Research Fields

Corporate Finance, Contract Theory, Information Economics, Financial Markets

Working Papers

Firm Performance Pay as Insurance against Promotion Risk (Forthcoming, Journal of Finance)

The prevalence of pay based on risky firm outcomes for non-executive workers presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. When workers at the same firm compete against each other for promotions, the optimal contract features pay based on firm outcomes as insurance against promotion risk. The model’s predictions are consistent with many observed phenomena, such as performance-based vesting and overvaluation of equity pay by non-executive workers. It also generates novel predictions linking a firm's hierarchy to its workers' pay structure.

Fighting Fire with Fire: The Value of Informed Buybacks 

This paper studies the authorization and execution of buybacks in a Kyle micro-structure setting with two informed parties: a speculator who trades on his own account and a manager who implements buybacks for the firm. Buybacks intensify the competition for trading profits, making it more difficult to profit from private information. However, buybacks also generate gains and losses that increase the dispersion of the firm's per-share value across different payoff states, making private information more valuable. Less informative buybacks weaken the first force while magnifying the second. The manager may manipulate the current stock price by knowingly repurchasing overvalued shares to increase her compensation; the agency problem constrains how much buybacks reflect her private information. The model generates novel predictions linking the structure of managerial compensation, the buyback authorization, and trading outcomes following buybacks.

Production and Externalities: The Role of Ownership Structure (with Michael D. Wittry)

We show that ownership structure plays an important role in firms' generation of negative externalities. Our framework highlights two complementary forces that result in socially costly production following the diffusion of ownership. First, the increased cost of monitoring results in a substitution towards higher-powered incentives, which also encourage more socially costly production. Second, reduced trading frictions potentially shift ownership towards investors who internalize less of the firm's externalities. Using asset-level data in the coal industry, we confirm that production increases and workplace safety deteriorates after private-to-public transitions, primarily when alternative governance mechanisms are weak and when more ownership reallocates. 

Encouraging Employee Engagement: The Role of Equity Pay

Despite the moral hazard literature suggesting that equity pay cannot provide meaningful incentives to non-executive workers, large firms routinely use such pay for the explicit purpose of incentivization. I revisit this puzzle in a parsimonious model of worker engagement. Engaged workers are more productive. At the same time, they are better able to assess the firm's future performance. Equity pay correlates with firm performance and motivates workers to engage as a way of resolving income risk early. The model's predictions are consistent with many stylized facts, such as the propensity of riskier firms to offer equity pay. The model also generates novel testable implications linking the worker's preference for early resolution of income risk to firm-level outcomes following the adoption of broad-based equity-based pay.

The Economics of Financial and Operational Hedging: Insights from U.S. Power Plants (with Grant Ran Guo, Haohang Wu, and Dong Yan)

We study how firms adapt hedging policies to manage increased weather-related risks due to climate change. We introduce a parsimonious model of financial and operational hedging, and financing frictions. Financial hedging reduces the firm's exposure to weather risk, lowering the firm's subsequent incentive to hedge operationally. However, financial hedging also makes the firm's debt safer and reduces borrowing costs, mitigating the conventional debt overhang problem that typically discourages operational hedging investments. The two types of hedging policies are strategic complements when financing frictions are sufficiently severe; otherwise, they are substitutes. We test the model's predictions using the U.S. electric power industry as an empirical setting. We document a financial hedging overhang: firms that hedge via financial contracts subsequently engage in less operational hedging, such as maintaining gas inventories.

Works in Progress

How Do Firms Execute Open Market Repurchases: Evidence from Taiwan (with San-Lin Chung and Wen-Rang Liu)

Innovation and Pivots (with Vincent Maurin)

Dynamic Firm Life Cycle and Payout Policy (with Tina Oreski and Cedric Wu)

Inactive Projects

Public and Private Weather Information in the Orange Juice Market (with Thomas Gilbert)

A Model of Cyber Insurance (with Ryan Skorupski)