Research

Conventional wisdom holds that the differential effect of inflation on stock returns, a metric I call the inflation beta of a stock, should be positively related to fixed cost in the cross-section. Contrary to this, I find that fixed cost is negatively related to inflation beta. To address this paradox, I delve into a firm's cost structure and discover that variable cost dominates the firm's cost structure, is negatively associated with fixed cost, and is positively related to inflation beta. Critically, fixed cost inflation beta switches sign and turns positive when orthogonalized to variable costs, but this reversal is not observed for variable cost. Taken together, these results indicate that variable cost drives fixed cost's negative inflation beta. To further investigate variable cost, I hypothesize that during periods of high inflation, customers within an industry are more likely to switch from high-margin firms (low variable cost) to low-margin firms (high variable cost), thereby positively impacting the latter. Supporting this hypothesis, I find that variable cost inflation beta is higher in industries with profit and margin dispersions, less competition, lower customer loyalty, and more customer switching, enabling more price competition and customer substitution. Finally, I demonstrate that the inflation beta and risk premiums of quintile portfolios based on variable cost and fixed cost respectively, are inversely related. This allows me to derive a negative unconditional price of inflation risk, consistent with existing literature.

We find that transportation risk carries a negative risk premium. The high minus low quintile portfolio formed based on exposure to transportation shock carries an annualized CAPM alpha of -3.7 % and an FF3 alpha of -5.0%. We rule out other potential explanations, including industry centrality, upstreamness, and industry competitiveness. Firms with higher exposure to transportation shocks experience negative gross profit growth in response to aggregate profitability shocks. These high transportation exposure companies also incur higher transportation costs, which suppress their gross margins. Additionally, their CEOs exhibit greater concern regarding supply chain shocks, as evidenced by conference call transcripts. To address endogeneity, we conduct event studies that mitigate potential biases. Our approach differs from existing literature by focusing on firm-level risk and overall transportation shock exposure, rather than solely on international trade.

This study investigates whether tonal disagreement in sentiments, a form of soft information, is priced in risk-adjusted stock returns. Leveraging a variety of speaker-level sentiment from earnings call transcripts, we identify four key channels through which tonal disagreement influences pricing: who disagree (managers versus analysts), how much they disagree (extreme versus moderate), why investors process the contextual aspects of the disagreement differently (via credibility and information acquisition costs) and, when they disagree (early versus late in the call). We find that managerial disagreement commands a significant positive equity risk premium, particularly when the disagreement is extreme (measured by kurtosis) and occurs early in the call. In contrast, analyst disagreement exhibits a largely insignificant or negative risk premium, suggesting that it enhances the informativeness of the call rather than reflecting fundamental risk. The positive pricing effects are further amplified when information sources are highly credible but costly to process, consistent with the predictions of a Bayesian learning framework developed in this study. We further find that heightened managerial disagreement increases CEO turnover risk and introduces uncertainty in firm governance, factors the market prices as systematic risk. Our findings underscore that soft information influences asset prices through distinct, context-dependent channels, while also driving real economic consequences.

We explore the impact of gender diversity on firm risk, focusing on two key stakeholders: employees and retail customers. Using monthly data from the NielsenIQ retail customer purchase database and annual workforce data from Bloomberg, we find a significant hedging effect of gender diversity on firm risk. long-short portfolios formed on workforce gender diversity and customer gender diversity yield negative annualized risk premiums of approximately -6% and -10%, respectively. These risk premiums are particularly pronounced during periods of high uncertainty. Our cross-sectional tests demonstrate that under adverse conditions, firms with a higher proportion of women in the workforce can better manage the growth of operating leverage, while those with a larger female customer base exhibit superior control over variable costs. We attribute the workforce effect to insights from gender wage gap literature and behavioral studies, which suggest that female employees tend to be less aggressive in salary negotiations, resulting in a hedging mechanism that is more responsive to negative economic shocks. For customer diversity, we find that female customers are less responsive to macroeconomic fluctuations and uncertainties, and are more loyal to the firms. Accordingly, female households cut down on purchases during economic downturns less than matched male households, contributing to decreased firm risk exposure. Lastly, our interaction regression analysis reveals that a change in the gender of the head of a household leads to a shift in purchases from firms with low workforce diversity to those with high workforce diversity. 

This paper uses the firm level gender diversity data to study the effects of workforce diversity on firm outcomes. Using two novel instrumental variables, state childcare funding and women role models, we find that workforce diversity leads to an improvement in firm innovation and overall firm value. Importantly, we show that workforce diversity can lead to similar outcomes even when firms have low board diversity. We further show that gender diverse firms incur fewer and less serious employee violations and receive better social scores, suggesting the positive effects of workforce diversity on non-financial outcomes. We identify less unionization, higher employee productivity, and more woman researchers as potentially important channels through which women in the workforce impact firm innovation and value. Finally, using textual measures of culture and MeToo movement as an exogenous shock to firm culture, we show that the positive impact of gender diversity on firm outcomes is more pronounced in firms with a conducive organizational culture. Overall, our study is one of the first to provide evidence on the advantages of a diverse workforce.

How does insufficient monitoring-induced moral hazard affect firm strategy with relation to green investment? We answer this question in the context of an international carbon offset mechanism- the Clean Development Mechanism (CDM). Under CDM mandated entities in developed countries could buy carbon offsets from green project owners in developing countries. Anecdotal studies have noted inconsistencies between the project claims made during application and the actual on-ground situation. However, a comprehensive analysis is missing. We fill this gap by analyzing all public firms across developing nations that participate in the CDM. We find that as these firms achieve successive CDM milestones, their stock returns react positively in the short term. This positive reaction is particularly concentrated in firms whose core business is unrelated to green technology. Further, we observe that the long-term firm performance declines post-participation, particularly when the green projects are unrelated to the company's core business, and the relative size of the project is large. Additionally, we find no such effect in a similar analysis of private firms. This suggests that myopic managers prioritize green projects for immediate stock gains despite not having the relevant experience, often resulting in getting stuck with long-term negative NPV investments. Lastly, we find that in the absence of robust oversight by local government, as seen in Indian CDM projects during periods of high political uncertainty, the moral hazard could get accentuated, leading to worse outcomes. This study is the first to comprehensively identify the underlying drivers of moral hazard clustering in international carbon markets through a firm-level lens rather than relying solely on project-based analysis.

This paper examines the association between a judge's financial holdings and the outcome of legal cases. Using novel data on financial disclosures of judges and the civil case information of public firms across district courts in the United States between 2000 and 2021, we document multiple instances in which judges fail to recuse themselves in cases where they hold common stock. We find robust evidence that judges rule more favorably and take longer when deciding over conflicted cases as compared to unconflicted ones. We also find that investors are positively surprised by these outcomes, as reflected by stock returns to trial outcomes. Collectively, our results provide the first large-scale evidence of the relationship between judges' financial holdings and case outcomes.