Corporate ESG Profiles and Investor Horizons, with Laura Starks and Qifei Zhu
Questions and debate surround institutional investor preferences regarding the Environmental, Social and Governance (ESG) profiles of their portfolio firms. To address these issues, we examine changes in their portfolios and find that preferences for corporate ESG depend critically on investor horizons: Investors with longer horizons tend to prefer higher-ESG firms, while short-term investors prefer the opposite. Consistent with the importance of horizon, we find that investors behave more patiently toward high ESG firms, selling less after negative earnings surprises or poor stock returns. We further support these findings using changes in the FTSE4Good Index as shocks to firms’ ESG reputations.
- Presented at the 2016 JOIM “Long-run Risks, Returns and ESG Investing” Conference, 2018 Western Finance Association Annual Meeting, 2018 Financial Management Association Annual Meeting and Best quantitative paper at the 2018 PRI Academic Network Conference
Product Differentiation, Benchmarking and Corporate Fraud, with Audra Boone, Billy Grieser and Rachel Li
We find that firms with lower product market differentiation exhibit significantly lower rates of fraud. This relationship is more pronounced for complex firms and is robust to controlling for various measures of competition, predictors of fraud, and industry heterogeneity. To help establish causality, we show this relationship holds when we exploit changes in product differentiation stemming from rivals’ IPO and acquisition activity. Finally, we find that IPOs (and acquisitions) of rivals facilitate the detection of fraud for firms with ex ante greater product differentiation. Overall, our findings suggest that lower differentiation disciplines firms by facilitating fraud detection through a benchmarking channel.
- Presented at the 2018 Financial Management Association Annual Meeting
The Effect of Mergers on Human Capital: Evidence from Sell-Side Analysts (Job Market Paper)
I find that when brokerage houses merge, acquiring house analysts temporarily produce less accurate estimates. This temporary impairment suggests that the merging process can distract high-skilled employees. Furthermore, high-quality analysts, especially when redundant, often leave target houses to avoid covering new firms. This attrition suggests that high-skilled employees exercise outside options to avoid abandoning human capital. As a consequence of these effects, the forecast error in merged houses remains elevated by 10% for two years, thus impairing information quality in financial markets. I conclude that mergers can temporarily, but significantly, impair firms’ ability to acquire, develop, and retain human capital.
- Presented at the 2016 FMA Doctoral Student Consortium
- Presented at the 2016 FMA Conference
We study how property-rich and property-poor districts respond to funding changes under a wealth equalization policy, using an instrument to exogenously identify funding changes. We find that property-rich districts reduce their tax rates and issue debt for capital expenditures after the state redistributes some of their funding to poorer districts. In contrast, when property-poor districts receive additional funding, this spending correlates with investments, such as employing more and better teachers, implying that properly recaptured and redistributed funds may increase quality in property-poor districts.
- Presented at 42nd Annual Education and Finance Policy Conference