1. Price-Based Return Comovement (with T. Clifton Green), 2009, Journal of Financial Economics 93, 37-50.
"Investors' grouping companies based on stock price causes 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), 2016, Strategic Management Journal (forthcoming).
"Founder CEOs of S&P 1500 firms are significantly more overconfident than their non-founder counterparts. Our finding helps, in part, to 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), 2016, Journal of Financial Economics (forthcoming).
"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.]
Active Working Papers
Arbitrage Involvement and Security Prices (with Baixiao Liu and Wei Xu), 2017.
"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 can therefore help correct underpricing."
We argue that hedge funds more aggressively buy underpriced stocks when they are able to short and, as such, immunize their long positions against industry fluctuations. 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. No such pattern is found for long-only investors to whom the ability to hedge risk via short positions is of little consequence. 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.]
Offsetting Disagreement and Security Prices (with Dong Lou and Chengxi Yin), 2016.
"Portfolios often trade at a discount relative to its components. Here, we provide a unifying explanation for this phenomenon."
Portfolios often trade at substantial discounts relative to the sum of their components (e.g., closed-end funds, conglomerates). We propose a simple explanation for this phenomenon: While investors may strongly disagree at the component level, as long as their relative views are not perfectly positively correlated across the components, disagreement will partially offset at the portfolio level. In other words, investors generally disagree less at the portfolio level than at the individual component level. Coupled with short-sale constraints, this explains why a portfolio trades below the sum of its parts.
Utilizing closed-end funds, exchange-traded funds, conglomerates, and mergers and acquisitions as settings where prices of the underlying components and prices of the aggregate portfolio can be evaluated separately, we present evidence supporting our argument.
The Speed of Communication (with Shiyang Huang and Dong Lou), 2016.
"We estimate how fast information can travel via word-of-mouth in financial markets and what factors, to what degree, determine that speed of communication."
Drawing from research on disease contagion, we estimate a transmission matrix to quantify how the speed at which information (or noise) travels through the investor population varies with distances in social characteristics (such as age, income, and gender).
We utilize cross-industry stock-financed mergers and acquisitions as a source of plausibly exogenous variation in investors' information gathering activity. In particular, we conjecture that once “endowed” with shares of the acquiring firm, target investors are more likely to study and trade in the acquirer industry; target investors also spread any newly acquired industry views to their neighbors. Tracing out the path of contagion via investors' trading behavior, we estimate that a ten-year difference in age, a one-step difference in income, and being of different gender lowers the effective communication rate between an investor pair by 12%, 2%, and 17%, respectively. In addition, the effective communication rate from older, wealthier, female investors to their younger, poorer, male counterparts is noticeably higher than the effective communication rate in the reverse direction.