entertaining and engaging way. I thank Mike for sharing their thoughts on the capital market implications of passive investing, particularly through retirement-driven Target Date Fund investing. 

I am grateful to David Einhorn, the CEO and President of Greenlight Capital, for kindly taking the time to discuss my findings and for sharing his insights on passive ownership and value investing at his beautiful office in Midtown Manhattan. This study was inspired by his comments on passive ownership and value investing.

Abstract: This study revisits the CEO pay-for-performance relation using two methodological innovations designed to address well-known measurement challenges. First, we aggregate pay and performance over the CEO’s entire tenure, allowing us to account for ex-post settling-up in pay. Second, we use realized compensation, rather than ex-ante estimates, to better capture the actual economic rewards CEOs receive. We find strong evidence of pay-for-performance in the full sample, with a magnitude 2-10 times greater than that reported in previous studies. However, the pay-for-performance relation is asymmetric. CEOs who outperform their peer firms exhibit strong pay-for-performance sensitivity, while those who underperform do not. This asymmetry arises because boards offset weak performance with incremental equity grants, undoing the mechanical correlation that would result from declining stock prices. Finally, we show that underperforming CEOs are significantly more likely to be dismissed, suggesting that turnover, rather than lower pay, could be a disciplinary mechanism used by boards. Collectively, our findings demonstrate that tenure-aggregated realized pay better reveals how boards structure incentives and accountability over the full horizon of a CEO’s leadership.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5026348 

Abstract: In November 2021, the Financial Accounting Standards Board passed ASC 832, mandating disclosure of government subsidy-related information in annual reports. ASC 832 did not prescribe specific measurement, recognition, or presentation guidelines, giving firms discretion to determine compliance practices. In this paper, we provide initial evidence on firms’ disclosures under the new standard. We highlight three key findings. First, both the quantity and quality of subsidy-related disclosures improved following the standard’s implementation, but improvements are concentrated in firms receiving larger subsidies or previously voluntarily disclosing subsidy-related information. Second, despite the standard’s adoption, firms do not disclose substantial subsidies, potentially dampening the standard’s impact. We leverage the observability of non-compliance, unique to our setting, to identify information withholding. Third, given ASC 832’s limited scope, public firms are increasingly pursuing subsidies not subject to the disclosure mandate. Our findings highlight both the immediate impact of the standard and shortcomings of its implementation.  

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5135879 

Abstract: We examine the relationship between stock return sensitivity to interest rate changes (interest rate sensitivity) and firm growth. Theory suggests a negative relationship because, all else equal, the present value of distant cash flows declines more sharply than that of near-term cash flows when interest rates rise. However, changes in interest rates may also correlate with expected cash flows and the equity risk premium, making the overall relationship an empirical question. We find that interest rate sensitivity is weakly related to growth, whereas expected inflation sensitivity is strongly negatively related to growth. Specifically, firms with low expected inflation sensitivity subsequently experience high and persistent growth. In contrast, analysts’ long-term earnings growth forecasts are positively related to expected inflation sensitivity. Consistent with investors exhibiting a similar bias, expected inflation sensitivity negatively predicts future stock returns. Taken together, expected inflation sensitivity conveys useful yet overlooked information about firms’ long-term growth. 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5251618