Recent journal articles

Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers

Phong Ngo, Jared Stanfield

Forthcoming, Journal of Financial and Quantitative Analysis.

We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

Local Bankruptcy and Geographic Contagion in the Bank Loan Market

Nhan Le, Jawad Addoum, Alok Kumar, Alexandra Niessen-Ruenzi

Forthcoming, Review of Finance.

We examine whether corporate bankruptcies influence bank loan characteristics of geographically proximate firms. Controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a seven basis point increase in loan spreads. The effect is transitory and cannot be fully explained by local correlated information or lenders' financial health. Instead, the effect is more pronounced for informationally opaque bankruptcies and borrowers, and weakened among loans with relationship lenders and lenders with significant local presence.

Full paper here

Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Le Zhang, Claire Liu, Angie Low and Ron Masulis

Forthcoming, Review for Financial Studies

Boards are crucial to shareholder wealth. Yet, little is known about how shareholder oversight affects director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

Global political uncertainty and asset prices

Jonathan Brogaard, Lili Dai, Phong Ngo and Bohui Zhang

Forthcoming, Review of Financial Studies

We show that global political uncertainty, measured by the U.S. election cycle, on average, leads to a fall in equity returns in 50 non-U.S. countries. At the same time, market volatilities rise, local currencies depreciate, and sovereign bond returns increase. The effect of global political uncertainty on equity prices increases with the level of uncertainty in U.S. election outcomes, and a country’s equity market exposure to foreign investors, but does not vary with the country’s international trade exposure. These findings suggest that global political uncertainty causes an increase in investors’ aggregate risk aversion, leading to a flight to safer assets.

Understanding Informal Financing

Franklin Allen, Meijun Qian and Jing Xie
Journal of Financial Intermediation (2018)

This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.

Political Promotion, CEO Incentives, and the Relationship between Pay and Performance

Jerry Cao, Michael Lemmon, Xiaofei Pan, Meijun Qian and Gary Tian
Management Science (2018)

Both theory and empirical evidence suggest that managers’ career concerns can serve as an important source of implicit economic incentives. We examine how incentives for political promotion are related to compensation policy and firm performance in Chinese state-owned enterprises. We find that the likelihood that the CEO receives a political promotion is positively related to firm performance. We also find that CEOs with a higher likelihood of political promotion have lower pay levels and lower pay–performance sensitivity. Overall, the evidence suggests that competition in the political job market helps mitigate weak monetary incentives for CEOs in China.

Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market

Luis Goncalves-Pinto, Bruce D. Grundy, Allaudeen Hameed, Thijs van der Heijden, Yichao Zhu

Forthcoming, Management Science

Stock and options markets can disagree about a stock's value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements due to pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.

Employee inside debt and firm risk-taking: Evidence from employee deposit programs in Japan

Sudipto Dasgupta, Yupeng Lin, Takeshi Yamada and Zilong Zhang

Review of Corporate Finance Studies. vol. 8, no. 2, 2019

Unlike broad-based equity ownership by employees, ownership of company debt by rank-and-file employees has not received much attention. We argue that company debt held by employees in the form of in-company deposits can monitor risk-taking and facilitate risk discovery. Employee deposits have historically been widely used in Japan. For a sample of 2104 Japanese firms, using an identification strategy that utilizes a new law in 2003 that changed the priority of employee deposits in bankruptcy and led to large scale withdrawals of employee deposits, we find that employee deposits mitigate firms’ risk-taking behavior and reduce the agency cost of debt.