Research Interests
Asset Pricing, Macro-Finance, Contract Theory and Firm Dynamics
Publications
Unified Model of Firm Dynamics with Limited Commitment and Assortative Matching, Journal of Finance
with Hengjie Ai, Dana Kiku and Rui Li
Abstract: We develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, the joint distribution of firm size, investment and managerial compensation is determined by the optimal contract where neither firms nor managers can commit to arrangements that yield lower payouts than their outside options. The outside options of both parties are micro-founded by the equilibrium conditions in a matching market. Our model endogenously generates power laws in firm size and CEO compensation and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time-series dynamics and the cross-sectional distribution of firm growth, dividend payout and CEO compensation.
Unified Model of Firm Dynamics with Limited Commitment and Assortative Matching, Journal of Finance
with Hengjie Ai, Dana Kiku and Rui Li
Abstract: We develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, the joint distribution of firm size, investment and managerial compensation is determined by the optimal contract where neither firms nor managers can commit to arrangements that yield lower payouts than their outside options. The outside options of both parties are micro-founded by the equilibrium conditions in a matching market. Our model endogenously generates power laws in firm size and CEO compensation and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time-series dynamics and the cross-sectional distribution of firm growth, dividend payout and CEO compensation.
Working Papers
Inflation risk and finance-growth nexus
with Alexandre Corhay, Revise & Resubmit, Review of Economic Studies
Abstract: This paper shows that the effect of inflation on asset prices and real aggregates depends on the financial intermediation sector. When firms finance using nominal long-term debt issued by financial intermediaries, unexpected changes in inflation lead to a wealth transfer across sectors. Higher inflation decreases firms' real liabilities and default risk, which helps reduce debt overhang. However, it hurts intermediaries' balance sheet, leading to a contraction in credit. We show theoretically that the ultimate effect of inflation depends on the tightness of financing constraints in the intermediation sector. We find strong empirical evidence consistent with these results. We also show that an inflation policy responding to both financial and real variables can help stabilize our economy.
with Alexandre Corhay, Revise & Resubmit, Review of Economic Studies
Abstract: This paper shows that the effect of inflation on asset prices and real aggregates depends on the financial intermediation sector. When firms finance using nominal long-term debt issued by financial intermediaries, unexpected changes in inflation lead to a wealth transfer across sectors. Higher inflation decreases firms' real liabilities and default risk, which helps reduce debt overhang. However, it hurts intermediaries' balance sheet, leading to a contraction in credit. We show theoretically that the ultimate effect of inflation depends on the tightness of financing constraints in the intermediation sector. We find strong empirical evidence consistent with these results. We also show that an inflation policy responding to both financial and real variables can help stabilize our economy.
Equilibrium Value and Profitability Premia
with Hengjie Ai, Jun E. Li, Revise & Resubmit, Journal of Finance
Abstract: Standard production-based asset pricing models cannot simultaneously explain the value and the profitability premia, because the value and the profitability factors are highly negatively correlated. Empirically, we show that value and profitability sorted portfolios differ in the persistence of productivity. We develop a general equilibrium model where firm-level productivity has a two factor structure with different persistence and demonstrate that heterogeneity in the persistence of productivity shocks can account for the coexistence of the profitability and the value premium.
with Hengjie Ai, Jun E. Li, Revise & Resubmit, Journal of Finance
Abstract: Standard production-based asset pricing models cannot simultaneously explain the value and the profitability premia, because the value and the profitability factors are highly negatively correlated. Empirically, we show that value and profitability sorted portfolios differ in the persistence of productivity. We develop a general equilibrium model where firm-level productivity has a two factor structure with different persistence and demonstrate that heterogeneity in the persistence of productivity shocks can account for the coexistence of the profitability and the value premium.
State Ownership and Monetary Policy Transmission: A Tale of Two Sector
with Frederico Belo, Dapeng Hao, Xiaoji Lin, Zhigang Qiu
Abstract: We study the role of firm heterogeneity in state-ownership and productivity in monetary policy transmission in China. Empirically, we document that the impact of monetary supply shocks on firms' risk premia and corporate decisions varies substantially both within and across state-owned enterprises (SOEs) and private-owned enterprises (POEs). We develop and estimate a dynamic heterogeneous firm model with monetary supply shocks and financial frictions to interpret the empirical findings. The model shows that more severe frictions in accessing debt markets for POEs exacerbates capital misallocation in times of contractionary monetary shocks, leading to sizable losses in aggregate productivity and output.
with Frederico Belo, Dapeng Hao, Xiaoji Lin, Zhigang Qiu
Abstract: We study the role of firm heterogeneity in state-ownership and productivity in monetary policy transmission in China. Empirically, we document that the impact of monetary supply shocks on firms' risk premia and corporate decisions varies substantially both within and across state-owned enterprises (SOEs) and private-owned enterprises (POEs). We develop and estimate a dynamic heterogeneous firm model with monetary supply shocks and financial frictions to interpret the empirical findings. The model shows that more severe frictions in accessing debt markets for POEs exacerbates capital misallocation in times of contractionary monetary shocks, leading to sizable losses in aggregate productivity and output.
Markup Shocks and Asset Prices
with Alexandre Corhay, Jun E. Li
Abstract: We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household’s marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms that have larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.
with Alexandre Corhay, Jun E. Li
Abstract: We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household’s marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms that have larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.
Data, Markups, and Asset Prices
with Alexandre Corhay,Kejia Hu, Jun E. Li, and Chi-Yang Tsou
Abstract: This paper studies the implications of data technology on firms' markups and asset prices. We empirically show firms that employ more data scientists have higher markups. A long-short portfolio constructed using a novel measure of data scientist hiring generates an annual excess return of approximately 4%. We develop a heterogeneous firm model in which firms employ data scientists to forecast consumer demands. Aggregate data scientists hiring exhibit countercyclical dynamics due to endogenous countercyclical markup variations. Unproductive firms optimally choose to hire more data scientists to exploit the price markup. This behavior increases their expected returns through an operating leverage channel. Our model can quantitatively account for the positive association between data scientist hiring, markups, and expected stock returns.
with Alexandre Corhay,Kejia Hu, Jun E. Li, and Chi-Yang Tsou
Abstract: This paper studies the implications of data technology on firms' markups and asset prices. We empirically show firms that employ more data scientists have higher markups. A long-short portfolio constructed using a novel measure of data scientist hiring generates an annual excess return of approximately 4%. We develop a heterogeneous firm model in which firms employ data scientists to forecast consumer demands. Aggregate data scientists hiring exhibit countercyclical dynamics due to endogenous countercyclical markup variations. Unproductive firms optimally choose to hire more data scientists to exploit the price markup. This behavior increases their expected returns through an operating leverage channel. Our model can quantitatively account for the positive association between data scientist hiring, markups, and expected stock returns.