Working Papers

Ubiquitous Comovement, with Jung Hoon Lee and Morad Zekhnini

A large literature explores whether asset returns comove in excess of what can be explained by fundamentals, therefore indicating the existence of frictions or behavioral biases. However, we show that comovement is a ubiquitous feature of asset returns that will arise in the presence of latent or mismeasured systematic factors. Thus, existing empirical tests cannot distinguish between alternate sources of comovement, and several documented interpretations of comovement in favor of particular explanations are premature and warrant reconsideration. We propose new statistical tests of excess comovement that account for latent factors and that exploit additional implications of market efficiency.

♦ Presented at the 2020 AFA meeting in San Diego, Emory University, Michigan State University, Rice University, Southern Methodist University, Texas Christian University, Tulane University, the University of Arizona, the University of Houston, the University of New Orleans, and the University of Texas at Dallas

Does Economic Comparability Discipline Financial Reporting?, with Audra Boone, Rachel Li, and Parth Venkat

We exploit a pairwise measure of product market differentiation to study the relation between economic comparability and financial accounting fraud. We show that firms with greater economic comparability exhibit a significantly lower incidence of fraud. Importantly, this effect is economically larger than that of most predictors of fraud documented in the literature. To help establish identification, we exploit economic comparability with rivals issuing IPOs, as well as cross-sectional variation in accounting comparability, firm complexity, institutional ownership, and analyst coverage. Our analyses suggest that greater economic comparability enhances the external information environment, which improves external monitoring and disciplines manager reporting behavior.

♦Best Paper Award at the New Zealand Finance Meeting (2018). Also presented at Alabama, Clemson University, Drexel University, Michigan State University, the Sixth Annual Conference on Financial Market Regulation, Southern Methodist University, the University of Nevada Las Vegas, the 2018 Financial Management Association (best paper semi-finalist), the SEC, and the Australasian Finance and Banking Conference

The Epidemiology of Financial Constraints and Corporate Investment, with Ioannis Spyridopoulos and Morad Zekhnini

This study shows that production networks amplify the effects of a firm's financial constraints, generating substantive contagion effects on its partners' investment. We quantify these effects via a network multiplier whereby a one-dollar drop in the constrained firm's investment reduces total supply-chain investment by an additional dollar. To facilitate identification, we employ multiple measures of financial constraints, a Network Regression Discontinuity Design that accounts for spillovers around covenant violations, and an instrumented network of long-term partners. Consistent with production-driven spillovers, firms producing highly specific inputs generate larger investment spillovers and receive more trade credit. Overall, our results suggest that production linkages serve as an aggregation mechanism of firm-level financial frictions. 

♦Best Paper Award in Corporate Finance at the 2022 Southern Finance Association. Also presented at Alabama, The University of Texas at Austin, The University of Colorado, BI Norwegian School of Business, University of Maryland, Michigan State University, Texas Christian University, Colorado State University, DC Juniors Finance Conference, Western Finance Association, Finance Organizations, and Markets 2022 Annual Conference, Southern Finance Association, American Finance Association, Lone-Star Finance Conference.

Decomposing the Spillover Effects of Financial Restatements on Corporate Investment, with Jan Ditzen, Patrick Hopkins, and Stephen Lusch 

We employ network methods and financial restatements to explore three channels through which disclosure quality influences corporate investment: own-firm effects, contextual peer effects, and endogenous peer effects. Our network approach provides a unified framework to quantify the relative influence of each channel while also addressing well-known challenges in estimating peer effects. Since each channel yields considerably different implications for the economics of disclosures, separating their relative influence is a first-order objective. Though financial statement disclosures are primary sources for learning about peers’ investments, we find evidence that disclosure-induced investment spillovers operate almost exclusively indirectly through peers’ strategic responses to investment spending (i.e., endogenous peer effects). Firms adjusting investment spending in direct response to peers’ disclosure quality (i.e., contextual effects) constitutes a very modest effect. We also show that the endogenous peer effects channel generates network effects that dramatically alter inferences regarding the own-firm and contextual effects of disclosure quality on investment. 

Work in Progress

Do Flexible Sources of Supplemental Income Promote Entrepreneurship? Evidence from Uber Introductions, with Joerg Picard, Keith Teltser, and Parth Venkat 

This paper uses the introduction of Transportation Networking Companies (TNC), such as Uber, to show that access to flexible sources of income facilitates entrepreneurship.  TNCs give prospective entrepreneurs the ability to earn a substantive wage, which provides the financial assurance to start their new businesses.  Because hours are set independently, entrepreneurs also maintain the temporal flexibility to work the unpredictable hours that characterize new ventures.  We employ a difference-in-differences approach that exploits variation in the timing and location of TNC introductions and find evidence that the introduction of TNCs increases young firm employment and proprietorship.  We also present survey-based evidence consistent with these findings; TNCs have provided artists, musicians, engineers and other entrepreneurs the financial and temporal flexibility to pursue their passions.