Published and Accepted Papers

Accepted, Management Science

(Circulated under NBER Working Paper No. 26113)

We document the role that inside investment plays in managerial compensation and hedge fund performance. Merging against a comprehensive dataset of US hedge funds, we find that funds with greater inside investment outperform on a factor-adjusted basis. We emphasize the role of capacity constraints in explaining this result: insider funds are smaller, are less likely to accept inflows in response to positive returns, and are more likely to be closed to outside investors. These results suggest that managers earn outsize rents by operating trading strategies further from their capacity constraints when managing their own money.

Media Coverage: Harvard Law School Forum, Bloomberg View, Institutional Investor, ValueWalk, Reuters

Working Papers

Revise & Resubmit, Review of Financial Studies

This study empirically evaluates the relationship between health state-contingent assets and their ability to facilitate greater survival rates. Using transaction-level data from the life settlement market in a quasi-experimental setting, this study finds that wealth in particularly poor states of health leads to a significant increase in survival rates. This relationship is stronger for people in fragile health and those living furthest from hospitals. Improved survival rates are independent from the severity of the disease diagnoses and the social-economic status of the policyholders. These findings provide novel evidence in support of financial solutions aimed at the rising cost of healthcare.

We study the anatomy and evolution of ESG reports, examining how firms and standards influence the decision to make voluntary disclosures on ESG issues. Using a hand-collected sample of all ESG reports for S&P 500 firms from 2010-2020, we analyze their content, document how these disclosures have changed over time, and identify factors that influence the disclosure choice (e.g., leading firms and voluntary standards). Using topic modeling algorithms guided by the Sustainable Accounting Standards Board’s ESG standards, we provide evidence for the influence of other firms and the influence of these standards in the dynamic shaping of voluntary ESG reports.

- Recipient of the Moskowitz Price, Best Paper on Socially Responsible Investing

- Research Proposal Accepted by the Pacific Center for Asset Management (PCAM)

- Best Paper in Corporate Finance and Financial Institutions at the FMA European Conference, 2021

- European Investment Forum, Research Award for Best Paper, 2021

We study the real effects of environmental activist investing. Using plant-level data in a quasi-experimental setting, we find that firms targeted by environmental activist investors reduce their toxic releases, greenhouse-gas emissions, and cancer-causing pollution through preventative efforts. Improvements in air quality within a one-mile of targeted plants suggest potentially important externalities to local economies. We provide evidence supporting the external validity of environmental activism while also ruling out reporting biases, forms of selection, and other alternative hypotheses. Overall, our study suggests that engagements are an effective tool for long-term shareholders to address climate change risks.

This paper studies the conflict between ESG funds and their investors. Funds trade-off greater short-term financial performance against long-term sustainability. This conflict results in ESG funds voting against their stated pro-social mandate, even when supported by proxy advisors. Lower returns to sustainable proposals result in funds actively managing returns, while flow tests suggest that investors do not respond to contradictory voting. Simulating a correction to this voting pattern suggests an increase in passage of proposals, and greater sustainability disclosures. While investors delegate their pro-social preferences onto socially responsible funds, financial returns ultimately determine a funds' stance towards such issues.

This paper measures the cost of biased retirement expectations for investors in target-date funds. Using a nationally representative survey that follows households for nearly three decades, we document those survey respondents systematically underestimate their long-run labor participation on average by 4.8 years, with these errors having meaningful cross-sectional relationships with the respondent’s health, earnings, and wealth. We use these insights to build a life-cycle model of target-date funds to measure the costs of biased expectations. Model calibrations suggest that errors in expectations compound over time, costing the median respondent 4% of wealth at retirement, equivalent to 0.2% a year in losses.

with Ali Kakhbod and Joshua Bosshardt

Can tightening capital requirements lead to greater lending? We introduce a model to illustrate how the effect of capital requirements on bank lending can qualitatively depend on the extent of managerial protections against shareholder actions. Protections encourage managers to pursue unprofitable projects. While managers can still be disciplined by debt, if a financial institutions debt is constrained by capital requirements, then a higher level of investment can serve as a partial substitute. Capital requirements can therefore spur increased investment for banks with managerial protections. Empirically, we study banks facing stress-tests following the great recession and find evidence consistent with our model, that there was an increase in lending for banks with strong protections compared to banks with weak protections. These results provide new insights into the central role that corporate governance and incentives of bank managers have on the efficacy of capital controls of banks.

with Yael Hochberg, Ali Kakhbod and Peiyao Li

Implementing a state-of-the-art machine learning technique for causal inference using text analysis, we document that women are under-recognized for the quality of the patents they are granted. For the equivalent patent written by a female, a male would have received 12% more citations and 16% more patents in the top decile. Both female inventors and examiners tend to cite patents with female lead inventors more. Underrecognition of female-authored patents likely has economic implications for the allocation of talent in the economy. We conclude by outlining future applications of this new causal inference technique to finance and economics.

This paper examines whether targeted credit rationing by banks can disrupt the operations of firms likely to generate negative externalities. We exploit a major regulatory initiative in the United StatesOperation Choke Pointwhich targeted bank relationships with firms in industries with a high risk for fraud and money laundering. Using supervisory loan-level data, we find that targeted banks reduce lending and terminate relationships with affected firms. However, these firms fully compensate by substituting lending from non-targeted banks at similar terms, resulting in no changes in total debt, investment, or profitability. Our results suggest that targeted credit rationing fails to promote change.

The Impossibility of Communication Between Investors

All investors face the same decision problem: either invest for themselves or delegate their portfolio problem to an outside investor. Typically, asset managers can communicate their superior knowledge to attract capital. However, such communication comes with the risk of revealing the particulars of their valuable information without a commitment from potential investors. I explore this fundamental investment-delegate problem through developing an entropy-based model of communication, where investors endogenously determine to be a principal or an agent in a highly generalizable setting.