Byoung-Hyoun Hwang

Published Papers

1. Price-Based Return Comovement (with T. Clifton Green), 2009, Journal of Financial Economics 93, 37-50.

"Investors group companies based on stock prices. This can cause excess-comovement."

We find that, shortly after a stock conducts a 2-for-1 split, the stock starts co-moving more with lower-priced stocks and less with higher-priced stocks. This shift in co-movement occurs after the effective date of the split and not on (or before) the announcement date of the split. Our results suggest that investors care about a company’s stock price; the findings are also broadly consistent with the notion that investors’ moving money in and out of categories induces stock-return co-movement above and beyond what would be expected based on firm fundamentals.
[Please check out the SAS code under "Code and Data" to reproduce our main results.]

2. It Pays to Have Friends (with Seoyoung Kim), 2009, Journal of Financial Economics 93, 138-158.

"Social ties between corporate directors and CEOs affect directors' monitory effectiveness."

The conventional view of director independence puts the focus on financial/familial ties to the CEO/firm. Here, we provide evidence that social ties between directors and CEOs also matter. We approximate social ties via background similarities (e.g., the CEO and the director both served in the military, share an alma mater, were born in the same region . . . ). We find that firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay–performance sensitivity, and exhibit stronger turnover–performance sensitivity than firms whose boards are conventionally independent only.

3. Country-Specific Sentiment and Security Prices, 2011, Journal of Financial Economics 100, 382-401.  

"Companies operating in less popular countries (among Americans) trade at a substantial discount in the US. Country popularity also affects foreign direct investment and cross-border mergers."

I provide evidence that a country’s popularity among Americans (as measured by Gallup Polls) affects US investors’ demand for US securities and causes security prices to deviate from their fundamental values. Country popularity also positively associates with the intensity of US cross-border M&A activity, suggesting that country popularity enters the investment-decision-making process of not only investors but also firms.

[If you are interested in the country popularity data and your institution subscribes to the Gallup Polls or the iPoll Databank, please let me know. I'd be happy to share the original and an updated dataset.]

4. IPOs as Lotteries: Skewness Preference and First-Day Returns (with T. Clifton Green), 2012, Management Science 58, 432-444.

"Investors treat IPOs like lotteries. Investors' preference for lotteries causes temporary IPO overpricing and, subsequently, poor long-run performance."

We provide evidence that skewness preference plays a role in the pricing of stocks. In particular, we find that IPOs that are predicted to be more positively skewed have significantly higher returns on the first day of trading; these IPOs also have lower long-term returns. 
[Please check out the SAS code under "Code and Data" to reproduce our main results.]

5. Wisdom of Crowds: The Value of Stock Opinions Transmitted through Social Media (with Hailiang Chen, Prabuddha De and Yu (Jeffrey) Hu), 2014, Review of Financial Studies 27, 1367-1403.

"Stock opinions transmitted through social media can be very valuable."

This paper investigates the extent to which investor opinions transmitted through social media predict future stock returns and earnings surprises. We conduct textual analysis of articles published on one of the most popular social media platforms for investors in the United States from 2005 to 2012. We also consider the reader’s perspective as inferred via commentaries written in response to these articles. We find that the views expressed in both articles and commentaries predict future stock returns and earnings surprises in a statistically significant and economically meaningful way.

6. Are Founder CEOs more Overconfident than Professional CEOs? Evidence from S&P 1500 Companies (with Hailiang Chen and Joon Mahn Lee), 2017, Strategic Management Journal 38, 751-769.

"Founder CEOs of S&P 1500 firms are more overconfident than their non-founder counterparts. Our finding helps explain why large publicly traded firms managed by founder CEOs behave so differently."

We provide evidence that founder CEOs of large S&P 1500 companies are more overconfident than their non-founder counterparts (“professional CEOs”). We measure overconfidence via tone in CEO tweets, tone in CEO statements during earnings conference calls, management earnings forecasts, and CEO option-exercise behavior. We find that compared with professional CEOs, founder CEOs use more optimistic language on Twitter and during earnings conference calls. In addition, founder CEOs are more likely to issue earnings forecasts that are too high; they are also more likely to perceive their firms to be undervalued, as implied by their option-exercise behavior. To date, investors appear unaware of this “overconfidence bias” among founders.
[If you are interested in our founder dataset, which signs each CEO in the Execucomp database from 2008 through 2012 as a founder CEO versus a professional CEO, please let me know. We'd be happy to share the dataset.]

7. It Pays to Write Well (with Hugh Hoikwang Kim), 2017, Journal of Financial Economics 124, 373-394.

"The readability of disclosure documents affects firm value."

