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Do Managers Learn from Institutional Investors through Direct Interactions? (Solo-authored)
Journal of Accounting and Economics, 2023
I examine whether corporate managers learn from institutional investors through direct interactions at investor conferences. I find that managers seek more direct interactions with institutional investors at conferences when they have a greater need for information about their firm’s product markets and supply chains. This relation is stronger when managers expect investors to be knowledgeable. I also show that the information acquired from conference interactions is reflected in subsequent manager decisions. First, direct interactions help managers to extract information embedded in stock prices and later use it to make investments. Second, within the same firm and month, managers’ personal stock trades immediately after attending a conference earn higher abnormal returns, consistent with direct interactions expanding their private information set. Overall, these findings suggest that managers can acquire decision-relevant information from direct interactions with institutional investors of their firm.
Beyond Old Boys’ Clubs: Financial Analysts' Utilization of Professional Connections. (With Mengqiao Du)
Women often lack the opportunity to enter exclusive social clubs, reaping fewer benefits from their social networks. We investigate, conditioning on having the opportunity to interact with the right people in a professional setting, whether women can better utilize connections for career performance and advancement than men. Using a unique dataset that documents when, where, and with whom a financial analyst interacts at investor conferences, we find that female analysts issue more accurate earnings forecasts than their male counterparts after establishing connections with the firms' executives. This result is robust to exploiting variations in connections within an analyst-firm pair. In addition, female analysts overcome homophily when interacting with executives, and their superior ability to utilize connections is recognized in both the capital and labor markets. Our findings suggest that women are better at capitalizing on professional connections and highlight the importance of promoting women's networking opportunities in the workplace.
The Cost of Regulatory Inaction: Evidence from IFRS Non-Adoption. (With Miao Liu and Wanrong Xu)
A growing literature has examined the benefits and costs of implementing new disclosure regulations. However, little is known about the consequences when regulators fail to take action. Using IFRS adoption in 2005 as the setting, we examine the costs of regulatory inactions among non-adopting countries. We first validate that IFRS adoptions by other countries do not affect the liquidity of S&P 1500 US firms. Next, using S&P 1500 US firms as the control group, we observe a significant decline in liquidity for non-US firms in non-adopting countries after Q4 2005, indicating a deteriorating information environment. Employing a within-firm-time design, we demonstrate that analysts and institutional investors shift their attention from non-IFRS firms when other firms in their portfolios adopt IFRS. Overall, our findings highlight the potential costs of regulatory inaction. Valuable information production resources are diverted to the new regime, resulting in a worsened information environment for companies in the old regime.
Is Information Production for the U.S. Stock Market Becoming More Concentrated? (With Yang Cao and Miao Liu)
Over the past two decades, the US stock market has undergone significant changes in its structure, with small firms disappearing and large firms gaining market share. This study investigates whether the dominance of large firms in the market creates positive spillover for or shifts resources away from small firms' information production. Using a shift-share IV approach and a difference-in-differences design, our identification strategy isolates two independent variations in large firms’ market share that are plausibly exogenous to small firms’ fundamentals. We find that as large firms gain market share, information production resources, including the attention of financial analysts and institutional investors, are shifted away from small firms, even if the size and business fundamentals of small firms remain unchanged. The loss of information production results in deteriorating stock price informativeness, but only among smaller firms with business fundamentals distinct from large firms. Our evidence suggests that the concentration of information production in the US stock market creates a distributional effect on smaller firms – small firms whose business fundamentals differ from large firms experience a deteriorating information environment.
Executive Compensation Contracts in the Presence of Adverse Selection. (With Chris Armstrong and Luzi Hail)
We develop three complementary tests to examine how adverse selection affects the design of executive compensation contracts: First, we show that externally hired CEOs receive higher total pay and have fewer equity incentives relative to internally promoted CEOs, consistent with their ability to extract larger information rents due to greater private information. These differences are more pronounced when less is known about the prospective CEO, but quickly dissipate over time. Second, we show that external CEOs’ initial contracts differ more from those of their firm’s incumbent senior managers than do those of internal CEOs—particularly in terms of accounting performance metrics and equity-based pay, in line with the use of these features to elicit private information. Third, we find that following an unanticipated change in option vesting schedules prompted by SFAS 123R, newly appointed executives do not increase their option exercises and share sales—despite their newfound ability to do so—while longer-tenured executives do, consistent with contracts initially being designed to screen for certain types of managers before shifting to encourage certain behaviors. Combined, our evidence supports the distinct role of adverse selection in the design of executive compensation contracts.