WORKING PAPERS
Passive Aggressive: How Index Funds Vote on Corporate Governance Proposals (Job Market Paper)
I study how index funds impact corporate governance through their votes during proxy meetings. My data includes all mutual fund votes on 159,262 proposals at 6,260 firms over 2005-2016. I measure the value created by a proposal using a Regression Discontinuity Design on the market reaction to a narrow vote outcome. I derive four main results. First, the market reaction to the passage (resp. failure) of a proposal is higher if a larger proportion of index fund votes support (resp. oppose) it. Second, consistent with index funds optimally allocating limited monitoring resources, the probability that they vote against management (a proxy for engagement) increases in the size of their stake and decreases in the number of shareholders meetings they must attend; these variables lose their significance for votes where index funds are pivotal. Third, index fund ownership of a company’s stock (instrumented using the Russell 1000/2000 cut-off) promotes the adoption of value-creating proposals. Last, managers of firms with higher index fund ownership present fewer value-reducing proposals. Overall, my findings imply that index fund ownership makes value-creating proposals and their passage more likely.
Paper available here
Becoming Virtuous: Mutual Funds’ Reactions to ESG Scandals
with Daniel Schmidt and Bastian von Beschwitz
We study how mutual funds respond to ESG scandals of portfolio companies. We find that, after experiencing an ESG scandal in their portfolio, active mutual fund managers (but not passive ones) are more likely to vote in favor of ESG proposals compared to other funds without scandal exposure voting on the same proposal. This result is more pronounced when the scandal stock has a larger portfolio weight and when the scandal is less expected. It is also pronounced when the scandal is accompanied by more negative stock returns, suggesting that fund managers change behavior out of performance considerations rather than a shift in personal preferences. Finally, we show that, following a scandal, mutual funds reduce their stakes in the highest-ESG risk stocks; i.e., they shy away from engaging exactly with those firms for which the impact of engagement may be the greatest.
Paper available here
Rich and Responsible? The Rise of Responsible Investors
With Steffen Andersen, Dmitry Chebotarev and Kasper Meisner Nielsen
We study the rise of responsible investing (i.e., investing in assets with environmental and social benefits as well as financial returns) among investors in Denmark. From 2011 to 2021, the average portfolio weight of responsible assets has increased from 2.5% to 4.9%, predominantly driven by an increasing fraction of investors with responsible mutual funds (0.4% to 6.8%) and green energy stocks (8.7% to 15.9%). Motivated by the observation that responsible investments concentrate among wealthy investors, we use windfall wealth from inheritances to document that investors perceive responsible investing as a luxury good, with demand partially motivated by a "warm glow" effect.
Paper available here
Media-Government Disagreement and Stock Market
with Massimo Massa and Hong Zhang
We examine how confidence in the government reporting of public information affects the way the market reacts to firm-specific public news. We argue that the less the market believes in the quality of the macro-news released by the government the less it will believe in the quality of firm-specific news. We test this hypothesis using a cross-section of all the Dow-Jones news on public firms around the world over the period 2000-2012. We build a proxy of lack of confidence in the government by exploiting the difference in tone between the way the government reports the macro news of the country the way the press covers them (government-media disagreement). If the market does not believe in the government it also believes less firm-released news and more media-released news. Media- government disagreement delays the impounding of information for firm-released news and accelerates that for media-released news. Media-government disagreement reduces the reaction to firm-released news while it increases it for media-released news. We also exploit an-experiment-based source of variation and show that exogenous shocks to media-government disagreement reduce reaction to firm-released news and increase stock price inefficiency lowering stock liquidity. Our results have important policy implications, suggesting that one way to ameliorate stock market efficiency is to improve the quality of government reports.
WORK IN PROGRESS
A Breath of Change: Can Personal Exposures Drive Green Preferences?
With Steffen Andersen, Dmitry Chebotarev and Kasper Meisner Nielsen
Are investors’ preferences for responsible investing affected by their idiosyncratic personal experiences? Using a comprehensive dataset for hospital visits and the information on portfolio holdings by retail investors in Denmark, we show that when an investor’s child is diagnosed with a respiratory disease, the investor decreases (increases) portfolio weights of “brown” (“green”) stocks but does not alter their holdings of ESG funds. Consistent with parents attributing respiratory diseases to air pollution, we find no effects for non-respiratory diseases. The results are stronger for more severe diseases and are entirely driven by parents who live with their children.
Feedback Effect and Strategic Investment: Stock Price Impact on Firms’ Diversification
In this paper, I build a model where a firm manager relies on stock informativeness through a feedback effect to assess potential growth opportunities. In determining whether future growth of the company, the manager can either further specialise in the same industry or branch out and diversify. The stock price reaction to this new project’s announcement is then used to finalise the investment. I derive two sets of testable hypotheses that I then empirically explore. The first set of hypotheses are firm characteristics that play a role in the choice to diversify. A firm is more likely to diversify in the industry where its shareholders or its manager are most informed. The second set concerns industry characteristics that determine the diversification choice. A firm is more likely to diversify into an industry in which firms have more informative stock prices or where firms’ cash-flows are more correlated. In sum, my results suggest that strategic investment decisions are not made in isolation from shareholders’ choices as identified by stock market reactions.