Ming Dong

We study how social connectedness affected mutual fund manager trading behavior in the first half of 2020. In the first quarter during which the COVID outbreak occurred, fund managers located in or socially connected to COVID hotspots sold more stock holdings compared to a control group of unconnected managers. The economic impact of social connectedness on stock holdings was comparable to that of COVID hotspots and was elevated among “epicenter” stocks most susceptible to the pandemic shock. In the second quarter, social interaction had an overall negative effect on fund performance, but this effect depended on manager skill; unskilled managers who were connected to the hotspots underperformed, while skillful managers suffered no deleterious effect. Our evidence suggests that social connections can intensify salience bias for all but the most skilled institutional investors, and policy makers should be wary of the destabilizing role of social networks during market downturns.

It is widely recognized that workplace sexual harassment has significant negative psychological and personal consequences, and employees facing harassment suffer reductions in productivity. Our contribution is to propose a novel measure of workplace sexual harassment risk and provide a fuller estimation of the firm value impact of sexual harassment. In contrast to recent studies that focus on short-run market reactions to media announcements of harassment scandals, we use employee job reviews to identify low-profile harassment incidents that better reflect the pervasive, toxic environment pertaining to sexual harassment than do newsworthy scandals, and we measure the longer-term effect on firm value starting from the date when harassment risk affects employee morale. We identify firm harassment risk by analyzing employee job reviews and estimate the sexual harassment score (SH) through textual analysis of online job reviews. Our sample of high-SH firms, or firms with unusually high-SH scores, exhibits significant reductions in future stock performance and profitability. For example, firms with a top 2% SH score earn a value-weighted risk-adjusted stock return of − 17% in the 1-year period after high-SH classification, and this damage is concentrated in firms with higher investor attention. Furthermore, high-SH firms experience a decline in operating profitability and an increase in labor costs during a 5-year period around high-SH classification. Our evidence suggests that sexual harassment can cause greater damages to firm value than previously documented.

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as research and development (R&D) and innovative output (patent and citation counts). Misvaluation affects R&D more via a nonequity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation increases with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and encouraging firms to engage in “moon shots.”

We hypothesize that employee flexibility enhances firm value by helping firms respond to exogenous shocks. We estimate employee-flexibility scores through textual analysis of online job reviews, and we find that a high flexibility score leads to superior stock returns for firms exposed to external risk. During 2011–2017, the value-weighted hedge portfolio formed on employee flexibility earned a 5-factor annualized alpha of 9.5% during periods of high policy uncertainty. Earnings-announcement returns also suggest that investors do not fully value workforce flexibility. These results indicate that employee flexibility is a valuable corporate intangible that helps firms to manage risk during uncertain times.

We hypothesize that weather’s emotional effects depend on climate and season, and examine the relation between weather (sunshine, wind, rain, snow, and temperature) and index returns separately for each region (cold, hot, and mild countries) and month. We find strong effects of all five weather variables in 49 countries from 1973 to 2012, and all but the sunshine effect vary across temperature regions and seasons. The systematic patterns of weather effects across climates and seasons suggest that weather influences stock returns through investor mood, and that the emotional effects of the weather are stronger and more pervasive than previously documented.

We revisit the survey questions on convertible bond issue motives from the influential study of Graham and Harvey (2001). Our question-conditional analysis connecting survey answers with firm characteristics reveals that the conclusions on two of the four convertible debt theories from the original study need to be revised. More particularly, the delayed equity rationale and the sequential financing rationale on convertible bond issuance do not receive support from the question-conditional tests. Our results indicate that adding a question-conditional analysis is essential in obtaining correct inferences from survey data.

We conduct interviews with financial managers in Australia, Canada, the U.K., and the U.S. to study the question why companies issue convertible bonds. For the vast majority of the firms, convertible bonds are chosen because managers find straight debt too costly. Convertible bonds are preferred to equity either because of the pecking order or because of managers’ perceived equity undervaluation and share dilution. Our results suggest that managers time the issuance of convertible bonds based on the demand of the investors and the misvaluation of the firms’ debt and equity. The evidence lends considerable support to the theory of management-investor differences in opinion about firm’s risk, but yields very little support to the theories of risk shifting, sequential financing, or backdoor equity.

We study market timing and pecking order in a sample of debt and equity issues and share repurchases of Canadian firms from 1998 to 2007. We find that only when firms are not financially constrained is there evidence that firms issue (repurchase) equity when their shares are overvalued (undervalued) and evidence that overvalued issuers earn lower postannouncement long‐run returns. Similarly, we find that only when firms are not overvalued do they prefer debt to equity financing. These findings highlight an interaction between market timing and pecking order effects.

We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation, but only among overvalued stocks, and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment-scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

We investigate the effects of five weather conditions (sunshine, wind, rain, snow depth, and temperature) on daily index returns of 49 countries from 1973 to 2012. We hypothesize that the effects of the weather on investor behavior depend on climate and season, and examine the relation between weather and daily returns separately for each temperature region (cold, hot, and mild) and each month. We find that the effects of weather on returns are contingent on climate and season and more pervasive than previously documented. A hedge strategy that exploits the daily return predictability of the weather generates up to 25% annualized out-of-sample gross profits during 1993-2012. The patterns of weather effects across climates and seasons suggest that weather influences investor psychology.

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as R&D and innovative output (patent and citation counts). Misvaluation affects R&D more via a non-equity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation is increasing with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and by encouraging firms to engage in highly inventive innovation.

We hypothesize that employee flexibility enhances firm value by helping firms respond to exogenous shocks. We estimate employee flexibility scores through textual analysis of online job reviews, and find a high flexibility score leads to superior stock returns for firms exposed to external risk. During 2011-2017, the value-weighted hedge portfolio formed on employee flexibility earned a five-factor annualized alpha of 9.5% during periods of high policy uncertainty. Earnings announcement returns also suggest that investors do not fully value workforce flexibility. These results indicate that employee flexibility is a valuable corporate intangible that helps firms to manage risk during uncertain times.