Research

My research covers the following topics:

Working Papers

January 2024

Rational Sustainability

SSRN #10 download, across all SSRN journals, Mar-May 2024

This essay proposes rational sustainability as an evolution to the practice of ESG. It seeks sustainability – the creation of long-term value – which is of interest to all job titles and political leanings. It is rational since it recognizes diminishing returns and trade-offs; it is based on evidence and analysis; and guards against irrational sustainability bubbles.

Coverage: Bloomberg, Forbes

September 2023

Does the Carbon Premium Reflect Risk or Mispricing?

(with Yigit Atilgan, Ozgur Demirtas, and Doruk Gunaydin)
SSRN #3 download, across all SSRN journals, Feb-Apr 2024

Companies with higher carbon emissions (scope 1, 2, or 3) enjoy higher earnings surprises; earnings announcement returns account for 30-50% of the carbon premium. The carbon premium may result from outperformance (companies can “get away with” emitting) rather than a higher cost of capital.

Coverage: Financial Times, VoxEU

July 2023 (revised)

Diversity, Equity, and Inclusion

(with Caroline Flammer and Simon Glossner)
Ford Foundation / Just Capital Research Grant

Perceptions of DEI by employees are unrelated to the standard measures of demographic diversity focused on by academics and practitioners. DEI is correlated with superior future accounting performance but demographic diversity is not.

Coverage: FT Moral MoneyBoard Agenda

July 2023

Socially Responsible Divestment 

(with Doron Levit and Jan Schneemeier)
PRI Best Paper Award, 2022

Blanket exclusion of “brown” industries provides no incentives for brown firms to take corrective actions, as they will be divested regardless. We show that the most effective strategy is often “tilting” – underweighting a brown industry but being willing to hold best-in-class firms.

Coverage: The EconomistFT Sustainable ViewsVoxEUHarvard Law School Corporate Governance Forum

March 2023

When Is (Performance-Sensitive) Debt Optimal? 

(with Pierre Chaigneau and Daniel Gottlieb)

Existing theories of debt assume output is the only contractible performance measure available. We show that debt continues to be optimal when the firm has access to other performance signals – and how these signals should affect the debt repayment, leading to performance-sensitive debt.

February 2023

Learnings From 1,000 Rejections

SSRN #3 download, across all SSRN journals, Jan-Mar 2023

Common themes from rejection letters for nearly 1,000 manuscripts at the Review of Finance, which aim to provide guidance for future reseach.

January 2023

A Theory of Fair CEO Pay

(with Pierre Chaigneau and Daniel Gottlieb)

Optimal executive pay when CEOs are motivated not only by consumption incentives, but notions of fairness.

November 2013

Contracting With Synergies 

(with Itay Goldstein and John Zhu)

Optimal effort, pay and incentives under with asymmetric synergies (A’s influence on B differs from B’s influence on A). Pay varies within a team, even if agents perform similar tasks.

June 2010

The Responsible Homeowner Reward: An Incentive-Based Solution to Strategic Mortgage Default

Named one of the 50 best inventions of 2010 by Time Magazine

A potential solution to strategic default based on incentives and behavioral economics. $107 million of rewards are currently being implemented across 45 states.

Coverage: VoxEUKnowledge@WhartonFinancial Times

Publications

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World

(with Darcy Pu, Chendi Zhang and Lucius Li)

Management Science, forthcoming                  Honorable Mention, Moskowitz Prize for Best Paper in Socially Responsible Investing.

Companies with high employee satisfaction outperform peer firms, but only in countries with high labor market flexibility. SRI strategies should take institutional context into account.

Coverage: Knowledge@WhartonVoxEUBusiness InsiderHarvard Law School Corporate Governance Forum

CEO Compensation: Evidence From the Field

(with Tom Gosling and Dirk Jenter) (web appendix, slides, video of presentation)

Journal of Financial Economics 150(3), 103718, December 2023 (Editor’s choice)

We survey directors and investors on how they set CEO pay in practice, revealing a number of departures from mainstream academic models. Incentives are used to fairly reward performance ex-post, rather than incentivize effort ex ante.

