Research
Published and Accepted Papers
A Theory of Firm Opacity and Corporate Social Responsibility, with Zhuoqiong Chen. Journal of Banking and Finance, accepted, 2022.
Abstract: We investigate theoretically the effect of firm opacity, the degree of information asymmetry between firms and outside investors, on whether Corporate Social Responsibility (CSR) activities signal firm value. In our model, a profit-maximizing firm chooses whether to conduct costly CSR activities observable to potential investors and whether to undertake internal corporate and managerial actions that improve its value, which is unobservable to potential investors. We show that the firm is more likely to perform CSR when it undertakes the value-enhancing internal actions in equilibrium, and hence, CSR signals the firm’s value and increases investors’ expected valuation of the shares, only when the firm is moderately opaque. Empirical implications regarding the effect of firm opacity on the correlation between CSR and firm value are discussed.
Investment Motives，Distances Factors and Location Choice of China’s Investment along the Belt and Road, with Yuna Di. China Soft Science, 2018(2).
Abstract: Identification of the investment motives and distance factors can help China to find suitable policies，escape risks and expand investment space. By extending the classical gravitational model，this paper uses Heckman two-stage estimation method to estimate the multiple motivations and multidimensional distances of China＇s investment along the belt and road. This method divide investment decision into two stages，whether to invest or not and the scale of investment. China＇s economic development level，the economic development level and resources of the host country are the important motivations for China to invest in the countries. Their geographical distances and political distances with China are the factors that China considered when it decided where to invest. And geographical distance and language distance are important factors influencing the scale of China’s investment. Therefore，China needs to consider both the benefits that are brought by the economic motives and the risk that are brought by the multidimensional distances，so as to realize the inclusive goals of the Belt and Ｒoad Initiative.
Working Papers Invited for Resubmission
- Leased Capital and the Investment-q Relation, with Kai Li, Revise and Resubmit at Journal of Corporate Finance. Leased capital accounts for a large fraction of public U.S. firms’ total productive physical capital. In this paper, we extend the neoclassical investment q theory with financial frictions by explicitly considering firms’ option to lease. Our model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs, and gives a strong implication that measured Tobin’s Q has to be adjusted by leased capital. Empirically, we use our model as guidance to construct the lease-adjusted Tobin’s Q, consistent with the recent leasing accounting change (ASC 842). We show that our lease-adjusted Tobin’s Q is a superior proxy for investment opportunities, especially for firms that rent more capital.
Working Papers
Aggregate Productivity, Leased Capital and Market Participation. (Job Market Paper)
Abstract: Leased capital accounts for a large fraction of publicly listed U.S. firms’ total physical capital. The model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs. I then study the effects of leased capital on aggregate productivity in general equilibrium. In particular, leased capital can alleviate collateral constraints faced by small and financially constrained firms; thus, it can mitigate resource misallocation to improve aggregate productivity; this is the direct effect. However, the increased demand for capital and labor also improves the wage rate; hence, the number of producing firms and firms’ optimal production scale is reduced, which in turn depresses aggregate productivity, these are indirect effects. Quantitatively, I show that the direct effect dominates the indirect effects in the general equilibrium with a leasing-improved policy and thus the aggregate productivity is enhanced.
Present at Ph.D. Economic Workshop Tianjin University 2022, Ph.D. Macro Workshop Xiamen University 2022.
Flexibility, Option Value of Leasing, and Investment, with Kai Li.
Abstract: We extend neoclassical investment theory with uncertainty by considering the operating lease. In this paper, we argue that the operating lease provides an important benefit of flexibility when firms cannot costlessly adjust their capital stocks. We explicitly consider a buy-and-lease decision into the neoclassical investment theory with costly reversibility and expandability. We show how operating lease flexibility can be valued as options, and also how their valuation relates to the incentive to buy or lease capital. As two sources of flexibility, leasing can alleviate firms’ costly reversibility and maintain the option for future expansion. We also derive the effect of the volatility of productivity on firms’ incentives to lease. Finally, we test a set of unique model implications among firms’ reversibility, expandability, volatility, and their incentive to lease and confirm consistent empirical evidence. The benefit of leasing flexibility adds to the literature as an important determinant of firms’ lease decisions.
Present at Asian Meeting of the Econometric Society 2022, MFA 2022, PKU-NUS Annual Conference on Quantitative Finance and Economics 2021, The 21th China Economic Association Annual Meeting, The 18th China Financial Research Conference, HKUST Brown Bag Seminar 2020.
Leasing and Constrained-Efficient Capital Reallocation, with Kai Li, Yicheng Wang and Yiming Xu.
Abstract: Firms extensively leased capital in their production, especially if they are financially constrained. We investigate the impacts of leased capital on capital reallocation and aggregate efficiency, both theoretically and quantitatively. Firms are subject to collateral constraints in the model. Inefficiency exists in the market economy, even if from a constrained social planner’s perspective, since individual firms do not internalize their actions on collateral values through market price (i.e., pecuniary externality). For the two-period model, we analytically characterize the stationary equilibrium. We show that leased capital can alleviate inefficiencies in both competitive equilibrium and constrained efficient allocations. With leasing, there is less room for the constrained social planner to further improve upon the market economy. Quantitatively, our dynamic structural model provides a good fit for our data, and we find sizable impacts of leased capital: if rental fees drop by about 2.4%, consumption and output would increase by about 2.1% and 1.9%, respectively. We also use this paper to study implied optimal taxation.
Present at PHBS Brown Bag Seminar 2022.