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 impact of national culture on within-firm pay inequality using a unique administrative dataset covering closely-held immigrant-owned firms in Canada from 2001-2017. Within-firm pay inequality varies significantly with a firm owner’s country of origin. Firms owned by immigrants from more individualistic countries have higher pay inequality. Using a difference-in-differences analysis, we find a significant increase in within-firm pay inequality after the firm is taken over by immigrant owners from countries with higher within-firm-pay-inequality or more individualistic cultures. Our results suggest that informal institutions are important determinants of within-firm pay inequality across countries and thereby income inequality world-wide.

Working paper

Patent Intensity, Firm Life-Cycle Dynamics, and the Pricing of Technological Innovators

joint with Adlai Fisher, Jiri Knesl, and Julian Vahl

We introduce patent intensity (PI) - patents granted divided by market capitalization - to classify technological-innovator types starting from 1926. High-PI firms represent ten percent of total market capitalization but over half of five year-forward public-company patenting. PI-sorted portfolios earn significant return spreads for a decade post-formation, with low turnover. Alphas controlling for standard factors are persistently large, and innovators are punished less for aggressive investment and weak profitability. Adding an expected growth factor resolves mispricing across horizons, with loadings showing high, declining growth, aggressive, increasing investment, and weak, improving profitability. Patent intensity captures life-cycle dynamics in fundamentals, loadings, and returns.

Working paper

Token-based Decentralized Governance, Data Economy and Platform Business Model

joint with Shiqi Zhang

The growing importance of data as a crucial input in production poses a governance challenge related to efficiency and fairness. To explore a potential solution, we analyze the optimal design of decentralized governance using blockchain technology for a platform that leverages user data as input. Users face varying costs when sharing their data with the platform. As the extent of data sharing expands, both the platform's productivity and the costs faced by users increase. The platform founder aims to maximize the platform's total output by defining the governance token's properties. This token is distributed to users without charge and provides them with voting rights. The platform's governance structure, the extent of data requirements, and user adoption are endogenously determined. We show that decentralized governance through the use of a governance token leads to a higher user surplus compared to the centralized governance of a traditional firm. Additionally, the platform's founder can achieve greater output by offering token buy-back. This is because tokens allow the founder to incentivize early platform adoption by committing to enable transfers among users at a later date. Token-based decentralized governance has the potential to align the interests of platform founders with those of users while also being the preferred governance regime for founders.

Working paper

Financing the Global Shift to Electric Mobility

joint with Bo Bian and Huan Tang

Using comprehensive auto loan data from Europe, we document a gap in financing terms between Electric Vehicles (EVs) and non-EVs. EVs, compared to non-electric models in the same car family or pair, are financed with higher interest rates, lower loan-to-value ratios, and shorter loan durations. We show that the primary driver of this EV financing gap is the technological risk associated with EVs. The rapid and uncertain evolution of EV technologies accelerates technology obsolescence, diminishing the resale value of EVs. In response, lenders charge higher interest rates on EV loans. Consumer demographics, lenders' market power, and macroeconomic factors contribute minimally to the EV financing gap.

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