My current research projects focus on behavioral finance – how the emotions of investors and company executives affect trading or corporate decisions. Behavioral finance is one of the fastest growing areas of finance. Through my own research, I am convinced of the pervasive role of investor psychology in affecting market valuation and corporate decisions. This fellowship supports me in coordinating my four on-going research projects.
The first project, ‘Does Management Earnings Guidance Benefit Shareholders?’, supported by a SSHRC Grant empirically tests whether an investor behavioral bias named loss aversion helps to explain why firms provide earnings guidance, and whether management earnings guidance benefits stock performance, especially in the case of bad news earnings guidance.
The second collaborative project, ‘Does Market Overvaluation Promote Corporate Innovation?’, supported by a National Center of Middle Market Grant explores whether misvaluation affects innovation input (R&D expense) and output (measured by patents and citations, using the newly updated NBER patent/citation dataset). We find stock overvaluation is associated with greater innovative output, but this effect is much weaker than the effect on R&D expenditure, suggesting substantial agency costs of overvalued equity.
In the third paper, ‘Rationalizing the Irrationality: Diffusion of Misvaluation through Economic Links,’ supported by a SSHRC Grant, my co-authors and I aim to establish when investors are attention-constrained, the channel for information flows can also facilitate the diffusion of misvaluation, using a hand-collected sample of supplier-customer company pairs.
The fourth paper, ‘CEO Overconfidence and Corporate Fraud’, my co-author and I examine how CEO overconfidence affects corporate fraud. In contrast to the literature which documents that executives tend to unintentionally overstate profitability which starts them on a “slippery slope” path to frauds, our evidence indicates that extremely overconfident CEOs intentionally commit fraud which are substantially more severe than frauds committed by non-overconfident CEOs.
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