Publications:

Theme One: Incentives for Executives and Employees, and Implicit Contracting

1. “Executive Compensation Incentives Contingent on Long-term Accounting Performance” with Zhi Li, Review of Financial Studies, 29 (2016): 1586-1633. [SSRN LINK]

The percentage of S&P 500 firms that adopt multi-year accounting-based performance (MAP) incentives increased from 16.6% in 1996 to 43.3% in 2008. The average annualized target payout from the plans is around $2.2 million, roughly two times a CEO’s base salary and exceeds the payout of a bonus plan. Expected payouts from MAP incentives have now exceeded those of option grants and become the most significant component of CEO compensation for firms that grant MAP incentives.


We analyze both cross-sectional determinants and time-series trend of MAP plan adoption and design. We find that the use and design of MAP incentives depend on the signal quality of stock vs. accounting performance, shareholder horizons, strategic imperatives, and board independence. The recent shift toward MAP incentives are related to several non-mutually exclusive events that are onset at the beginning of 2000s, including the technology bubble, accounting rule changes, and the option backdating scandals. These events increased the perceived costs of option grants and benefits of using MAP incentives. Subsequently, firms started to use stock-based MAP plans to replace option grants, resulting in changes in pay design but not level. While firms respond to the changes in the contracting environment, they rationally consider firm characteristics and do not blindly follow the trend.


2. "International Sourcing and Capital Structure" with Cheol S. Eun, Review of Finance, 20(2016): 535-574. [SSRN Link] 

The total value of international purchases of goods by U.S. firms increased from 498 billion dollars in 1990 to 2,745 billion dollars in 2012. Over the same period, the number of countries and areas that U.S. firms buy from increased from 76 to 236. - Based on the trade data from the U.S. Census Bureau


We use the IO tables to construct international sourcing level for over 500 disaggregate industries industries from 1993 to 2006 and find that international sourcing has a significant negative influence on financial leverage. The negative influence is stronger in industries that have high R&D intensities and are financially constrained. However, the negative relation is mitigated when suppliers are from countries with strong legal environments and when the supplier markets are more competitive. We rely on supplier countries' WTO accessions and supplier countries' natural trade openness to establish causality.

3. “Outside Employment Opportunities, Employee Productivity, and Debt Discipline" with Jayant Kale and Chip Ryan. Journal of Corporate Finance, 59 (2019): 142-161.[SSRN LINK] 


To what extent "Joe" puts up with his needy boss depends on whether he can easily find another job. This is pretty much our hypothesis in this paper and we find empirical evidence consistent with it.


Using a sample of over 99,000 firm year observations encompassing more than 13,800 firms from 1978 to 2007, we analyze how changes in labor market conditions influence the disciplining effect of debt on employee productivity. We document that better (worse) outside employment opportunities weaken (strengthen) the disciplinary effect of debt on employee output. The influence of outside employment options on leverage-output relation is robust to various controls for endogeneity, including using instrumental variables, a quasi-natural experiment, both firm and industry-level analysis, alternative model specifications, and controls for employees’ work conditions and changes in work efficiencies. Altogether, our findings highlight the importance of labor market conditions on the efficacy of corporate financial policies and our understanding of how these policies influence economic outcomes.

4. “Accounting-based Compensation and Debt Contracts" with Zhi Li and Karen Wruck. Contemporary Accounting Research, 37 (2020): 1475-1511.[SSRN LINK] 

The recent trend of adding accounting performance to CEO compensation contracts is welcomed by debtholders and helps reduce the cost of debt for firms. 


We examine how accounting‐based compensation plans influence a firm's contracts with its creditors. After granting long‐term accounting‐based compensation plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new bank loans. Mechanisms leading to lower borrowing cost include improvements in debt repayment ability, reduced shareholder‐debtholder conflicts, and reduced risk‐taking incentives. Creditors view LTAPs as a substitute for monitoring, adjust covenant design based on LTAP features, and value plans with concave performance‐payout functions and reasonable performance targets. A firm's credit rating improves and CDS spread declines after LTAP grants, suggesting that LTAPs help reduce firms' credit risk. 

5. “Pay for Outsiders: Incentive Compensation for Nonfamily Executives in Family Firms" with Zhi Li and Chip Ryan. Contemporary Accounting Research, 38(2) (2021): 1139-1176. [SSRN LINK] 

Family firms pay nonfamily executives less total and incentive pay but provide the outsiders with safer pay and higher job security than nonfamily firms. 


We use a hand‐collected sample of 1,628 S&P 1500 firms and more than 12,000 executives to examine how family firms compensate nonfamily executives. Family firms comprise a large percentage of firms around the world, and most of their executives are not members of the founding family. Moreover, the founding family's engagement in the firm alters agency conflicts, which in turn should influence the design of incentive compensation. However, there is no empirical evidence on whether and how the incentive compensation of nonfamily executives differs between family and nonfamily firms. Our study provides the first evidence. Consistent with our predictions, nonfamily executives in family firms receive significantly less performance‐based pay and equity‐based pay. Family monitoring, risk aversion, and a reluctance to dilute family ownership all contribute to the pay differences. Although incentive pay and total pay are lower in family firms, nonfamily executives receive safer pay and enjoy greater job stability. An analysis of executives' moves across firms suggests that ownership structure, not executives' preferences, is more likely the driver of pay differences between family and nonfamily firms. 

