Tse-Chun Lin
Prof. Tse-Chun LIN
Finance
Area Head of Finance
Professor

3910 2157

KK 1003

Publications
Psychological barrier and cross-firm return predictability

We provide a psychological explanation for the delayed price response to news about economically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We also find that analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.

The Cost of Distraction

What could be the result if some compelling opportunities, like lottery jackpots, were potentially lucrative enough to distract the investors' attention from monitoring the stock market?

Governance through Trading on Acquisitions of Public Firms

We identify an important channel, acquisitions of public targets, via which the governance through trading (GTT) improves firm values. The disciplinary effect of GTT is more pronounced for firms with higher managerial wealth-performance sensitivity and moderate institutional ownership concentration. Firms with higher GTT also have higher subsequent ROA, ROE, Tobin's Q, analysts forecasted EPS growth rate, and lower expected default risk. The effect is stronger after Decimalization and robust to using two instrumental variables. We conduct several exercises to rule out alternative explanations, such as institutional superior information, investor activism, and momentum. Additional tests show that the disciplinary effect of GTT only exists for less financially-constrained firms and non-all-cash M&As where the agency problem is more likely to be prevalent.

Does short-selling threat discipline managers in mergers and acquisitions decisions?

We explore the governance effect of short-selling threat on mergers and acquisitions (M&A). We use equity lending supply (LS) to proxy for the threat, as short sellers incentives to scrutinize a firm depend on the availability of borrowing shares. Our results show that acquirers with higher LS have higher announcement returns. The effect is stronger when acquirers are more likely to be targets of subsequent hostile takeovers and when their managers wealth is more linked to stock prices. We conduct four sets of tests to mitigate endogeneity concerns. Finally, the governance effect exists only for deals prone to agency problems.

Contractual Managerial Incentives with Stock Price Feedback

We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay-for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide managerial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay-for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market.

Attention allocation and return co-movement: Evidence from repeated natural experiments

We hypothesize that when investors pay less attention to financial markets, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.

Round Numbers Can Hurt Crowdfunding Campaigns

The research study by Professor Tse-Chun Lin, Professor of Finance and his Ph.D. student Vesa Pursiainen is covered by a number of regional and international media.

Ex-Day Returns of Stock Distributions: An Anchoring Explanation

We offer a new anchoring explanation for the ex-day abnormal returns of stock distributions, including stock dividend distributions, splits, and reverse splits. We propose that investors tend to anchor on cum-day prices in valuating ex-distribution stocks, resulting in a positive association between ex-day returns and adjustment factors. We find that this positive return-factor relation exists for all three types of stock distributions and in both the pre- and post-decimalization periods. Furthermore, we find that this positive return-factor relation is more pronounced among events that are more subject to investors’ anchoring propensity, featured by less investor attention, greater arbitrage difficulty, greater valuation uncertainty, less investor sophistication, and higher market sentiment. Last, using brokerage account data, we show that stocks that are traded by investors with more investment experience demonstrate a weaker return-factor relation.