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
Send Message +49 345 7753-875 Personal page

Refereed Publications

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Managerial Ability and Value Relevance of Earnings

Bill Francis Iftekhar Hasan Ibrahim Siraj Qiang Wu

in: China Accounting and Finance Review, No. 4, 2019

Abstract

We examine how management ability affects the extent to which capital markets rely on earnings to value equity. Using a measure of ability that captures a management team’s capacity for generating revenues with a given level of resources compared to other industry peers, we find a strong positive association between managerial ability and the value relevance of earnings. Additional tests show that our results are robust to controlling for earnings attributes and investment efficiency. We use propensity score matching and the 2SLS instrumental variable approach to deal with the issue of endogeneity. For further identification, we examine CEO turnover and find that newly hired CEOs with better managerial abilities than the replaced CEOs increase the value relevance of earnings. We identify weak corporate governance and product market power as the two important channels through which superior management practices play an important role in the corporate decision-making process that positively influence the value relevance of earnings. Overall, our findings suggest that better managers make accounting information significantly more relevant in the market valuation of equity.

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College Choice, Selection, and Allocation Mechanisms: A Structural Empirical Analysis

J.-R. Carvalho T. Magnac Qizhou Xiong

in: Quantitative Economics, No. 3, 2019

Abstract

We use rich microeconomic data on performance and choices of students at college entry to analyze interactions between the selection mechanism, eliciting college preferences through exams, and the allocation mechanism. We set up a framework in which success probabilities and student preferences are shown to be identified from data on their choices and their exam grades under exclusion restrictions and support conditions. The counterfactuals we consider balance the severity of congestion and the quality of the match between schools and students. Moving to deferred acceptance or inverting the timing of choices and exams are shown to increase welfare. Redistribution among students and among schools is also sizeable in all counterfactual experiments.

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Non-linearity in the Finance-Growth Nexus: Evidence from Indonesia

Nuruzzaman Arsyad Iftekhar Hasan Wahyoe Soedarmono

in: International Economics, August 2017

Abstract

This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.

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Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

Iftekhar Hasan Chun-Keung (Stan) Hoi Qiang Wu Hao Zhang

in: Journal of Financial and Quantitative Analysis, No. 3, 2017

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Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance

Iftekhar Hasan Chun-Keung (Stan) Hoi Qiang Wu Hao Zhang

in: Journal of Accounting Research, No. 3, 2017

Abstract

We investigate whether the levels of social capital in U.S. counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book-tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarters relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.

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Working Papers

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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

Abstract

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

Abstract

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

Abstract

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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Selection Versus Incentives in Incentive Pay: Evidence from a Matching Model

Shuo Xia

in: SSRN Working Papers, 2018

Abstract

Higher incentive pay is associated with better firm performance. I introduce a model of CEO-firm matching to disentangle the two confounding effects that drive this result. On one hand, higher incentive pay directly induces more effort; on the other hand, higher incentive pay indirectly attracts more talented CEOs. I find both effects are essential to explain the result, with the selection effect accounting for 12.7% of the total effect. The relative importance of the selection effect is the largest in industries with high talent mobility and in more recent years.

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The Liquidity Premium of Safe Assets: The Role of Government Debt Supply

Qizhou Xiong

in: IWH Discussion Papers, No. 11, 2017

Abstract

The persistent premium of government debt attributes to two main reasons: absolute nominal safety and liquidity. This paper employs two types of measures of government debt supply to disentangle the safety and liquidity part of the premium. The empirical evidence shows that, after controlling for the opportunity cost of money, the quantitative impact of total government debt-to-GDP ratio is still significant and negative, which is consistent with the theoretical predictions of the CAPM with utility surplus of holding convenience assets. The relative availability measure, the ratio of total government liability to all sector total liability, separates the liquidity premium from the safety premium and has a negative impact too. Both theoretical and empirical results suggest that the substitutability between government debt and private safe assets dictates the quantitative impact of the government debt supply.

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