Coverage: The Economist, The Economist Bartleby column, VoxEUHarvard Law School Corporate Governance ForumUN PRI
Talks: ECGI (written answers to Q&A)

Applying Economics – Not Gut Feel – To ESG

Financial Analysts Journal 79(4), 16-29, 2023
SSRN #7 download, across all SSRN journals, Feb-Apr 2023

ESG is no different from any other investment that generates financial and social value. Thus, we can apply decades of academic research on corporate finance, asset pricing, and welfare economics to ESG rather than shooting from the hip.

Coverage: Speech by SEC Commissioner Hester Peirce, Harvard Law School Corporate Governance Forum

The End of ESG

Financial Management, 52(1), 3-17, Spring 2023 (lead article)
SSRN #3 download, across all SSRN journals, Sept-Nov 2022

ESG is both very important and nothing special. It’s very important for long-term value, and thus relevant for everyone, not just ESG folks. It’s nothing special versus other drivers of value and shouldn’t be put on a pedestal.

Coverage: Wall Street Journal, IESE Insight
Short Summary in German: Das Ende von ESG

Short Summary in Italian: Gli Esg? «Nient’altro che intangible assets»

Sustainable Finance

(with Marcin Kacperczyk)

Review of Finance, 26(6), 1309-1313, November 2022

Editorial to Special Issue on Sustainable Finance

Music Sentiment and Stock Returns Around the World

(with Adrian Fernandez-Perez, Alexandre Garel and Ivan Indriawan)

Journal of Financial Economics, 142(2A), 234-254, August 2022
Featured in When People Listen to Happy Songs, the Market Outperforms (“Defend Your Research” interview with Scott Berinato) Harvard Business Review, January-February 2022

We introduces a real-time, continuous measure of national sentiment – the positivity of songs that citizens listen to – and link it to abnormal stock returns (which subsequently reverse), volatility, and mutual fund flows.

Coverage: Wall Street JournalWorld Economic ForumThe ConversationMatt Levine in BloombergUSA TodayBusiness InsiderThink@LBSDaily Star

The Long-Term Consequences of Short-Term Incentives 

(with Vivian Fang and Allen Huang)

Journal of Accounting Research, 60(3), 1007-1046, June 2022
Investor Responsibility Research Center (IRRC) Institute Research Award, 2017

Vesting equity is associated with a higher likelihood of M&A and share repurchases, and higher short-term returns but lower long-term returns to these actions.

The Purpose of a Finance Professor

Financial Management, 51(1), 3-26, Spring 2022 (lead article)

Based on my keynote speech at the 2021 FMA Annual Meeting.

Summary in Chinese (金融学教授应该追求什么?)

How Should Performance Signals Affect Contracts? 

(with Pierre Chaigneau and Daniel Gottlieb) (web appendix)

Review of Financial Studies, 35(1), 168-206, January 2022

The informativeness principle demonstrates that a contract should depend on informative signals. This paper studies how they should do so. “Good” signals of performance need not increase pay; for performance-based vesting, performance measures should affect the strike price rather than the number of vesting options.

Coverage: VoxEU

Governance Under Common Ownership 

(with Doron Levit and Devin Reilly) (web appendix)

Review of Financial Studies, 32(7), 2673-2719, July 2019

Common ownership gives investors flexibility of what to sell upon a liquidity shock. Thus, their trades are driven more by information and less by liquidity needs, increasing price informativeness.

Financing Through Asset Sales 

(with William Mann) (web appendix)

Management Science, 65(7), 3043-3060, July 2019

Analyzes choice between asset sales and equity issuance as financing channels. Firms need not issue the claim with lowest information asymmetry, in contrast to Myers and Majluf (1984).

