Christina Zhu

Qianqian Li, Edward Watts, Christina Zhu (Working), Retail Investors and ESG News.

Abstract: An important debate exists around the extent to which retail investors make sustainable investments and why they do. We provide evidence relevant to this debate by investigating the aggregate trading patterns of retail investors around a comprehensive sample of key Environmental, Social, and Governance (ESG) news events for U.S. firms. We show that ESG news events appear to be an important and growing component of retail investors' portfolio allocation decisions. Yet, inconsistent with non-pecuniary preferences, our evidence shows that retail investors mainly trade on this information when they deem it financially material to a company's stock performance. We also find their net trading demand predicts future abnormal returns in the subsample of financially material events, consistent with retail traders benefiting from incorporating ESG-related information in their decision-making when it is relevant to firm value. Overall, we conclude that the average U.S. retail investor cares about firms' ESG-related activities, but primarily to the extent they are financially material for company performance.

James Li, Olivia S. Mitchell, Christina Zhu (Working), Suboptimal Investment and Local Preferences: Evidence from 529 College Savings Plans.

Abstract: We investigate whether and why households overinvest in local assets by studying their choice of state 529 college savings plans. We estimate that 67% of open accounts between 2010 and 2020 were suboptimally located, due to tax inefficiencies and high expenses. Over accounts' projected lifetimes, such investments yielded expected average losses of 8%, and $13.4 billion in 2020 alone. Household financial literacy and plan disclosure complexity appear to explain suboptimal investment patterns, while local information advantages do not. Our study presents novel evidence on households' local preferences and how information-processing frictions shape individuals' investment decisions, reducing their financial well-being.

Allison Nicoletti and Christina Zhu (2023), Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending, Journal of Accounting Research, 61 (5), pp. 1827-1871. 10.1111/1475-679X.12498

Abstract: We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.

Brian Bushee, Daniel Taylor, Christina Zhu (2023), The Dark Side of Investor Conferences: Evidence of Managerial Opportunism, The Accounting Review, 98 (4), pp. 1-22. 10.2308/TAR-2020-0624

Abstract: Although the shareholder benefits of investor conferences are well-documented, evidence on whether these conferences facilitate managerial opportunism is scarce. We examine whether managers opportunistically exploit heightened attention around the conference to “hype” the stock. We find that (1) managers increase the quantity of voluntary disclosure leading up to the conference, (2) these disclosures are more positive in tone and increase prices to a greater extent than post-conference disclosures, and (3) these disclosures are more pronounced when insiders sell their shares immediately prior to the conference. In circumstances where pre-conference disclosures coincide with pre-conference insider net selling, we find evidence of a significant return reversal––large positive returns before the conference and large negative returns after the conference––and that the firm is more likely to be named in a securities class action lawsuit. Collectively, our findings are consistent with some managers hyping the stock prior to the conference.

Suzie Noh, Eric So, Christina Zhu (Working), Financial Reporting and Consumer Behavior.

Abstract: We show that financial reporting influences consumer behavior by showcasing firms' brand names and financial information. Analyzing GPS data, we document upticks in foot-traffic to firms' commercial locations immediately following their earnings announcements. This increase is more pronounced for announcements with extreme surprises, substantial media coverage, and heightened internet search volume—implying that announcement coverage drives consumer behavior by capturing attention. Furthermore, foot-traffic increases with positive earnings for firms offering durable goods, suggesting consumers respond to news about firms' financial prospects. These patterns generate feedback effects on revenue and advertising effectiveness, ultimately suggesting that financial reporting serves a marketing function.

Robert E. Verrecchia and Christina Zhu (Working), Liquidity, Trade, and Investor-Identity Disclosure.

Abstract: This study tests whether disclosing a trader's identity dampens or stimulates subsequent trading volume based on the trader's reputation for being informed. Reputation signals the quality of private information that exists in the market. While a reputation for being informed makes markets less liquid, thus inhibiting subsequent trade (“illiquidity effect”), the information others glean from informed trade might motivate subsequent trade (“information effect”). To study which of these countervailing forces dominates, we use a setting where mandated short-position disclosures in Europe reveal the trader's identity at the time of trade. Changes in bid-ask spreads, price adjustments, and changes in subsequent trading volume are positively associated with several proxies for the short seller's reputation: the short seller is local, has higher returns from previous short sales, and is a hedge fund or investment adviser. Despite the positive association between reputation and illiquidity, we show that reputation motivates more subsequent trade from other investors learning from the disclosure. The informational efficiency of prices also increases with trader reputation. Thus, our results support the notion that the “information effect” dominates the “illiquidity effect.” Our study contributes to the literature by investigating the interaction among investor identification, adverse selection, and trade.

Charles Lee and Christina Zhu (2022), Active Funds and Bundled News, The Accounting Review, 97 (1), pp. 315-339. 10.2308/TAR-2018-0380

Abstract: We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination. We find AMFs are drawn to, and participate disproportionately more in, earnings announcements (EAs) that include bundled managerial guidance. When the two pieces of news are directionally inconsistent, AMFs trade in the direction of future guidance rather than current earnings. AMFs exhibit an ability to discern, and adapt their trading to, the bias in bundled guidance. While AMF trades at EAs are generally more profitable than their non-EA trades, this result reverses when guidance bias is extreme. Overall, we find increased AMF trading during EAs leads to faster price adjustment. Collectively, these findings suggest AMFs are sophisticated processors of bundled earnings news, and their trading generally improves market price discovery.

Ed deHaan, Yang Song, Chloe Xie, Christina Zhu (2021), Obfuscation in Mutual Funds, Journal of Accounting and Economics. 10.1016/j.jacceco.2021.101429

Abstract: Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.

David F. Larcker, Charles McClure, Christina Zhu (Working), Peer-Group Choice, Chief Executive Officer Compensation, and Firm Performance.

Abstract: We examine the selection of peer groups that boards of directors use when setting CEO compensation. The challenge is to ascertain whether peer groups are selected to (i) attract and retain executive talent and/or (ii) enable rent extraction by inappropriately increasing compensation. We find that the inferences in prior research are based on questionable methodological choices and do not generalize with an expanded sample. After addressing these concerns, we find that, on average, excess peer compensation has a negative association with future firm operating performance. However, significant variation in CEO talent and corporate governance exists within the cross-section of firms. The negative association between excess peer compensation and future performance is mitigated when the firm has a high level of CEO talent, and exacerbated when the firm has low-quality corporate governance. Thus, the economic consequences of peer-group choice are highly contextual. In general, we find that talent motivations explain more of the variation in the future performance implications of peer-group choice than corporate governance.

Alan Kwan and Christina Zhu (Working), Does Context Matter? Evidence from Internet Research Activity by Sophisticated Investors.

Abstract: Using a unique dataset of internet research on business media sites matched to the identities of investors, we argue that broadly available media content can help sophisticated investors generate private information. Prior work finds that adverse selection increases at earnings announcements because some traders make superior assessments of firm value based on the disclosure. We find a positive relation between sophisticated investors’ pre-earnings announcement gathering of industry-relevant, “contextual” information and illiquidity at the time of the announcement, suggesting this specific source of public information provides some investors with a comparative advantage in interpreting earnings announcements.