We quantify the impact of easy-to-read disclosure documents on firm value. Using a copy-editing software application that counts the pervasiveness of the most important ‘writing faults’ that make a document harder to read, our analysis provides evidence that issuing financial disclosure documents with low readability causes firms to trade at significant discounts relative to the value of their fundamentals.
[Please check out the STATA code under "Code and Data" to reproduce our main results.]

8. Arbitrage Involvement and Security Prices (with Baixiao Liu and Wei Xu), 2017, Management Science (forthcoming).

"The presence of a deep and liquid short-selling market allows hedge funds to hedge their long positions, thereby allowing them to trade more aggressively on under-pricing. The presence of a well-functioning shorting market therefore not only facilitates the correction of over-pricing, but also helps correct under-pricing."

We propose that hedge funds more aggressively buy underpriced stocks when they are allowed to short. To test our proposition, we utilize the institutional feature in Hong Kong in virtue of which only stocks added to a special list can be shorted.
Our first-stage analysis uses hedge fund holdings data and provides evidence that the emergency of shortable securities, indeed, causes hedge funds to more aggressively buy seemingly underpriced stocks. Our second-stage analysis presents evidence that hedge funds’ increased involvement in these securities helps correct under-pricing and moves prices in the direction of fundamentals.
[Please click here for the Online Appendix.]

9. Information Sharing and Spillovers: Evidence from Financial Analysts (with Jason Sturgess and Jose Liberti), 2017, Management Science (forthcoming).

"In knowledge-based industries, individuals owe much of their success to the colleagues that surround them."

We study how information sharing within an organization affects individual performance. We look at situations in which the same analyst, while working at the same broker, covers multiple mergers and acquisitions (M&As), in particular the acquirer prior to the M&A and the merged firm thereafter. We find that earnings forecasts for the merged firm are significantly more accurate when the analyst has a colleague (working at the same broker) covering the corresponding target prior to the M&A. This holds particularly true if acquirer- and target-analysts reside in the same locale, if they are part of a smaller team, and if the target-analyst is of higher quality. Our findings highlight the importance of information spillovers on individual performance in knowledge-based industries.

Active Working Papers/Work-in-Progress

Economic Consequences of Social Media Adoption by CEOs and CFOs (with Hailiang Chen and Baixiao Liu), 2017.

"Top executives have begun to communicate directly with investors and, by doing so, directly shape their firms’ information environment and help widen their investor bases."

Corporate executives are becoming increasingly active on social media channels. This paper examines the economic consequences of such behavior and asks whether social media adoption by top executives improves the corresponding firms’ information environment and attracts more investors. We look at the personal Twitter activity of S&P 1500 CEOs/CFOs. Personal tweets contain news as well as reports on executives’ day-to-day activities, current interests, and mood. Our analysis suggests that personal tweets improve the information environment and widen the retail investor base. The effects are stronger among executives who post more tweets, receive more retweets, or have more followers. In addition, we exploit the Securities and Exchange Commission’s embracement of social media to broadcast company-specific news in April 2013 as an exogenous event that leads to a shift in social media use by existing adopters. Our results continue to hold in this subsample analysis and provide evidence for a causal relationship.

Offsetting Disagreement and Security Prices (with Dong Lou and Chengxi Yin), 2017.

"Investors generally are less excited about portfolios than they are about individual companies. This has important asset pricing implications."

We propose that investors are generally less excited about portfolios than they are about the individual companies in those portfolios. The reason is that companies liked by some investors are often not liked by other investors. This makes it almost impossible to construct a portfolio that perfectly pleases large groups of investors and contains (only) every investor’s most favorite companies. The maximum level of excitement that a portfolio of companies receives from investors, therefore, is almost always less than the sum of the level of excitement that the individual companies in the portfolio receive from their most fervent supporters. In the presence of binding short-sale constraints, wherein prices are set by the most optimistic investors, this difference in the level of excitement can become priced.
Utilizing mergers and acquisitions, closed-end funds, exchange-traded funds and conglomerates where the value of the aggregate portfolio and the values of the underlying components can be separately evaluated, we present evidence supporting our proposition.
[Please click here for the Online Appendix.]

The Speed of Communication (with Shiyang Huang and Dong Lou, work-in-progress), 2017.

"We estimate the rate at which information transmits in the financial marketplace via word-of-mouth and how that rate varies by type of information transmitted and investor characteristics."

We estimate the transmission rate of information in the financial marketplace and how that rate varies by type of information transmitted and investor characteristics. Our innovation is to use cross-industry stock-financed mergers and acquisitions (M&A) as a source of plausibly exogenous variation in investors’ information gathering activity. We conjecture that once “endowed” with shares of the acquiring firm, target investors more carefully study the acquirer industry, which generates abnormal trading activity in the acquirer industry (outside of the acquiring firm). Tracing out the “contagion” of abnormal trading activity in the acquirer industry to neighbors of target investors and their neighbors’ neighbors then enables us to quantify the transmission rate of information among investors.

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