Coverage: Knowledge@WhartonVoxEUHarvard Law School Corporate Governance Forum

The Informativeness Principle Without The First-Order Approach 

(with Pierre Chaigneau and Daniel Gottlieb) (web appendix)

Games and Economic Behavior, 113, 743-755, January 2019

We show that the informativeness principle does not hold if the first-order approach is invalid. We derive a “generalized informativeness principle” that holds generically, even if the first-order approach is invalid.

Strategic News Releases in Equity Vesting Months 

(with Luis Goncalves-Pinto, Moqi Groen-Xu, and Yanbo Wang) (web appendix)

Review of Financial Studies, 31(11), 4099-4141, November 2018 (lead article)

CEOs strategically time corporate news releases in months in which their equity vests. These releases boost the stock price and liquidity, which the CEO takes advantage of by cashing out shortly after.

Coverage: Financial TimesWall Street Journal Market WatchBloomberg TVBarronsHarvard Law School Corporate Governance ForumKnowledge@Wharton

Does Improved Information Improve Incentives? 

(with Pierre Chaigneau and Daniel Gottlieb) (web appendix)

Journal of Financial Economics, 130(2), 291-307, November 2018

Optimal contracting model showing that improved precision of the performance measure may reduce the agent’s incentives, offsetting the benefits of information typically documented in the literature.

The Source of Information in Prices and Investment-Price Sensitivity 

(with Sudarshan Jayaraman and Jan Schneemeier)

Journal of Financial Economics 126(1), 74-96, October 2017
Best Paper Award, German Finance Association, 2016

Managers learn from prices to guide their investment decisions – financial markets matter for the real economy. But value of financial markets depends not on the total amount of information in prices, but where this information comes from.

Equity Vesting and Investment 

(with Vivian Fang and Katharina Lewellen) (web appendix)

Review of Financial Studies 30(7), 2229-2271, July 2017 (lead article)
Wharton School-WRDS Award for Best Empirical Finance Paper, WFA 2014
Investor Responsibility Research Center (IRRC) Institute Research Award, 2017

Introduces a new empirical measure of a manager’s myopic incentives – the amount of equity scheduled to vest over the coming quarter. Linked to reductions in investment, positive analyst forecast revisions, and positive earnings guidance.

Coverage: The EconomistFinancial Times 1Financial Times 2Blog summaryHarvard Business Review
Featured in UK Goverment’s Green Paper on Corporate Governance Reform

Executive Compensation: A Modern Primer

(with Xavier Gabaix)

Journal of Economic Literature, 54(4), 1232-1287, December 2016

Survey of traditional and modern compensation theories, bringing them together under a unifying framework that can be taught to PhD students. Emphasis on role of modeling assumptions, predictions, and observed empirical findings.

The Real Costs of Financial Efficiency When Some Information is Soft

(with Mirko Heinle and Chong Huang)

Review of Finance 20(6), 2151-2182, October 2016

Even if the actual act of disclosure is costless, a high-disclosure policy can be costly. Increased disclosure of “hard” information distorts the relative weighting of “hard” and “soft” information, deterring investment.

Coverage: Knowledge@Wharton, New York TimesHarvard Law School Corporate Governance ForumVoxEU

Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage

(with Itay Goldstein and Wei Jiang) (web appendix)

American Economic Review 105(12), 3766-3797, December 2015

Trading impounds information into prices, guiding real decisions and improving firm value. This feedback effect increases (reduces) the profitability of informed buying (selling), creating an asymmetric limit to arbitrage.

The Effect of Liquidity on Governance

(with Vivian Fang and Emanuel Zur) (web appendix)

Review of Financial Studies 26(6), 1443-1482, June 2013

Stock liquidity increases governance through “exit”/trading and to a lesser extent “voice”/intervention. We use decimalization to identify causal effects.

