RESEARCH
RESEARCH INTERESTS
INVESTMENTS AND CAPITAL MARKET:
Institutional Investors, Financial Intermediaries, Liquidity, Market Efficiency
CORPORATE FINANCE:
Empirical Corporate Finance, Ownership Structure, Governance & Law
PUBLICATION
[1] "Stand in the wind: Market power reformation during uncertain periods" - with Heng Wang and Xiaoyang Zhu
- Published in "International Review of Economics and Finance", 2022
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[Abstract] Economic policy uncertainty affects firm dynamics and profitability, and thus imposes an impact on firm markups and market power. Using quarterly data of the U.S. publicly listed firms over 1985Q1 to 2020Q3, this paper empirically shows a decline of firm markups under an uncertain environment. However, the decrease in average markup does not necessarily imply an increase in market competition due to the heterogeneous effects among firms. Specifically, an uncertain environment seems to advantage larger and more innovative firms compared with smaller or less innovative firms, indicating a disproportionate distribution of resource and market power reformation. We further show that the within-industry markup dispersion, as well as the market concentration, increases given one standard deviation increase of economic policy uncertainty.
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[2] "Are U.S. Firms Still Using More Short-Term Debt?" - with Seong K. Byun and Luna Lin
- Published in "Journal of Corporate Finance", 2021
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[Abstract] This paper revisits the secular trend in corporate debt maturity by examining its evolution in more recent decades spanning the financial crisis of 2008 and the years of subsequent recovery. We complement existing literature by showing that corporate debt maturity has steadily risen in the 2000s and 2010s, reversing the widely documented decline in debt maturity in the 1980s and 1990s, despite the temporary decline in debt maturity during the financial crisis of 2008. We observe heterogeneity of the debt maturity across different firm sizes. The debt maturity trend reversal can not be solely explained by new firms entering the market, but seems to be universal among all existing firms in the market. In addition, changing firm-level characteristics or macroeconomic factors that do have explanatory power in explaining the initial decline in debt maturity do not seem to have much explanatory power in explaining the subsequent reversal. Our empirical findings shed lights on the explanation of the determinants of debt maturities and its changing structure, and, most importantly, are calling for new theories explore the reversal in debt maturity trends.
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[3] "Does the Investment Horizon of Institutional Investors Matter for Stock Liquidity? " with Xiaoqiong Wang
- Published in "International Review of Financial Analysis", 2021
[Abstract] This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm’s stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low-frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.
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[4] "COVID-19 and Women-Led Businesses in Developing Economies" - with Yu Liu and Jian Xu
- Published in "Finance Research Letters", 2021
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[Abstract] The impacts of crises are never gender-neutral, and the COVID-19 pandemic is no exception. Using a brand-new dataset covering 24 countries, we document that women-led businesses are subject to a higher likelihood of closure and a longer closure duration than men-led businesses during the pandemic. Women business leaders are also more pessimistic about the future than men business leaders. The disadvantages suffered by women-led businesses widen in high gender inequality economies. Our results further indicate that finance and labor factors are likely to be the major contributors to these disadvantages. We suggest that COVID-19's policy response should not be gender-neutral.
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[5] "The Monitoring Role of Institutional Investors: Geographical Proximity and Investment Horizon" - with Xiaoqiong Wang
- Published in "Studies in Economics and Finance", 2018
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[Abstract] This paper investigates institutional investors' monitoring role in corporate decision making by constructing a proximity-horizon classification. This measure captures the heterogeneity of institutional investors. Given that both geographical proximity and investment horizon are directly related to institutional investors' monitoring costs, we collectively examine both aspects and provide evidence that institutional investors present different preferences for corporate policies. Given stronger information advantage, both local and nonlocal investors that are long-term oriented fulfill a better role in monitoring corporate decisions but from different perspectives. The monitoring role of institutional investors based on proximity-horizon classification reflects two essential corporate finance issues: agency problems and information asymmetry.
