Latest Research Publications

Passively managed index funds now hold over 30% of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.

We decompose the decrease (1970s-2000) and subsequent recovery (2000-2018) in the fraction of dividend-paying firms. Changes in firm characteristics and proclivity to pay (probability of paying dividends conditional on characteristics) each drive half of the dividend disappearance. A higher proclivity drives 82% of the dividend reappearance. The remaining 18% is driven by a single characteristic: reduced earnings volatility. Changing characteristics are associated with low-profitability, high-earnings-volatility firms. Changing proclivity is associated with stable, profitable firms. Rather than dividend initiations or omissions, newly listed and delisted firms drive trends. Finally, the magnitude and duration of disappearing total payout is substantially smaller than that of dividends, indicating some substitution between dividends and repurchases.

Measures of US government policy approval are strongly related to persistent fluctuations in the dollar value. Contemporaneous correlations between approval ratings and the dollar approach 50% against advanced economy currencies. High approval ratings further forecast a decline in the dollar risk premium several years ahead and are associated with a persistent increase in economic growth and a reduction in economic volatility. We provide an illustrative model to interpret our empirical evidence. In the model, policy valuations (approvals) are forward-looking and increase at times of high expected policy-related growth and low policy-related uncertainty, which are times of a strong dollar and low dollar risk premium.

How can fragility be averted in open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor-level transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces outflows during market stress. Swing pricing also reduces concavity in the flow-performance relationship and dilution in fund performance.

We study the impact of an epidemic disease on modern financial development by exploiting geographic variations in the precolonial survival conditions of the TseTse fly, which transmits an epidemic disease that is harmful to humans and fatal to livestock in Africa. Using newly georeferenced data, we discover that firms and households in regions historically more exposed to the epidemic disease have less access to external financing today. Exploring the channels, we find that people in historically infested regions are less likely to trust others and financial institutions, to share credit information and to learn and adopt new financial technologies.

This paper provides a simple unified analysis of optimal interval division problems. My primitive is a cell function that assigns a value to each subinterval (cell). Submodular cell functions conveniently imply the property of decreasing marginal returns. Also, for coarse decision problems, optimal cutoffs commonly increase as prior belief shifts upward. Its implications on language and efficient menus are discussed.

This paper studies how the two types of uncertainty due to ignorance, parameter and model uncertainty, jointly affect strategic consumption-portfolio rules, precautionary savings, and welfare. We incorporate these two types of uncertainty into a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth, and derive analytical solutions and testable implications. We show that the interaction between the two types of uncertainty plays a key role in determining the demand for precautionary savings and risky assets. We derive formulas to evaluate both marginal and total welfare costs of ignorance-induced uncertainty and show they are significant for plausible parameter values.

In light of the critical role of price information in consumers’ decision making, this study investigates the effect of price rank on consumers’ responses to product list advertising (PLA) throughout the purchase funnel, as well as the moderating effects of two keyword attributes. A hierarchical Bayesian model, using a unique data set from a leading electronic shopping platform and a simulated experiment, reveals that in the early phases of the purchase funnel, consumers are more likely to click on extremely priced options (i.e., the highest or lowest), which consumers use as anchors to evaluate the broad range of options. Later in the purchase funnel, when clicks tend to convert to purchases, consumers instead are more likely to click on moderately priced options, which usually offer a compromise between price and quality. The effects of price rank diminish among advertisements that sponsor more specific keywords and increase among those that sponsor more popular keywords. These findings provide new insights into the role of price information in the PLA context, as well as managerial implications for devising effective PLA strategies.

One important benefit of teamwork is the exchange and integration of diverse knowledge, experience, and opinions group members bring to the table. However, demographic attributes, such as race, gender, and functional background, may create asymmetric influence patterns between group members in diverse groups, because these demographic characteristics are often associated with status differences. In the current research, we examine how to attenuate this disparity in member influence in diverse groups by focusing on the role of a leader’s gazing behavior. Across two studies, we found that asymmetric influence patterns in which high-status members tend to wield greater influence in group decision-making processes were attenuated when a leader increased visual attention toward low-status members in the group. This reduced disparity in member influence in turn improved group information elaboration and group performance in a collective decision-making task. Theoretical and practical implications for leaders’ visual attention, diversity, group decision-making processes, and group performance are discussed.