Working Papers

Using daily equity transactions, we create a hedge fund informed trading measure (ITM) that separates information related trades from liquidity driven trades. We find that stocks with higher hedge fund informed trading are associated with higher future stock performance. The long-short portfolio delivers 4% annual alpha after controlling for size, value, momentum, and illiquidity factors. The results are mainly driven by the long side of informed trading. We attribute the informed trading to funds' ability to identify and correct stock underpricing. The results are robust to various ways of constructing and sorting the measure, and we do not find a return reversal in 4 quarters, indicating that the measure is information related.

"Do Climate Risk Beliefs Shape Corporate Social Responsibility?" with Meimei Lin

This paper examines whether belief differences about climate change affect firms’ decision makings in Corporate Social Responsibility (CSR) commitment. We find that firms’ Environmental, Social, and Governance (ESG) scores are higher if they are located in the counties where more people believe in global climate change. We use natural disasters as exogenous shocks to the beliefs about climate risk, and continue to find a positive association between CSR and perceptions of climate risk. Besides, the correlation between CSR and climate risk beliefs is stronger when firms have more local investors.

"Litigation Risk and Stock Return Anomaly" with Jun Duanmu, Yongjia Li, and Lingna Sun

Revise and Resubmit at the Financial Analyst Journal

We create a novel proxy for security litigation risk using a dynamic logistic regression model and find that low litigation risk firms outperform high risk firms. The out-ofsample long-short portfolio delivers an annual alpha over 9%. The return anomaly is mainly driven by long positions in low risk firms. The results are not affected by the realization of the lawsuit events and are robust after controlling for other well-known anomaly factors. We believe that the litigation risk anomaly is driven by investors’ inattention (under-reaction) to the changes in firms’ risk, as we find weaker return anomaly when firms’ risk levels remain stable over either short term or long term. Our paper documents a robust return anomaly associated with litigation risk and provides possible explanations for this phenomenon.

"Do ETFs affect ADRs and U.S. domestic stocks differently?" with Chengbo Fu and Hongfei Tang

Revise and Resubmit at the Journal of International Financial Markets, Institutions and Money

This study examines the effect of Exchange Traded Funds (ETFs) on their underlying American Depository Receipts (ADRs). We find that percentage of ADR shares owned by ETFs increases dramatically in the past two decades. Contrary to U.S. firms, ETF ownership is positively associated with stock liquidity for ADR firms. In addition, ETF ownership improves ADR firms’ information environment by helping incorporate their earnings information. Furthermore, ETF ownership helps incorporate systematic related earnings into stock returns but not firm specific earnings. Overall, our results show that ETFs are beneficial to ADR stocks by providing better liquidity and information efficiency. Our results are interesting to academics, investors and policy makers.

"International Political Uncertainty and Climate Risk Premium" with Xu Gong, Chengbo Fu, and Meimei Lin

We use two measures of international political uncertainty and investigate their association with climate change risk premium. Empirical result shows that when facing the U.S. presidential elections, international firms with high climate change exposure tend to have high returns, return volatility, and return correlations. There is no such association for international firms when facing the national elections in their home countries. The result is consistent with Pástor and Veronesi (2013) and it also implies that’s the U.S. presidential election is a good measure of international political uncertainty as used by Brogaard et al. (2020).

"Sea Level Rise Risk and Mortgage Lending Standards" with Chengbo Fu, Meimei Lin, and Salman Tahsin

We study the relationship between sea level rise (SLR) risk and access to residential mortgage credit at the census tract level from 2018 to 2020. Three different levels of SLR risk, ranging from imminent to long-term risks, are estimated using the elevations from sea level. We find significantly lower loan approval rates in census tracts that are exposed to all three different levels of SLR risks. Additionally, we find that the climate risk beliefs do not matter if the location is under imminent risk. However, in areas under medium or long-term risks, approval rates are affected by SLR only if climate risk beliefs are high. We also find that both local and diversified banks reduce loan acceptance rates in locations that are under imminent risk, but local banks approve significantly more loans if the risks are more medium to long term. The local bank effects are not driven by the size of banks. Overall, we uncover a significant impact of SLR risks on mortgage approval rates and we also find that the effects vary based on the level of SLR risks.