Research

Published/Forthcoming Papers

Corporate Deleveraging and Financial Flexibility (with Harry DeAngelo and René M. Stulz)

     * Review of Financial Studies, 2018, 31(8): 3122-3174

Working Papers

Can Reinvestment Risk Explain the Dividend and Bond Term Structures?

      * Outstanding Paper Award, 68th MFA Meeting

      * Best Paper Award, 14th FRA Michael J. Barclay Award to best young scholar solo-authored paper

     * Best Paper Award, 5th USC Marshall Ph.D. Conference in Finance (Corecipient)___

Abstract: Abstract The term structure of dividend discount rates is downward sloping at long maturities despite the typical upward sloping bond yield curve. I empirically show that reinvestment risk explains both term structure patterns. Intuitively, dividend claims hedge reinvestment risk because dividend present values rise as expected returns decline. This hedge is better with longer-term claims given their higher sensitivity to discount rates, producing a downward sloping dividend term structure. In contrast, bonds are exposed to reinvestment risk because interest rates rise and bond prices fall as expected returns decline. This exposure increases with duration, generating an upward sloping bond term structure.

Aggregation, Capital Heterogeneity, and the Investment CAPM (with Chen Xue and Lu Zhang)

     * Revise and Resubmit, Review of Financial Studies

Internet Appendix

Abstract: A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously and partially explains the positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes.

The Short Duration Premium

Abstract: Stocks of firms with cash flows concentrated in the short-term (i.e., short duration stocks) pay a large premium over long duration stocks. I empirically demonstrate this premium: (i) is long-lived and strong even among large firms; (ii) subsumes the value and profitability premia; and (iii) exposes investors to variation in expected returns, especially in times when the premium is high. These facts are consistent with an intertemporal model in which the marginal (long-term) investor dislikes expected return declines as they lead to lower expected wealth growth. The model also captures the positive relation between risk premia and bond duration.

Work in Progress

What Moves Equity Markets? A Term Structure Decomposition for Stock Returns

Fundamental Valuation (with Lu Zhang and Chen Xue)

Unsmoothing Returns (with Spencer Couts and Andrea Rossi)