Published and Accepted Papers

THE VALUE OF OFFSHORE SECRETS – EVIDENCE FROM THE PANAMA PAPERS

with Hannes Wagner and Stefan Zeume

at The Review of Financial Studies (2019, 32(11): 4117-4155)

•  Lead article and runner up for Michael J. Brennan Best Paper Award

We exploit one of the largest data leaks to date to study whether and how firms use secret offshore vehicles. From the leaked data, we identify 338 listed firms as users of secret offshore vehicles and document that these vehicles are used to finance corruption,  avoid taxes, and expropriate shareholders. Overall, the leak erased $174 billion in market capitalization among implicated firms. Following the increased transparency brought about by the leak, implicated firms experience lower sales from perceptively corrupt countries and avoid less tax. We estimate conservatively that
one in seven firms have offshore secrets.

INTERNATIONAL ASSET PRICING WITH STRATEGIC BUSINESS GROUPS

with Massimo Massa and Hong Zhang

at The Journal of financial economics (2022, 145(2): 339-361)

Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel dataset of worldwide ownership for 2002-2012, we find that central firms are better protected in bad times and that they earn relatively lower expected returns. Moreover, a centrality factor augments traditional models in explaining the cross-section of international stock returns.

---

Working Papers

UNDERSTANDING THE ASSET GROWTH ANOMALY

Components of balance sheet asset growth which are related to earnings management contributed to the asset growth anomaly in the past. These components of balance sheet asset growth are no longer related to returns since 2002 and this has contributed to the disappearance of the asset growth anomaly. I provide evidence that the Sarbanes-Oxley Act reduced earnings management and improved the integrity of accounting information: earnings manipulation has decreased, earnings predictability has increased, and analyst forecast errors have decreased. Further, the cross-sectional relationship between the accrual accounts used to manage earnings and analyst optimism has reduced. The evidence suggests that the asset growth anomaly was driven by mispricing in the past and that this mispricing has decreased. More broadly, these findings point towards changes in the regulatory environment as a novel driver of equity market anomalies.

RETAIL OPTION TRADING AND MARKET LIQUIDITY: EVIDENCE FROM HIGH-FREQUENCY DATA

with Yang (Gloria) Yu and JINYUAN ZHANG

Eastern-FA 2023, FMCG 2023, PBFEAM 2023, FMA 2023, Paris December Finance Meeting 2023 (scheduled)

This paper demonstrates that retail trading in the options market impacts the liquidity of underlying stocks. Options contracts have zero net supply, and financial intermediaries engage in delta hedging to manage their net imbalances, unlike retail traders. Consequently, when intermediaries hold a net short (long) option position, their dynamic hedging demands liquidity from (or supplies liquidity to) the underlying stock, leading to market destabilization (or stabilization). Leveraging proprietary option exchange data that categorizes option trading by trader type, we document this effect and show that it is stronger for stocks and periods where liquidity supply is expected to be limited.

Partisan values and Financial Misconduct

with ANTHONY B. RICE

Brown bags – ASU, CItyU, CUHK

We study the relationship between partisan values and financial adviser misconduct. Using
self-declared party affiliations from voter records as our proxy for individual values, we find that Republican advisers are 11% more likely to commit financial misconduct than other advisers at the same branch during the same year. We find that this relation is not driven by matching with customers, changes in regulatory oversight, peer effects, or other time-varying omitted variables. We also find that in-group biases related to political affiliation can increase financial misconduct within firms, decrease misconduct-related turnover, and result in the reemployment of advisers with prior misconduct. Our findings indicate that individual values are an important driver of misconduct and that partisan in-group favoritism can result in labor-market disparities among professionals in the same field.

MONETARY POLICY AND FRAGILITY IN CORPORATE BOND FUNDS

with John Kuong and Jinyuan Zhang

We document aggregate outflows from corporate bond funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model’s predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

EQUILIBRIUM COMPUTATION WITH HETEROGENEOUS FIRMS AND BOUNDED RATIONALITY

I propose an algorithm to solve for general equilibrium with heterogeneous firms and bounded rationality. The algorithm uses a histogram-based approximation of the firm distribution and first-order optimality conditions to simultaneously solve market clearing and optimal firm policies. An advantage of this approach is that each solution point can be considered an equilibrium realization conditional on the learning rule. I show that this algorithm can be used to understand the impact of learning rules that capture bounded rationality, time to equilibrium, off-equilibrium dynamics, and transition dynamics after structural breaks.

TRANSACTION COSTS AND COST MITIGATION IN OPTION INVESTMENT STRATEGIES

with Yang (Gloria) Yu

We examine the impact of transaction costs on the profitability of long-short portfolios of delta-hedged option returns. Of the 24 variables studied, 17 generate positive and significant gross returns, but none remain profitable after accounting for trading costs. We explore cost-mitigation strategies and propose a novel approach that outperforms existing methods, restoring profitability to 7 long-short portfolios. Our findings emphasize the crucial role of implementation costs in assessing the investment opportunity set in equity-option markets and underscore the importance of incorporating transaction costs when evaluating option-based strategies.

---

Work in Progress

Machine learning the cross-section of option returns

(with Bowen Du, Xiao Qiao, Siyi Wang and Qi Wu)

Merger Financing and the Information Content of Option-Implied Moments

(with Cal Muckley and Conall O’ Sullivan)