“Natural disasters, risk salience, and corporate ESG disclosure” with Yongjia Li, Meimei Lin, and Garrett McBrayer
Journal of Corporate Finance 2022
We examine how natural disasters affect the corporate environmental, social, and governance (ESG) disclosure policies of firms located close to disaster areas. We study firms located in counties neighboring those impacted by natural disasters and find that, on average, these firms increase their ESG disclosure transparency over the period subsequent to the disaster. Given that our sample firms are located outside of the area directly impacted by the disaster, the changes in disclosure transparency after the disaster are consistent with managers increasing their preference for transparency as their risk salience increases. Further, we find that firms with a higher percentage of local institutional ownership are more likely to increase ESG disclosure after experiencing nearby disasters. The findings suggest that managers strategically react to a change in investors' risk perception by increasing ESG disclosure.
“Funding Liquidity Risk and the Dynamics of Hedge Fund Lockups” with Adam Aiken, Chris Clifford, and Jesse Ellis
Journal of Financial and Quantitative Analysis 2021
We exploit the expiring nature of hedge fund lockups to create a new measure of funding liquidity risk that varies within funds. We find that hedge funds with lower funding risk generate higher returns and this effect is driven by their increased exposure to equity mispricing anomalies. Our results are robust to a variety of sampling criteria, variable definitions, and control variables. Further, we address endogeneity concerns in a variety of ways, including a placebo approach and regression discontinuity design. Collectively, our results support a causal link between funding risk and the ability of managers to engage in risky arbitrage.
"Can Hedge Funds Benefit from CSR Investment?" with Jun Duanmu, Yongjia Li and Garrett McBrayer
Financial Review 2021
We explore the extent to which hedge funds incorporate corporate social responsibility (CSR) considerations in the development of their investment strategies. Using an asset-weighted composite measure of CSR by fund, we examine the difference in financial performance between hedge funds with high CSR investment relative to those with low investment and document no statistical difference. Yet, we find that hedge funds increase their exposure to high CSR investments over our sample period, specifically post-financial crisis. We find that the increases in CSR investment are consistent with hedge funds utilizing CSR strategies as a form of risk mitigation. Specifically, hedge funds with higher weighted CSR scores exhibit significantly lower risk factor loadings than funds with lower weighted CSR scores. Our results suggest that hedge funds are able to derive benefits by using CSR considerations as a form of risk-mitigation in their investment policies.
"Are U.S. Firms More Social Responsible than Foreign Firms? Evidence from ADR." with Reza Chowdhury, Chengbo Fu, and Nanying Lin
Journal of International Financial Markets, Institutions & Money 2021
Corporate social responsibility (CSR) is increasingly demanded by investors worldwide. In this article, we study whether foreign firms listed on U.S. markets are competitive to U.S. firms in terms of providing better CSR disclosure. We also examine whether such disclosure allows foreign firms to achieve a competitive advantage relative to publicly-listed U.S. counterparts. Using environmental, social, and governance disclosure scores, we find that foreign firms disclose more than comparable U.S. firms, particularly in the environmental and social dimensions of CSR. Furthermore, we find consistent evidence that compared to U.S. firms, foreign companies listed on U.S. stock markets have less information asymmetry and idiosyncratic volatility, better liquidity and higher institutional ownership due to their more social disclosure. The results are robust even after controlling for foreign firm’s industry affiliation and country of origins.