Borrowed Influence: When Can Activist Hedge Funds Do Well and Do Good? [SSRN](solo authored)
Previously circulated as: Leverage, Engagement and Welfare in Decentralised Financial Markets
Media featured: Financing a Sustainable Future Podcast, Global School of Sustainability, LSE
Can activist hedge funds seeking only returns correct an externality? In a general equilibrium model, activists push firms toward a costly change that consumers value but firms will not make alone. The activist’s information advantage cannot pay for engagement: her trading profit is bounded by the value she creates, which is below cost. Borrowing can: activists earn the margin between the return on scarce liquidity capital and the deposit rate. Activism raises welfare at intermediate borrowing limits: too tight, and activists cannot borrow enough; too loose, and they bid up the rate on scarce deposits until fewer break even.
We study electoral competition when the incumbent party controls a social media platform and strategically censors public opinion. Within-country panel evidence from electoral autocracies shows that higher censorship is associated with more targeted policy in political competition, the opposite of what a simple substitution story would predict. To explain this pattern, we extend the probabilistic voting framework of Lindbeck and Weibull (1987) to incorporate strategic censorship operating through the visible distribution of public sentiment. A uniform censorship rule partitions the electorate into two sets: groups with concentrated valence opinions remain policy-contested, while groups with dispersed opinions are censorship-captured and dropped from the policy calculus entirely.
Bigger pie, bigger slice: liquidity, value gain and underpricing in IPOs [SSRN], with Lily Y. Li and Hongda Zhong
Journal of Financial Markets, January 2025, Vol 72, 100949
Since investor participation is essential for successful IPOs, we hypothesize that issuers share value gain from IPOs with IPO investors, resulting in IPO underpricing. We test the positive relation between value gain and underpricing from the liquidity angle, as improved liquidity via IPO increases firm value. We find supporting evidence that underpricing is positively related to the expected post-IPO liquidity of the issuer. Using two regulation changes as exogenous shocks to share liquidity before and after IPO, we further show that underpricing is more pronounced with better expected post IPO liquidity or lower pre-IPO liquidity.
We model spinoffs of polluting subsidiaries as private value auctions. Greener preference among current shareholders results in more spinoffs. However, the winning buyer who has the highest valuation of the subsidiary tends to care least about the environment; and therefore, creates more pollution after acquiring the subsidiary. Despite the ex-post undesirable outcome, the possibility of spinoffs shifts the manager towards greener actions ex-ante. Such a “green shift” occurs even when the manager has stronger green preferences than shareholders. Finally, spinoffs only exist when agents’ green preferences are “narrow” — they suffer disutility only from self-generated pollution rather than economy-wide pollution.