Research
Research
Like a duck to water: Do credit rating analysts outperform in bond fund management, with Xiaolu Hu [SSRN Link]
This paper investigates whether bond fund managers with credit rating experience outperform their peers. We document that bond fund managers who previously worked in credit rating agencies on average create higher risk-adjusted returns than their peers by 11–16 bps per month, with better security picking and market timing skills. We further confirm that this outperformance is sourced from their industry-specific knowledge gained via rating experience (specialization), rather than information advantage provided by previous colleagues (network). Last, we document net inflows to funds managed by agent managers, indicating the investor awareness of analyst managers' skill.
Cash, crisis, and capers: The UK's cashbox policy during COVID-19, with Yunhe Dong, Zijin Vivian Xu and Xing (Alex) Yang [SSRN Link]
This study investigates the market impact of the “Cashbox” policy introduced in the UK during the COVID-19 pandemic, which eased shareholder approval norms for equity issuances. Using manually collected data, we find that Cashbox issue announcements yield abnormal returns 4-6% higher than other issuances, indicating that investors prioritise liquidity over agency concerns during the pandemic. Notably, this effect is more pronounced in firms facing greater financial constraints or exhibiting superior corporate governance. Our study sheds light on the impact of crisis-driven policy changes on financial markets, providing important and timely implications for policymakers and investors on the trade-off between rapid capital access and governance standards in times of significant social crises.
Long-term value versus short-term profits: When do index funds recall loaned shares for voting?, with Zijin Vivian Xu [SSRN Link]
In this paper, we examine the effects of share lending or recall on proxy voting, with a particular focus on the role of index funds. Our study reveals that higher index ownership in a firm is associated with an increased likelihood of share recall, particularly in the presence of higher institutional ownership, lower past return performance, smaller firm size, and when more shares are held by younger fund families with higher turnover ratios or higher management fees. Using the Russell 1000/2000 Index reconstitution as an exogenous shock, we establish a causal relationship between index ownership and share recall through instrumental variable (IV) analysis. Furthermore, we find a positive correlation between index ownership and share recall for proxy voting proposals related to compensation, director election, and those sponsored by management. In subsequent proxy votes, shareholder-sponsored proposals and environmental, social, and governance (ESG) proposals receive more support in firms with higher index ownership, especially when share recall is more prevalent. Our analysis does not provide evidence to support the conjecture that firms with higher index ownership are more vulnerable to empty voting issues.
Investing while lending: Do index funds improve managerial information disclosure?, with Yunhe Dong, Zijin Vivian Xu and Xing (Alex) Yang [SSRN Link]
Securities lending activities have become pervasive among index funds in recent decades, yet its impact on information disclosure remains unclear. In this paper, we jointly investigate the information disclosure impact of both investing and lending activities of index funds, using a sample of the U.S. firms for 2002–2017. On the one hand, we document that securities lending deteriorates the information environment of public firms. On the other, index fund holdings are associated with greater information transparency and less bad news hoarding by firm managers, after controlling for the opposing effects from securities lending. This finding survives a battery of robustness tests and is more pronounced in a small sample using the Russell 1000/2000 index reconstitution as a source of plausibly exogenous variation in index fund holdings. We also document a negative association between index ownership and abnormal trading activities around stock price crash weeks. Our findings support the view that regardless of their pervasive securities lending engagement and passive investing strategies, index funds impose an overall favourable impact on information environment of public firms.
Intra-industry spill-over effect of default: Evidence from the Chinese bond market, with Xiaolu Hu, Jiang Li and Zijin Vivian Xu [SSRN Link]
We investigate the intra-industry spill-over effect of defaults in the Chinese bond market by using a sample of public corporate debt securities for the period 2014–2018. We find that both industry portfolios and individual firms witness a strong contagion effect, which further spreads to the primary bond market, triggering a surge in the debt financing cost for default industries. Moreover, this contagion effect is stronger for low-competition industries and regulated industries, as well as when a default happens to state-owned enterprises. Better information access and higher bond liquidity alleviate the contagion effect, lending support to the information updates and liquidity dry-up hypotheses.
How going public affects firm productivity and cost of debt: Evidence from buyout firms, with Maurice McCourt (Under Review, the Review of Financial Studies) [SSRN Link]
Two key questions facing private firms contemplating a stock market listing are the impact on the firms’ productivity, and the impact on the firms’ cost of debt. We examine the impact of going public on productivity (value-add) and cost of debt (syndicate loan spreads) of US Buyout firms relative to similar firms that stay private. Before their IPO, Buyout firms: (1) generate higher value-add; (2) have lower spreads due to their strong bargaining power. After their IPO: (1) they increase their value-add; and (2) their spreads increase, due to their weakened bargaining power after the 2008 financial crisis.