I am an associate professor in finance at University of Texas at Dallas. My research lies in the area of empirical and theoretical asset pricing, and focuses on the time series and cross-sectional variations of asset returns.
1. "Asset growth effect and Q theory of investment" (with Leonid Kogan and Xiaotuo Qiao) [SSRN]
Abstract: We extend the standard q theory of investment into a two-capital setup in which firms use both physical capital (long-term asset) and short-term capital (current asset) as production inputs.
We find this simple extension is capable of explaining the stronger return predictive power of total asset growth than current and long-term asset growths. A novel asset imbalance channel creates negatively correlated comovement between current and long-term asset growths that are unrelated to the discount rate effect. Part of this comovement is cancelled out in the total asset growth, giving rise to its stronger return predictive power. Empirically, once controlling for this comovement, the return predictive power of current and long-term asset growths substantially improves. Furthermore, we document compelling evidences for the model's prediction that the asset growth effects are more prominent among firms with low asset imbalance. Our results support the q-theory based explanation for the asset growth effect.
-Presented at the Conference in Financial Economics and Accounting, the 18th Annual Conference in Financial Economics Research by Eagle Labs, 14th Florida State University Truist Beach Conference, China Interantional Conference in Finance, and Midwest Finance Association annual meeting, European Finance Association Meeting, Northern Finance Association Meeting, and Econometric Society Asian Meeting.
Abstract: We propose a measure of valuation gap between debt and equity, the debt-equity spread (DES), based on the difference between actual and equity-implied credit spreads. DES predicts the cross section of stock and bond returns in opposite directions, with stronger results among smaller, less liquid, and more difficult-to-short stocks and bonds, and the predictability cannot be explained by exposures to a variety of risk factors. Furthermore, high-DES firms tend to have more negative growth forecast revisions, are more likely to issue equity and retire debt, and have more insider equity selling. These findings on asset pricing dynamics and corporate financing behavior are consistent with DES capturing relative mispricing between debt and equity. They imply that segmentation between the two markets is prevalent at firm level.
- Revise & resubmit at Journal of Finance,
-Presented at Arrowstreet Capital, BI Norwegian Business School, City University of London, Peking University HSBC Business School, Babson University, Chinese University of Hong Kong, Hong Kong Baptist University, and Southern University of Science and Technology, American Finance Association annual meeting, European Finance Association annual meeting, Financial Intermediation Research Society meeting, China International Conference in Finance, Midwest Finance Association annual meeting, and UNSW Asset Pricing Workshop.
Abstract: We investigate the joint asset pricing effects of variable costs and fixed costs in a firm's production process. While the latter such as SG&A expenses create an operating leverage effect, the variable costs allow firms to hedge against aggregate profitability shocks. Taking into account both types of production costs explains the empirical patterns in the cross-section asset returns in portfolios sorted by the gross profitability and operating leverage. Our model reconciles the seemingly contradictory phenomena that higher productivity firms earn lower returns (Imrohorouglu and Tuzel, 2014), whereas more profitable, often more productive, firms earn higher returns (Novy-Marx, 2013). It also offers a novel explanation for the negative idiosyncratic volatility premium (Ang, Hodrick, Xing, and Zhang, 2006) based on production costs.
-Presented at Australian National University, Chinese University of Hong Kong, Baylor University, Ohio State University, University of Cincinnati, European Finance Association meeting, North Finance Association meeting, Midwest Finance Association meeting, the PKU/PHBS Sargent Institute Macro-Finance Workshop, the Summer Institute of Finance, the 9th annual workshop on investment and production-based asset pricing, Western Finance Association meeting, China Finance Review International & China International Risk Forum Joint Conference, and China International Conference in Finance.
PUBLICATIONS
1. "Investor attention, psychological anchors, and stock return predictability" (with Jianfeng Yu),
Journal of Financial Economics, Vol. 104, pp. 401-419, May 2012 [SSRN]
2. "Government spending, political cycles and the cross section of stock returns" (with Frederico Belo and Vito Gala),
Journal of Financial Economics, Vol. 107(2), pp. 305-324, Feb 2013 [SSRN]
3. "Asset pricing in production economies with extrapolative expectations" (with David Hirshleifer and Jianfeng Yu), Journal of Monetary Economics, Vol. 76, pp. 87-106, Nov 2015 [SSRN]
Internet Appendix
4. "Short-run and long-run consumption risks, dividend processes, and asset returns"(with Harold H. Zhang),
Review of Financial Studies, Vol. 30, pp. 588-630, Feb 2017
[SSRN]
Internet Appendix
5. "Explaining momentum and value simultaneously", Management Science, Vol.64(9), pp.4239-4260, Sep 2018
[SSRN]
6. "Labor-force heterogeneity and asset prices: the importance of skilled labor" (with Frederico Belo, Xiaoji Lin, and Xiaofei Zhao),
Review of Financial Studies, Vol. 30, pp. 3669-3709, Oct 2017
[SSRN]. Industry level labor skill data here.
7. "Aggregate expected investment growth and stock market returns" (with Huijun Wang and Jianfeng Yu) Journal of Monetary Economics, Vol. 117, pp 618-638, Jan 2021 [SSRN]. Monthly AEIG data from June 1953 to November 2015 are here.
8. "Expected investment growth premium" (with Huijun Wang and Jianfeng Yu) Financial Management, 50 (4) pp 905-933, 2021 [SSRN]
9. "Is the size premium really driven by firm size?" (with Zhiyao Chen and Huijun Wang) Journal of Investing, 30 (5) pp 127-143, Aug 2021 [SSRN]
10. "The opposing effects of complexity and information content on uncertainty dynamics: Evidence from 10-K filings" (with Joon Woo Bae, Frederico Belo, Xiaoji Lin, and Xiaofei Zhao) Management Science, 69 (10) pp 6313-6332, 2022 [SSRN]
11. "It depends on when you search!" (with Xianwei Liu, Qiang Ye, Feng Zhao and Xiaofei Zhao) MIS Quarterly, 47 (1) pp 263-280, 2023
12. "Operating hedge and gross profitability premium" (with Leonid Kogan and Harold H. Zhang)
Forthcoming, Journal of Finance [SSRN]
