Matching and Incentives in Financial Markets

This research group studies matching mechanisms in financial markets. In financial markets, we observe choices by very different types of agents to establish relationships: mergers and acquisitions between firms, employment contracts between managers and firms, lending relationships between banks and firms, and so forth. This research group fosters our understanding of the incentives that determine why agents are matched with each other, how they are matched, and the consequences of the match is important.

Research Cluster
Institutions and Social Norms

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Professor Shuo Xia, PhD
Professor Shuo Xia, PhD
Mitglied - Department Financial Markets
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Refereed Publications


Institutions and Corporate Reputation: Evidence from Public Debt Markets

Xian Gu Iftekhar Hasan Haitian Lu

in: Journal of Business Ethics, forthcoming


Using data from China’s public debt markets, we study the value of corporate reputation and how it interacts with legal and cultural forces to assure accountability. Exploring lawsuits that change corporate reputation, we find that firms involved in lawsuits experience a decrease in bond values and a tightening of borrowing terms. Using the heterogeneities in legal and social capital environments across Chinese provinces, we find the effects are more pronounced for private firms, firms headquartered in provinces with low legal protections, and firms headquartered in provinces with high social capital. The results show that lawsuits that allege misconduct are associated with reputational penalties and that such penalties serve as substitutes for legal protections and as complements to cultural forces to provide ex post accountability and motivate ex ante trust.

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Management Capability and Innovation

Bill Francis Iftekhar Hasan Gokhan Yilmaz

in: Advances in Financial Economics, September 2022


This chapter investigates whether core competence of managers and their expansive (vs. specialized) managerial style affects firms' innovative ability, capacity, and efficiency. Using exogenous CEO departures as a natural experiment, it establishes a causal link between managerial capability and innovation. Importantly, it reveals that firms with talented managers receive significantly more nonself citations; make significantly lower self-citations and lesser citations to the others, indicating novel and explorative innovation achievements. Also, managers with higher general (specialized) ability are cited more (less) by patents from a wider range of fields. Lastly, career concern is identified as a mechanism linking higher ability and innovation.

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CEO Network Centrality and the Likelihood of Financial Reporting Fraud

Salim Chahine Yiwei Fang Iftekhar Hasan Mohamad Mazboudi

in: Abacus, No. 4, 2021


This paper investigates the association between CEO’s relative position in the social network and the likelihood of being involved in corporate fraud. Tracing a large sample of US publicly listed firms, we find that CEO network centrality is inversely related to the likelihood of fraudulent financial reporting. We also document a significant spillover effect of financial reporting behaviour from the dominant (most central) CEO to other CEOs in the same social network, suggesting that the ethical corporate behaviour of CEOs is, on average, influenced by that of their dominant CEO in the network. We further find that the role of CEO network centrality in reducing fraud risk is more prominent in firms with lower auditor quality. Overall, our results suggest that network centrality is an important CEO trait that promotes ethical financial reporting behaviour within social networks.

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Stock Liquidity, Empire Building, and Valuation

Sris Chatterjee Iftekhar Hasan Kose John An Yan

in: Journal of Corporate Finance, 2021


We conjecture that high stock liquidity negatively affects firm valuation by inducing inefficient investment. Using takeovers of public targets to study the empire-building motive, we find that a liquid firm is more likely than an illiquid firm to acquire a public firm. Such a takeover by a bidder with higher stock liquidity destroys bidder value to a larger degree. These patterns occur in both stock and cash acquisitions and hold after we use decimalization of tick size as a quasi-exogenous shock to stock liquidity. Finally, we show that financial constraints and corporate governance play important roles in the effects of stock liquidity on empire building in mergers and acquisitions.

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Do Activist Hedge Funds Target Female CEOs? The Role of CEO Gender in Hedge Fund Activism

Bill Francis Iftekhar Hasan Yinjie (Victor) Shen Qiang Wu

in: Journal of Financial Economics, No. 1, 2021


Using a comprehensive US hedge fund activism dataset from 2003 to 2018, we find that activist hedge funds are about 52% more likely to target firms with female CEOs compared to firms with male CEOs. We find that firm fundamentals, the existence of a “glass cliff,” gender discrimination bias, and hedge fund activists’ inherent characteristics do not explain the observed gender effect. We also find that the transformational leadership style of female CEOs is a plausible explanation for this gender effect: instead of being self-defensive, female CEOs are more likely to communicate and cooperate with hedge fund activists to achieve intervention goals. Finally, we find that female-led targets experience greater increases in market and operational performance subsequent to hedge fund targeting.

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Working Papers


Trading away Incentives

Stefano Colonnello Giuliano Curatola Shuo Xia

in: IWH Discussion Papers, No. 23, 2022


Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers’ portfolio choices.

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Corporate Governance Benefits of Mutual Fund Cooperation

Rex Wang Renji Patrick Verwijmeren Shuo Xia

in: IWH Discussion Papers, No. 21, 2022


Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making. We present evidence that dual ownership allows financially distressed firms to increase investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. As such, dual ownership reduces shareholder-creditor conflicts, especially when families encourage cooperation among their managers. Overall, our results suggest that mutual fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.

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Non-Standard Errors

Albert J. Menkveld Anna Dreber Felix Holzmeister Juergen Huber Magnus Johannesson Markus Kirchler Sebastian Neusüss Michael Razen Utz Weitzel et al.

in: IWH Discussion Papers, No. 11, 2021


In statistics, samples are drawn from a population in a datagenerating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidencegenerating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.

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Green Investing, Information Asymmetry, and Category Learning

Shasha Li Biao Yang

in: Working Paper, 2021


We investigate how the attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms’ financing costs. To guide our empirical analysis, we propose a model where an investor with green taste endogenously allocates attention to market or firm-specific shocks. We find that more green-motivated investors tend to give more attention to green firm-level information instead of market-level information. Thus higher green taste leads to less category learning behavior and reduces the information asymmetry. Furthermore, it suggests that higher green taste results in lower leverage and lower cost of capital of green firms.

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Lame-Duck CEOs

Marc Gabarro Sebastian Gryglewicz Shuo Xia

in: SSRN Working Papers, 2018


We examine the relationship between protracted CEO successions and stock returns. In protracted successions, an incumbent CEO announces his or her resignation without a known successor, so the incumbent CEO becomes a “lame duck.” We find that 31% of CEO successions from 2005 to 2014 in the S&P 1500 are protracted, during which the incumbent CEO is a lame duck for an average period of about 6 months. During the reign of lame duck CEOs, firms generate an annual four-factor alpha of 11% and exhibit significant positive earnings surprises. Investors’ under-reaction to no news on new CEO information and underestimation of the positive effects of the tournament among the CEO candidates drive our results.

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