Publications

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World (joint with Alex Edmans, Chendi Zhang, and Lucius Li). Management Science, August 2023

Studying 30 countries, we find that the link between employee satisfaction and stock returns is significantly increasing in a country’s labor market flexibility. This result is consistent with employee satisfaction having greater recruitment, retention, and motivation benefits where firms face fewer hiring and firing constraints and employees have greater ability to respond to satisfaction. Labor market flexibility also increases the link between employee satisfaction and current valuation ratios, future profitability, and future earnings surprises, inconsistent with omitted risk factors and identifying channels through which employee satisfaction may affect stock returns. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

Working Papers

Local Temperature Anomalies and Asset Prices (JMP)

This paper studies the asset pricing implications of local temperature anomalies (“LTA”), characterized by anomalous heat and cold. A long-short portfolio constructed from firms with low minus high LTA within an industry generates a monthly four-factor alpha of 0.46% from 2000 to 2022. The negative LTA-return relation cannot be explained by existing systematic risks, investor preferences, attention, extreme heat or cold alone, or extreme temperature levels. High-LTA firms exhibit significantly higher bond yield, worse operating performance and productivity, and diminished analysts’ earnings forecasts and surprises. I propose a model where firms are heterogeneous regarding disaster resilience and find that investors’ expected dividend loss rate upon climate disasters rises by 0.43-0.56 after extreme LTA.

Meritocracy and Asset Prices (joint with Suleyman Basak  and Valeria Fedyk)

Meritocracy characterizes a political system wherein economic goods are allocated based on an individual's ability and effort, rather than social class. This paper constructs a measure of meritocracy, examines meritocracy's impact on asset prices, income inequality, and effort empirically, and proposes a theoretical model that is consistent with these findings. Our empirical analysis demonstrates that higher levels of meritocracy are associated with a higher risk-free interest rate, lower stock price, and lower stock risk premium and volatility. We also find that meritocracy plays a significant role in the real economy, with higher meritocracy related to higher levels of individual and aggregate effort and greater income inequality over the past 50 years. To shed light on these findings, we develop a dynamic model of financial markets that incorporates meritocracy in the economy. Our model provides insights that support our empirical results, uncovers the underlying mechanisms at play, and allows us to identify specific conditions under which meritocracy can help to reduce income inequality.

Information Frictions and index ETFs (joint with Yizhen Xie)

We investigate the role of information costs in creating an anomaly in the index ETF industry: the flow-return-fee sensitivity within and across fund families is weaker than rational behavior would lead us to expect. Despite strong return-fee predictability, there is little flow-return-fee responsiveness within fund families, suggesting investors face information inertia---they do not switch away from older funds even if they are suboptimal. Unsophisticated investors have information friction as index ETFs held by more institutional investors deliver higher returns and charge lower fees. We parsimoniously explain these facts using a dynamic model with switching costs. Overall, our results suggest that the anomaly in flow-return-fee sensitivity in the index ETF industry can be explained by economic and switching costs.

The timing and consequences of share repurchases (joint with Chris Lien)

This paper studies the agency costs associated with the open-market repurchase program and documents its real financial consequences. Specifically, we look at the role of a manager’s behavioral bias in making repurchase decisions. We find that the likelihood of open-market repurchase jumps discontinuously when the stock price equals the previous repurchase price. The anchoring effect holds after considering other fundamental determinants. After identifying this discontinuity, we then use a fuzzy regression discontinuity design based on this cutoff, which exploits the local randomness in stock price, to study the consequences of anchoring in share repurchases. We find that anchoring-driven repurchase leads to aggressive investment (investment, R&D) but poor financial performance (ROA, earning growth) and deteriorated financial health (more debt, lower credit rating upgrade probability). Overall, we provide some of the cleanest estimates, to date, of the agency cost and financial consequence of the open-market repurchase program. Our results highlight the non-contractable agency cost associated with the share repurchase program. 

Work in Progress

Measuring Index Fund Performance (joint with Anna Helmke and Yizhen Xie)

Does investor activism drive environmental protection or degradation? Evidence from power plant companies