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[6] "Shareholder litigation and the risk incentive effect of executive compensation: a re-examination" - with Isarin Durongkadej and Ramesh Rao
- Published in "Finance Research Letters", 2020
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[Abstract] Previous literature shows that securities litigation is positively impacted by management compensation with a focus on the delta, but not the vega, component of compensation. We argue that the vega, rather than the delta, component of management compensation should be associated with litigation propensity. Using a sample from 1996 to 2018, we document that securities litigation is related to option vega but not to delta. Our results are robust to alternate specifications of delta and vega, and to endogeneity concerns from reverse causality.
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[7] "Economic Policy Uncertainty and Heterogeneous Institutional Investor Horizons" - with Xiaoqiong Wang and Xiaoyang Zhu
- Published in "Review of Quantitative Finance and Accounting", 2023
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[Abstract] Existing literature has extensively discussed the impact of economic policy uncertainty (EPU) on firm-related activities, but there is sparse evidence of its impact on the behavior of institutional investors. Using quarterly U.S firm-level data for 1980Q1-2020Q4, we find heterogeneous responses of institutional investors to EPU shocks to different horizons. Specifically, long-term institutional investors respond positively to EPU shocks, while short-term institutional investors reduce their holdings during periods of uncertainty. We posit that different expectations about the future of firms between long- and short-term investors may account for the heterogeneous responses. We test this hypothesis by investigating how firm growth opportunities, volatility, and investment activity influence the relationship between EPU and institutional investor horizons. The results show that the positive (negative) effect of EPU on long-term (short-term) institutional investors becomes stronger for firms with higher growth opportunities, higher volatility, and more investment. Our paper has important economic implications that the countercyclical behavior of long-term institutional investors improves firm value and liquidity during uncertain periods.
WORKING PAPERS
[8] "Firms' Risk Incentives and SEO Underpricing: Evidence from a Natural Experiment" - with Jun Zhang
- Semifinalist for "Best Paper Award in Corporate Finance", FMA 2018
- Revise and Resubmit at Financial Review
[Abstract] This paper examines the impact of firms’ risk incentives on seasoned equity offering (SEO) underpricing by exploring RegSHO pilot program as a natural experiment. Facing greater downside risk due to the removal of short selling constraints, the randomly selected pilot firms have lower risk incentives and risk-taking, which should mitigate the negative market reaction and reduce SEO underpricing. Using a difference-in-difference approach, we find that, consistent with the conjecture, the pilot firms experience smaller SEO underpricing during the program and the reduction of SEO underpricing is more pronounced in more risky and less conservative pilot firms. In addition, the pilot firms have lower default risk and tend to issue more equity during the program. Overall results support that firms’ risk incentives have important impacts on SEO underpricing.
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[9] "Insider Share Pledging, Managerial Risk-Taking, and Corporate Policies"
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[Abstract] Firms expend considerable resources, including designing an appropriate incentive structure, to mitigate the potential conflict of interest between firms’ executives and shareholders. By altering the incentives of ownership, share pledging can affect risk-taking choices made by management. The practice of share pledging, wherein insiders pledge their shares as collateral for personal loans, has the potential to misalign the incentive structure of management. For example, because pledged shares are subject to margin calls, it may incentivize management to undertake less risky projects than what is optimal for shareholders. By employing a unique sample of share pledging by management in U.S. firms, this paper documents that the practice of insider share pledging affects risk-taking in a negative way. This, in turn, impairs firms’ profitability and erodes shareholder wealth. The paper also documents that share pledging is associated with greater earnings management, perhaps in an attempt to keep prices stable and alleviate margin call pressure. Finally, the paper also looks at the role of the institutional investors in their capacity as external monitors to limit the negative effects of share pledging. We find that institutional ownership is associated with lower pledge ratios and moderates risk reduction behavior associated with pledging. Overall, our findings inform the regulatory debate on the need to provide detailed disclosure and restrict share pledging by managers.
