Fake Entry
We show the financial interests of a generic-drug manufacturer's largest shareholders in a branded competitor predict the generic's likelihood of being the first to challenge a drug patent. Conditional on a challenge, these common-ownership links predict settlements and delayed generic entry in exchange for payments to the generic. The stock price reactions are positive for the brand but negative for the generic, implying wealth transfers from one portfolio firm to another, with net benefits to investors. These facts suggest that in supracompetitive markets, corporate objectives depend on shareholder preferences.
Martin Schmalz, Jin Xie
Working Paper | No. 20250102 |
Keywords: ownership, corporate objective, corporate governance
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Nominal Rigidities, Earnings Manipulation, and Securities Regulation
How does output-price stickiness affect managers’ incentive to manipulate earnings and their firms' financing costs? We show firms with sticky-output prices experience more negative returns during tight windows around the Enron scandal and are more likely to misreport earnings when securities regulation is lenient, and their misreporting drops significantly after regulation becomes stringent. Sticky-price firms also face improved credit-market conditions following securities regulation. We build a model of earnings manipulation with endogenous manipulation costs to rationalize our empirical findings. The study suggests firms' stickiness in product pricing facilitates insiders' selfinterested behavior, imposing agency costs on firms.
Erica Xuenan Li, Pengfei Wang, Jin Xie, Ji Zhang
Working Paper | No. 20250101 |
Keywords: nominal rigidities, earnings manipulation, agency cost, Sarbanes-Oxley Act, credit market
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Multinational Expansion in Time and Space
This paper studies the expansion patterns of multinational enterprises (MNEs) in time and space. Informed by a set of facts documented using a panel of US MNEs, we develop a multi-country general equilibrium dynamic model featuring a rich structure of costs to firm expansion into host and export markets. We introduce a novel compound-option formulation for the firm problem, which captures the spatial heterogeneity observed in the data. Using the calibrated model, our quantitative applications reveal that both the spatial and time dimensions of MNE activities matter for predicting the effects of globalization shocks.
Stefania Garetto, Xiao Ma, Lindsay Oldenski, Natalia Ramondoy
Working Paper | No. 20241204 |
Keywords: Multinational firms, foreign direct investment, firm dynamics, sunk costs
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Asylum Assignment and Burden-Sharing
We analyze the problem of matching asylum seekers to member states, incorporating wait times, preferences of asylum seekers, and the priorities, capacities, and burden-sharing commitments of member states. We identify a unique choice rule that addresses feasibility while balancing priorities and capacities. We examine the effects of both homogeneous and heterogeneous burdensizes among asylum seekers on the matching process. Our main result shows that when all asylum seekers are treated as having identical burden-sizes, the asylum-seeker-proposing cumulative offer mechanism guarantees both stability and strategy-proofness. In contrast, when burden-sizes vary, there are scenarios where achieving stability or strategy-proofness is no longer possible.
Gian Caspari, Manshu Khanna
Working Paper | No. 20241203 |
Keywords: matching theory, market design, stability, asylum assignment
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Information Design for Social Learning on a Recommendation Platform
A recommendation platform sequentially collects information about a new product revealed from past consumer trials and uses it to better guide later consumers. Because consumers do not internalize the value of information they bring to others, their incentive for trying out the product can be socially insufficient. Given such a challenge, I study how the platform can improve social welfare by designing its recommendation policy. In a model with binary product quality and general trial-generated signals, I find that the optimal design features a U-shaped sequence of recommendation standards over the product’s life, and the optimal learning dynamic can involve temporary suspensions following negative consumer feedback when the product is young. Various extensions and comparative statics regarding the optimal recommendation standards are provided. My analysis also illustrates the usefulness of a Lagrangian duality approach for dynamic information design.
Chen Lyu*
Working Paper | No. 20241201 |
Keywords: information design, social learning, recommendation platform, Lagrangian duality
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No Sparsity in Asset Pricing: Evidence from a Generic Statistical Test
We present a novel test to determine sparsity in characteristic-based factor models. Applying the test to industry and pseudo-random portfolios, we reject the null hypothesis that fewer than ten factors are sufficient to explain returns, and show that at least forty factors are needed for the various sample periods examined. We find that dense models outperform sparse ones in both pricing and investing. Testing with tree-based portfolios also indicates no sparsity. Our results suggest that most existing factor models, which have fewer than six factors, are questionable, and that future research on such low-dimensional models is unlikely to be fruitful.
Junnan He, Lingxiao Zhao, Guofu Zhou
Working Paper | No. 20241202 |
Keywords: factor models, characteristic-based factors, sparsity, test
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Monetary Policy in Open Economies with Production Networks
This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output
Zhesheng Qiu, Yicheng Wang, Le Xu, Francesco Zanetti
Working Paper | No. 20240906 |
Keywords: ESG, Mutual fund family, Spillover effect, Fund flows, Affection-based judgement, Fund proliferatio
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Transcontinental Railways and Hinterland Development
The dominant role of maritime shipping in international trade has led to the imbalance between coastal and inland regions. We study whether transcontinental railways, an alternative mode that opens up vast heartlands of a continent to trade and business, can boost inland development. Using the post-2010 expansion of China-Europe Railway Express as a natural experiment and rich Chinese firm-level data, we find that exports to Europe, manufacturing production, and firm entry increase in areas surrounding the transcontinental railway stations. We present supportive evidence on the increase in producer services, freight agencies, nightlight intensity, capital inflow and the slowdown of outmigration.
Siwei Cao, Mi Dai, Yizhen Gu, Kui Zhao
Working Paper | No. 20240905 |
Keywords: ESG, Mutual fund family, Spillover effect, Fund flows, Affection-based judgement, Fund proliferatio
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How do Multinationals Impact China’s Technology? The Role of Quid Pro Quo Policy and Technology Spillovers
Multinationals play a crucial role in international knowledge diffusion. Using comprehensive patent data, we document: (1) multinational affiliates and their foreign parent firms comprise a significant portion of patents filed with China’s patent office; and (2) there are subsequent transfers and spillovers of these technologies to domestic firms. Guided by this evidence, we develop a model of multinational production featuring cross-country idea flows, transfers, and spillovers. Quantitatively, we find that without multinational production and knowledge spillovers, the idea stock owned by China would drop by 27%. Furthermore, due to the externalities of multinationals through technology transfers and spillovers, subsidizing multinationals will at most increase real income by 8% in China.
Xiao Ma, Yiran Zhan
Working Paper | No. 20240902 |
Keywords: multinational activities, technology transfers, knowledge spillovers
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Overnight Learning, Price Discovery, and Macroeconomic Announcements
We show fast price discovery at the market opening after macroeconomic announcements released overnight even when investors do not trade and learn from quotes while the stock market is closed. Leveraging a unique feature of unscheduled macroeconomic announcements arriving outside of regular trading hours of Chinese stock markets, our paper identifies the large impacts of learning from alternative sources other than prices on price discovery. We document that investors’ overnight learning from social media in the period between macro news arrival and market opening enhances the price discovery once market reopens for trades. Overnight learning among investors helps level the playing field across investors and mitigates reversals of overnight and intraday returns.
Haozhe Han, Grace Xing Hu, Calvin Dun Jia*
Working Paper | No. 20240904 |
Keywords: overnight learning, macroeconomic announcements, price informativeness, social media
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