Coverage: Knowledge@Wharton, VoxEUOxford University Press

Dynamic CEO Compensation 

(with Xavier Gabaix, Tomasz Sadzik and Yuliy Sannikov) (web appendix)

Journal of Finance 67(5), 1603-1647, October 2012
Best Paper Award, Financial Research Association, 2009

Dynamic model of CEO pay featuring manipulation and private saving. Proposes a reform of CEO compensation to address problems that led to the financial crisis.
Non-technical summary: Pathways (Economic Policy Institute)

Coverage: Fox Business Network (TV) NPR (radio), Knowledge@WhartonVoxEUWall Street JournalReuterspress release

The Real Effects of Financial Markets: The Impact of Prices on Takeovers 

(with Itay Goldstein and Wei Jiang) (web appendix)

Journal of Finance 67(3), 933-971, June 2012
Terker Family Prize in Investment Research, 2009

Low market valuations attract takeovers, consistent with disciplinary role of takeover market. We use an IV approach as prices are endogenous and reflect takeover expectations.

Coverage: Knowledge@Wharton

Short-Term Termination Without Deterring Long-Term Investment: A Theory of Debt and Buyouts

Journal of Financial Economics 102(1), 81-101, October 2011

Managers voluntarily take on debt as it concentrates investors’ stakes, inducing monitoring. Rather than automatically terminating a loss-making manager, investors find out if losses result from investment.

Tractability in Incentive Contracting 

(with Xavier Gabaix) (web appendixnon-technical primer)

Review of Financial Studies 24(9), 2865-2894, September 2011(lead article) NYU Glucksman Prize for Best Working Paper in Finance, 2008/9 (First Place)

Develops a framework that delivers tractable (i.e. closed-form) optimal contracts, with few restrictions on the utility function, cost of effort or noise distribution

Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices

Journal of Financial Economics 101(3), 621-640, September 2011
FIR-PRI Prize for Best Paper in Finance and Sustainability, 2011

Moskowitz Prize for Best Paper in Socially Responsible Investing, 2007 (audio of talk)

Fortune’s “Best Companies to Work For” outperformed by 3.5%/year from 1984-2009. Employee satisfaction is associated with higher stock returns, rather than being wasteful expenditure.

Featured in TEDx talk, The Social Responsibility of Business Profiled in UBS research report “Corporate Culture: Relevant to Investors?“, and previously in 2009 and 2011 Other coverage: Yahoo FinanceMoney Message (radio) BBC (radio), Knowledge@WhartonWall Street JournalThe EconomistTimeKiplingerHarvard Business

The Effect of Risk on the CEO Market 

(with Xavier Gabaix)

Review of Financial Studies 24(8), 2822-2863, August 2011

Risk aversion causes distortions to a standard assignment model – risky firms hire less talented CEOs. Firm size is not a proxy for talent. Pay depends not only on firm size, but also risk and disutility.

Governance Through Trading and Intervention: A Theory of Multiple Blockholders 

(with Gustavo Manso) (web appendix)

Review of Financial Studies 24(7), 2395-2428, July 2011

Model justifying prevalence of multiple blockholders in reality. MBs trade aggressively when “voting with their feet,” inducing greater managerial effort ex ante

Do Investment Banks Matter For M&A Returns?

(with Jack Bao) (web appendixdata on investment bank mergers)

Review of Financial Studies 24(7), 2286-2315, July 2011

Documents a significant investment bank fixed effect to the announcement returns of an M&A deal: a bank’s M&A performance is persistent. But performance is negatively related to market share.

Coverage: Wall Street JournalEconomistNew York TimesKnowledge@Wharton

Inside Debt

(with Qi Liu)

Review of Finance 15(1), 75-102, January 2011
Spängler IQAM Prize for Best Paper in the Review of Finance (runner-up)
McGraw-Hill/Irwin Best Paper in Corporate Finance Award, 2006 FMA Meetings

Optimal executive compensation involves debt, rationalizing the widespread use of defined benefit pensions. But manager’s debt/equity mix need not equal the firm’s

Coverage: IESE InsightVoxEUKnowledge@WhartonReutersCFOZoneFinancial Times,  

A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium 

(with Xavier Gabaix and Augustin Landier) (web appendixdata on CEO incentives)

Review of Financial Studies, 22(12), 4881-4917, December 2009

Quantitatively explains negative empirical scaling of incentives with firm size. Advocates “scaled wealth-performance sensitivity” (dollar equity / annual pay) as a new measure of incentives, independent of firm size.