Theme Two: Culture, Social Attitudes, and Asset Prices

6. "Culture and R2" with Cheol S. Eun and Steven C. Xiao, Journal of Financial Economics, 115 (2015): 283-303. [SSRN Link]

Culture - "Software of the Mind", "it is the collective programming of the mind which distinguishes the members of one group or category of people from another." - Geert Hofstede


We find that stock prices co-move more (less) in culturally tight (loose) and collectivistic (individualistic) countries. Culture influences stock price synchronicity by affecting correlations in investors’ trading activities and a country’s information environment. Trade and financial openness weakens the effect of domestic culture on stock price comovements.


7. "The Economic and Cultural Motives of Green Price Premium" with Zinat Alam and Miran Hossain, British Accounting Review, forthcoming [SSRN Link]

Does it pay to add green features to residential properties? Economically, no! But psychologically, yes! 

We use the house transaction data to analyze why houses with energy-saving (green) features are sold for higher prices. We estimate house-specific economic values of green features and show that these values account for about 20-53% of the green price premium, depending on how economic values are measured. Individual homebuyers’ cultural origins and environmental attitudes also play a significant role in explaining the green price premium, with a weaker premium observed among less individualistic and indulgent buyers, and a stronger premium among those who are more uncertainty-avoidant and pro-environment. These results are robust to various strategies to address selection bias and cannot be explained by buyers’ income levels or political orientations. Our findings point to both the economic and social value of green homes and highlight the role of investors’ behavioral preferences in evaluating green investments. 


8. "House Price Growth Synchronization and Business Cycle Alignment" with with Cheol Eun and Teng Zhang. Journal of Real Estate Finance and Economics, 65 (2022): 675-710. [SSRN LINK]


One of the most notable trends in the U.S. housing market in the recent decades is the increasing house price growth (HPG) synchronization across regions. 

Using four decades of data, we provide novel evidence that the increasing HPG synchronization leads to higher business cycle alignment across U.S. states. One standard deviation increase in HPG synchronization is associated with a 15%, 12%, and 10% increase in the alignment of the states’ gross state product, employment, and income growth, respectively. The relation is stronger between states with similar banking development and in non-tradable sectors. Supporting both the collateral and direct wealth effect channels, we find more aligned house-secured borrowing activities and consumption growth between states with more synchronized house price growth. Results also hold at the MSA level and are robust to various endogeneity controls, including a Bartik-type instrument. Overall, our findings suggest that the housing market integration can lead to amplified business cycles associated with an increased systemic economic risk at the country level. 


9. "Discretion in Pay Ratio Estimation" with Zinat Alam, Chinmoy Ghosh, and Harley E. Ryan. Journal of Banking and Finance 173 (2025), 107416. [SSRN Link] 

The CEO's pay is 192 times of the median employee pay when the simplest method is used to determine the median employee. When the most complex method is used, however, the CEO pay ratio drops to 70, a 64% decline. We study why firms choose different methods and find that social attitudes toward income inequality play a significant role. 

We use the first mandated pay inequality disclosure in U.S. firms, the CEO-employee pay ratio disclosure, to examine firms’ disclosure decisions under social pressure. We find that firms use disclosure discretions to lower reported pay ratios when their headquarter states exhibit stronger income inequality aversion and when the CEO has higher reputational concerns. Industry, size, compensation design, and workforce composition differences do not explain the findings. Firms do not appear to make real changes to reduce the pay ratio. Together, our results highlight the influence of societal attitudes on social disclosure and cast doubt on the informativeness of the pay ratio disclosure. 

 

Theme Three: Textual Analysis and Machine Learning


10.  "On the Effectiveness of the CD&A Disclosure: Evidence from CD&A Textual Features" with Jieqiong Gao and Chinmoy Ghosh, Journal of Accounting, Auditing, and Finance, forthcoming (2025). [SSRN Link] 

Why some firms need the length of an academic research paper (~40 pages) to describe their compensation design for executives while the others only need one or two pages? We study the cross-sectional differences of the CD&A textual features and their implications for disclosure effectiveness.

Based on 10,000+ Compensation Discussion and Analysis (CD&A) disclosures of large U.S. firms, we provide some first evidence on the relations between the CD&A’s textual features and the effectiveness of the disclosure in achieving the SEC’s objective for the CD&A mandate. Information asymmetry increases and support on executive pay decreases after firms file longer and more negative CD&As. Say-on-Pay vote participation is also lower when the CD&As are longer, more uncertain, and more litigious. We dissect the disclosure into compliance component that is necessary to satisfy SEC requirements and discretionary component that is associated with agency motives, and find that the latter drives all the undesired disclosure outcomes. 

11. “Automatic Trend Detection: Time-Biased Document Clustering" with Sahar Behpour, Mohammadmahdi Mohammadi, Mark Albert, Zinat Alam, and Ting Xiao. Knowledge-Based Systems 220 (2021).

Using the abstracts from all JFE publications from 1974 to 2020, we show that adding the time of publication to standard topic clustering models (which do not have a time dimension) can significantly improve the models' predictivity of trends in research topics.