Publications

Financial Media, Price Discovery, and Merger Arbitrage

Review of Finance, 25(4) (2021), 997-1046. (With Josef Zechner)

Winning paper of the Hong Kong Asian Capital Markets Research Prize 2013 of the Hong Kong Society of Financial Analysts (HKSFA) and the CFA Institute

Abstract:
Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced.

Should Investors Join the Index Revolution? Evidence from Around the World

Journal of Asset Management, 21(3) (2020), 192-218. (With Kit Pong Wong)

Abstract:
Over the past fifteen years, passive investing has seen 1.5 trillion dollars of fund inflows while active investing has seen 500 billion of outflows. These numbers are in line with the tenets of passive investing, which assert it is close to impossible to consistently outperform the market. We therefore ask in this paper whether there are truly no viable alternatives to indexing and passive investing. We devise a simple actively-managed strategy based on a new version of the minimum variance portfolio that outperforms comparable stock indices around the world with on average 20.2% higher raw returns, 46.7% higher risk-adjusted returns, and 28.4% smaller drawdowns. Furthermore, it exhibits 32.4% lower portfolio turnover than the 1/N strategy of DeMiguel et al. (2009) around the world. Not only does this actively-managed portfolio have higher returns at lower risk (the well-known risk-return puzzle), it also displays higher returns at higher skewness levels (i.e. lower downside risk) and thus presents a novel skewness-return puzzle. Moreover, the portfolio also has lower recession risk. Our evidence thus suggests that the principles of passive investing should be questioned and that more effort in the actively-managed fund industry should be devoted to the exploration and application of similar strategies to overcome the industry's decades-long underperformance.

Are Financial Constraints Priced? Evidence from Textual Analysis

Review of Financial Studies, 31 (2018): 2693-2728. (With Toni M. Whited)
Second Prize at CQAsia 2014 Academic Competition

Abstract:
We construct novel measures of financial constraints using textual analysis of firms' annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. Our results are strongest when we consider debt constraints. A portfolio based on this measure earns an annualized risk-adjusted excess return of 6.5%.

Debt, Equity, and Information

Journal of Mathematical Economics, 50 (2014): 54-62.

Abstract:
Most firms issue financial assets such as debt or equity (e.g. bonds or stock) to outside investors. While these financial assets differ greatly in their characteristics, their diversity has received little attention in the literature. Filling this important gap in the literature, this paper views debt and equity as financial contracts and asks why they are optimal instead of other financial contracts. By endogenizing the bankruptcy process, this paper shows how debt and equity arise as a consequence of an optimal allocation of cash-flow rights and monitoring rights, and how equity leads to dividend signaling.

Working Papers

The Role of the Media in Takeovers: Theory and Evidence

Best paper award semifinalist (corporate finance), 2011 FMA Annual Meeting

Working paper; current version: February 26, 2015
A previous version of this paper was circulated under the title "Takeovers and the Media."

Abstract:
Using text-based media content, this paper develops and empirically confirms a theory that explains how the media predicts takeover outcomes. It shows that positive media content about the acquirer predicts takeover success. Relative to other predictors proposed in the literature, the media measure is the most important explanatory variable in terms of marginal effect, significance, and goodness of fit.

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