Research#

Working Papers#

"Disclosure and external financing under asymmetric information," Job Market Paper.
Draft available upon request
Summary

This paper examines how voluntary disclosure influences capital structure choices for firms raising external capital under information asymmetry. I develop a model in which managers of good-type firms choose whether to disclose the future profitability of a prospective project and whether to issue debt or equity to finance it. Managers of good-type firms have two options to reduce the problem of information asymmetry when raising external capital: (1) issue debt or (2) disclose and issue equity. The optimal choice depends on the relative costs of disclosure and debt. Using data from U.S. public firms from 2002 to 2023, I show that, for good-type firms, voluntary disclosure is positively associated with equity issuance and negatively associated with bond issuance. Cross-sectional analyses based on disclosure costs and default risk, as well as two regulatory settings—the 2005 Securities Offering Reform and the 2017 Tax Cuts and Jobs Act—support the prediction that firms raising external capital substitute between debt and equity issuance accompanied by disclosure. These findings help reconcile empirical inconsistencies in the pecking order theory. In particular, augmenting the pecking order theory with disclosure explains why some good-type firms prefer issuing equity.

"I need a network: determinants and consequences of debt roadshows," with Mingxuan Ma and Sike Chen.
Draft available upon request
Summary

This paper examines why some public firms conduct roadshows for bond issues and their ex-post impact on the cost of bond financing and bond underpricing. Using data from the German bond market (2014–2023), we find that roadshows primarily serve as a marketing tool, establishing a network of investors and boosting demand, rather than as a tool to reduce information asymmetry, as shown by previous studies on initial public offerings (IPOs) roadshows. Firms that conduct bond roadshows experience larger upward price revisions, higher oversubscription ratios in the primary market, and lower financing costs. We validate our results by running cross-sectional tests and additional tests that determine whether bond roadshows have an impact on bond underpricing through investors' interest. Lastly, we find evidence that bond roadshows aim to market special bond characteristics and establish a network of investors. These findings offer novel insights into the role of the investors' networks in bond markets, highlighting how roadshows influence capital-raising outcomes.

"Mandatory Sustainability Reporting and Project Selection," with Hui Chen.
SSRN link
Summary

We examine the implications of a regulatory shift in sustainability reporting from voluntary to mandated regime in a market with responsible investors. A myopic manager must choose between a brown project and a green project, both of which generate an uncertain financial return and an environmental externality. Since the information quality on externality is not perfect, the manager always under-invests in the green project in both reporting regimes, but more severely so in the voluntary regime due to the optional value voluntary disclosure provides in concealing bad information. Adopting mandatory disclosure thus improves firms' sustainability performance and investor welfare. However, considering the costs associated with mandatory disclosure, it is more efficient only when the quality of a firm's sustainability information is sufficiently high. To ensure an efficient shift to sustainability disclosure mandates, firms should first improve the quality of their sustainability information systems.