Publications

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World (jointly 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

Abnormal Local Temperatures and Asset Prices

Abnormal local temperatures (“ALTs”) are defined as the extent to which current temperatures are more uncomfortable than historical norms in firms’ operating locations, encompassing both hotter and colder conditions. This paper analyzes the asset pricing implications of extreme ALTs in the United States. A long-short portfolio constructed from firms with low minus high ALTs within an industry generates a monthly risk-adjusted return exceeding 0.4% from 2000 to 2022. The negative return–extreme ALTs relationship cannot be explained by existing systematic risks, investors’ preferences, mood, political leaning, emissions, or other climate-related variables. Firms encountering extreme ALTs exhibit worsened operating performance, attributable to lower labor productivity, employee reduction, and direct output impact. Extreme ALTs also relate to lower earnings surprises and diminished institutional investors’ holdings. The predictability of stock returns in the presence of extreme ALTs is primarily due to the mispricing of negative cash-flow news rather than the updating of discount-rate news.

Meritocracy and Asset Prices (jointly 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 (jointly 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 (jointly 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 (jointly with Anna Helmke and Yizhen Xie)

Corporate Meritocracy (jointly with Valeria Fedyk)

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