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[10] "Kick the Cat? Evidence of Retail Investors' Displaced Aggression from Amazon Product Rating" with Yanhui Zhao
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[Abstract] In this study, we present novel findings that the e-commerce market reflects the displaced aggression behavior of retail investors from the capital market. We document that market return fluctuations substantially impact the distribution of product-market customer satisfaction proxied by daily Amazon star ratings. We find that one standard deviation decrease in market return (around 1.29\%) leads to a 1.23\% reduction in the average daily product rating over the following day. We further find that reviewer-investors respond to stock market losses and gains asymmetrically: investors only react to stock market losses. The importance of investors' displaced aggression lies in the ``feedback effects" on security prices in the economy \citep{Shiller2002}. Our findings are consistent with investors' recursive preferences focusing on the trade-off between current period utility and the certainty equivalent of random future utility.
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[11] "Financial Development and Product Market Concentration: an Inverted-U Shape" with Xiaoyang Zhu
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[Abstract] This paper empirically investigates how financial development affects the product market concentration. We find strong evidence of an inverted-U relationship using a cross-country industry-level panel of 58 countries over 1980-2017. The inverted-U relationship is robust to the instrumental variable tests, the inclusion of competition law, the influence of business cycles, and the sector-wise examination. We identify two mechanisms through which the development of credit and equity markets affect market concentration in a nonlinear form. We show that this relationship is particularly pronounced among industries that are more dependent upon external finance and that are associated with larger technology gap. We also examine the implications of this inverted-U relationship on research productivity using a novel cross-country Research Quotient dataset. We find an inverted-U relationship between financial development and research productivity. Our results further entail that financial development may play a role in explaining the modern productivity growth slowdown puzzle.
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[12] "Shaping the Stock Price Informativeness: The Role of Share Pledging in China’s Market" with Yanbo Jin and Jian Xu
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[Abstract] This paper examines the impact of share pledging on firms’ future stock price informativeness (SPI, thereafter), and the mechanism through which share pledging affects SPI. Using a sample of Chinese listed firms over 2001 - 2017, we document strong positive explanatory power of both the existence of share pledging and the percentage of shares pledged by the top ten shareholders on the SPI. The baseline results are robust to additional tests on sample selections, endogeneity, and model specifications. Further tests show that the pledging-SPI relation magnifies as share pledging help improve corporate transparency, leading to higher SPI. Finally, we find the improved transparency through share pledging produces higher firm value outcomes.
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[13] "Can Institutional Ownership Improve Market Efficiency in Parsing Complex Legal Disputes - Evidence from Natural Language Processing" - with Paul Borochin and Xiaoqiong Wang
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- Covered by Columbia Law School's Blog on Corporations and the Capital Markets.
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[Abstract] Long-horizon institutional investors can help mitigate information asymmetries around securities class action (SCA) lawsuits. We find that the machine readability of SCA complaint filings can predict the outcome and duration of class actions. Long-term institutional investor ownership leads to a more positive post-SCA announcement price reaction and increases the volatility ratio of prices as a measure of price informativeness. Furthermore, there is a significant interaction effect between long-term institutional ownership and SCA complexity on price informativeness consistent with a superior information processing ability about complex corporate events affecting portfolio firms
[14] "Who Loses Most When Big Banks Suddenly Fail? Evidence from Silicon Valley Bank Collapse" - with Xia Summer Liu, William Megginson, and Nhu Tran
- Revise and Resubmit.
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[Abstract] We analyze the market reaction of 137 Silicon Valley Bank (SVB) depositors and 251 SVB borrowers to the bank’s collapse. Depositor shares experience a -5.12% abnormal return (AR) on the event date (March 10, 2023), and a -12.38% cumulative abnormal return (CAR) over a 30-day post-event window. More surprisingly, the borrowers also experience a similar event-day AR (-4.16%) and an even worse 30-day post-event CAR (-13.47%). SVB clients have worse CARs if they are smaller, with higher cash holdings, or with lower market-to-book ratios. These results indicate that borrowers appear to suffer more than depositors from SVB’s failure.
