Working Papers

Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms' Innovation

We study how an improvement in contracting institutions due to the 1999 U.S.-China bilateral agreement affects U.S. firms' innovation. We show that U.S. firms operating in China decrease their process innovations—innovations that improve firms' own production methods—following the agreement. We obtain the same result using the inter-temporal variation in ownership restrictions on foreign investment in China across industries. These findings suggest that a better ability to source labor cheaply across borders affects the types of technologies that are being developed—less process innovation aimed at reducing production cost. More broadly, a decrease in the effective price of labor due to the removal of frictions affects corporate innovation.

Working paper

Mutual Fund Disagreement and Firm Value: Passive vs. Active Voice

joint with Iris Wang

Using mutual funds’ proxy voting behavior, we construct a novel measure of shareholder disagreement between passive and active mutual funds. To create the measure, we use mutual funds’ voting decisions to capture the difference in “approval of management” between passive and active funds. We find that the disagreement among the two groups destroys firm value when the vote outcome of a proposal is not perfectly anticipated—viable. Using Federal Open Market Committee announcements with press conferences as events that create scope for investors to interpret news differently for individual firms, we show that such value-destroying effect is causal. When proposals are not viable, the presence of disagreement increases firm value. We show evidence consistent with such disagreement being a form of shareholder engagement that is interpreted in a positive way by the financial market participants.

Working paper

Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

joint with Isil Erel, Daisy Wang, and Michael S. Weisbach

Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.

Working paper

Relative Pricing of Private and Public Debt: The Role of Money Creation Channel

joint with Isha Agarwal and Joyce Xuejing Guan

We examine how the money creation function of banks affects the relative cost of firm financing in the bank loan vs public bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm with the same maturity and at the same time, we show that the loan-bond spread is lower for firms impacted by information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and provide evidence suggesting that the discount obtains due to the ‘money creation’ mechanism in the theory of financial intermediation according to which banks need to keep information about their assets secret to produce private money.

Working paper

Owner Culture and Pay Inequality within Firms

joint with Guangli Lu and Iris Wang

We study the role of national culture in explaining within-firm pay inequality in closely-held firms owned by immigrants using a unique employee-employer matched dataset linked with firm ownership and immigrant records in Canada over the 2001 – 2017 period. We find that culture that immigrant owners carry from their home countries is an economically significant determinant of pay inequality within their firms. We show that Hofstede’s individualism is a key cultural dimension affecting within-firm pay inequality: firms owned by individuals from more individualistic countries have larger pay inequality. We show that the impact of culture on within-firm pay inequality is causal. In a difference-in-differences setting using firms that undergo ownership changes, we find a significant increase in within-firm pay inequality after the firm was taken over by immigrant owners from a country with higher within-firm pay inequality or from a more individualistic country. We find similar results among employee stayers; among employee stayers in firms within a labor-intensive industry where production technology is comparable; when the owner changes were caused by deaths of prior owners. Overall, our findings suggest that informal institutions such as national culture are important determinants of income inequality.

Working paper

Pricing Technological Innovators: Patent Intensity and Life-Cycle Dynamics

joint with Adlai Fisher, Jiri Knesl, and Julian Vahl

Technological innovators are priced differently than other firms, earning high stock returns controlling for standard factors, with less punishment for high capital investment and weak profitability. We create the persistent new firm variable patent intensity (PI), patents received divided by market capitalization, available from 1926. On average, high PI firms account for ten percent of CRSP market value but generate over half of five-year-forward public-market patenting. Aged portfolios and standard factors show high alpha and low profitability lasting more than a decade past formation. Adding an expected growth factor, alphas become insignificant at most horizons, and loadings show strong life-cycle dynamics: high but declining growth, aggressive and increasing investment, and weak but improving profitability.

Working paper

Token-Based Decentralized Governance

joint with Shiqi Zhang

We study blockchain-based decentralized governance of a platform where users contribute to the platform's output and incur differential costs that depend on the type of platform's technology. The objective of the platform's founder is to maximize the platform's total output by devising properties of the platform's governance token. Token holders decide about the platform's technology improvement. We provide novel insights on the economics of tokens and platforms: Governance rules drive the extent of platform adoption by users and the technology improvement in opposite directions. The optimal platform's governance rules depend on the type of platform's technology. Users' heterogeneity matters for the impact of governance rules on total output. The governance token has a non-zero price and allowing token buy-back increases user adoption. Decentralization increases social welfare.

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