Blockholder Trading, Market Efficiency, and Managerial Myopia 

(web appendix)

Journal of Finance 64(6), 2481-2513, December 2009

Blockholders can exert governance even if they cannot intervene. By trading, they impound information about long-run value into prices, attenuating myopia.

Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories 

(with Xavier Gabaix)

European Financial Management 15(3), 486-496, June 2009 (lead article)

Survey paper on recent theories arguing that executive compensation is efficient. A response to the Bebchuk-Fried critique that CEOs are stealing from shareholders.

Sports Sentiment and Stock Returns 

(with Diego García and Øyvind Norli)

Journal of Finance 62(4), 1967-1998, August 2007
Finalist, Smith-Breeden Prize for Best Paper in the Journal of Finance
Best Paper Award, Caesarea Center 3rd Annual Conference 

Investor mood affects asset prices. Soccer World Cup elimination leads to a next-day abnormal return of -49bp on the national index.

Coverage: Non-technical summary,  CNBC, (TV), ESPN (TV), ROBtv (TV), BBC Five Live (radio), BBC World Service (radio), MarketWatch (radio), Financial Times 1FT 2Wall Street Journal 1 WSJ 2WSJ 3BloombergBoston GlobeMarketWatch 1MarketWatch 2Newsweek The TimesThe IndependentThe GuardianDaily MailDaily MirrorLe MondeFrankfurter Allgemeine ZeitungDie Zeit

Surveys

Executive Compensation: A Survey of Theory and Evidence

(with Xavier Gabaix and Dirk Jenter)

Handbook of the Economics of Corporate Governance, Chapter 9, 383-539, 2017 (edited by Hermalin/Weisbach)

Survey paper on executive compensation, containing (1) Data on CEO and other top executive pay over time and across firms, including private firms and non-US firms. (2) Critical analysis of three explanations for the drivers of pay: shareholder value maximization (including a simple unifying model), rent extraction, institutional influences. (3) The “effects” of executive pay and challenges in causal identification. (4) Directions for future research.

Blockholders: A Survey of Theory and Evidence

(with Cliff Holderness)

Handbook of the Economics of Corporate Governance, Chapter 8, 541-636, 2017 (edited by Hermalin/Weisbach)

Survey paper on: underlying property rights of public firms and role of blockholders; definition of a blockholder; new evidence on frequency and characteristics of blockholders; simple model unifying theories of voice and exit; review of empirical studies; future research directions.

Executive Compensation: A Modern Primer 

(with Xavier Gabaix)

Journal of Economic Literature 54(4), 1232-1287, December 2016

Survey of traditional and modern compensation theories, bringing them together under a unifying framework that can be taught to PhD students. Emphasis on role of modeling assumptions, predictions, and observed empirical findings.

Blockholders and Corporate Governance

Annual Review of Financial Economics 6, 23-50, December 2014

Survey paper covering theoretical and empirical literature on both “voice”/intervention and “exit”/trading, with directions for future research.

Coverage: Harvard Law School Corporate Governance Forum

The Real Effects of Financial Markets 

(with Philip Bond and Itay Goldstein)

Annual Review of Financial Economics 4, 339-360, October 2012

Survey paper at the intersection of asset pricing and corporate finance. Secondary financial markets can have real effects, even though they do not lead to capital flows to/from firms.

Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories 

(with Xavier Gabaix)

European Financial Management 15(3), 486-496, June 2009 (lead article)

Survey paper on recent theories arguing that executive compensation is efficient. A response to the Bebchuk-Fried critique that CEOs are stealing from shareholders.