Job Market Paper
Innovation strategies and stock price informativeness (PDF)
This paper models the interactions among technological innovation, product market competition and information leakage via the stock market. Two firms compete in a product market and have an opportunity to invest in a risky technology either early on as a leader or later once stock prices reveal the value of the technology. Information leakage thus introduces an option of waiting, which enhances production efficiency. A potential leader may, however, be discouraged from investing up front, anticipating its competitor to invest later in response to positive information. I show that an increase in product market competition increases the option value of waiting but has an ambiguous effect on information production. It may thus be the case that intense competition leads to more information leakage such that no firm is to invest up front, especially so in a smaller market. Price informativeness may also improve investment outcome when investment profitability and the market size are relatively large with moderate competition. The model predicts that, under these conditions, a follower firm’s investment is more sensitive to share price movements.
This paper models the interactions among technological innovation, product market competition and information leakage via the stock market. Two firms compete in a product market and have an opportunity to invest in a risky technology either early on as a leader or later once stock prices reveal the value of the technology. Information leakage thus introduces an option of waiting, which enhances production efficiency. A potential leader may, however, be discouraged from investing up front, anticipating its competitor to invest later in response to positive information. I show that an increase in product market competition increases the option value of waiting but has an ambiguous effect on information production. It may thus be the case that intense competition leads to more information leakage such that no firm is to invest up front, especially so in a smaller market. Price informativeness may also improve investment outcome when investment profitability and the market size are relatively large with moderate competition. The model predicts that, under these conditions, a follower firm’s investment is more sensitive to share price movements.
In Progress
Do credit ratings improve price informativeness?
The paper looks at the impact of price efficiency on firms’ delegation choice of information acquisition. A firm has to decide whether to ascertain the prospect of a potential investment on its own or to delegate this task to an outside agent (e.g., credit rating agency) who takes a monitoring role and reveals his evaluations publicly. When the signal acquired by the agent is released to the public, it may alleviate the information asymmetry between the firm and lenders, and thus reduce the adverse selection problem at the financing stage. By increasing the transparency in the firm’s prospect, delegation may crowd out private information that would be acquired by speculators, which then reduce the total amount of information production in the economy. Firms thus need to trade off between a lower cost of capital and the information crowd-out under delegation, and the reverse under the choice of “in-house” information acquisition. I show that under a lower prior for the investment prospect, firms would prefer to evaluate the potential investment in-house, because the crowding-out effect would be more severe if the public agency publicizes bad news.
The paper looks at the impact of price efficiency on firms’ delegation choice of information acquisition. A firm has to decide whether to ascertain the prospect of a potential investment on its own or to delegate this task to an outside agent (e.g., credit rating agency) who takes a monitoring role and reveals his evaluations publicly. When the signal acquired by the agent is released to the public, it may alleviate the information asymmetry between the firm and lenders, and thus reduce the adverse selection problem at the financing stage. By increasing the transparency in the firm’s prospect, delegation may crowd out private information that would be acquired by speculators, which then reduce the total amount of information production in the economy. Firms thus need to trade off between a lower cost of capital and the information crowd-out under delegation, and the reverse under the choice of “in-house” information acquisition. I show that under a lower prior for the investment prospect, firms would prefer to evaluate the potential investment in-house, because the crowding-out effect would be more severe if the public agency publicizes bad news.
Managerial incentives in a spatial competition with uncertain product quality
This paper investigates the impact of market competition on the managerial incentive when two firms compete in a circular city facing uncertainty about product quality. Firms offer incentive compatible contracts to managers in order to improve product quality and maximize firm value. A higher traveling cost, as a proxy for lower competition, increases both firms’ local monopoly power and the marginal benefit from improving product quality, which leads to opposing effects on managers’ incentive. When the size of quality improvement is sufficiently large compared to the cost of inducing effort, the second effect dominates and hence lower competition gives rise to a higher managerial incentive, and vice versa. The horizontal differentiation (the location of firms) and the market size also affect the equilibrium outcome. The model provides a new explanation for the ambiguous relationship between product market competition and managerial incentive.
This paper investigates the impact of market competition on the managerial incentive when two firms compete in a circular city facing uncertainty about product quality. Firms offer incentive compatible contracts to managers in order to improve product quality and maximize firm value. A higher traveling cost, as a proxy for lower competition, increases both firms’ local monopoly power and the marginal benefit from improving product quality, which leads to opposing effects on managers’ incentive. When the size of quality improvement is sufficiently large compared to the cost of inducing effort, the second effect dominates and hence lower competition gives rise to a higher managerial incentive, and vice versa. The horizontal differentiation (the location of firms) and the market size also affect the equilibrium outcome. The model provides a new explanation for the ambiguous relationship between product market competition and managerial incentive.
Publication
The value of celebrity endorsements: A stock market perspective (With A.E. Molchanov and P.A. Stork)
Are celebrity endorsements worthwhile investments in advertising? To answer this question, we analyze a unique sample of 101 announcements made between 1996 and 2008 by firms listed in the USA. Internet is the main medium of communication for these announcements. We employ event study methodology and document statistically insignificant abnormal returns around the announcement dates. This finding is consistent with the notion that the incremental benefits from celebrity endorsements closely match the incremental costs due to such contracts. Further, we investigate if the announcement date return depends on a number of characteristics that are often used in the endorsement literature. As a result, we find that endorsements of technology industry products coincide with significant positive abnormal returns around the announcement dates. Finally, we find weak support for the match-up hypothesis between celebrities and endorsed products.
Are celebrity endorsements worthwhile investments in advertising? To answer this question, we analyze a unique sample of 101 announcements made between 1996 and 2008 by firms listed in the USA. Internet is the main medium of communication for these announcements. We employ event study methodology and document statistically insignificant abnormal returns around the announcement dates. This finding is consistent with the notion that the incremental benefits from celebrity endorsements closely match the incremental costs due to such contracts. Further, we investigate if the announcement date return depends on a number of characteristics that are often used in the endorsement literature. As a result, we find that endorsements of technology industry products coincide with significant positive abnormal returns around the announcement dates. Finally, we find weak support for the match-up hypothesis between celebrities and endorsed products.