Working Papers

Patent Trolls and the Market for Acquisitions

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Frivolous patent-infringement claims increase the cost of innovation for small businesses and force them to exit via premature and discounted acquisitions. This study investigates the effect of abusive patent-infringement claims by patent trolls on acquisitions of small firms. I exploit the staggered adoption of anti-patent troll laws in 35 states as a quasi-natural experiment and find that the laws have two effects on acquisitions. First, the number of acquisitions of small businesses by large firms declines after these laws are passed. Second, the anti-troll laws increase the acquisition price for large firms. I find that the market reflects the increased cost of acquisition following the passage of anti-troll laws as measured by the lower acquisition announcement returns. Moreover, I find evidence that large firms increase R&D expenditure after the adoption of state laws. Using a sample of acquisitions that are plausibly unaffected by the state laws, I disentangle alternative explanations such as local economic shocks, industry-wide changes and merger waves. Overall, the findings suggest that the anti-patent troll laws increase the value of small innovative firms.

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CEO Inside Debt and Mutual Fund Investment Decisions

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Consistent with the incentive implication of inside debt, I show that equity mutual funds invest less in firms whose CEOs have higher levels of debt-like compensation, whereas corporate bond mutual funds invest more in these firms. Evidence from the 2007 SEC disclosure reform as a quasi-natural experiments and an instrumental variable approach supports a causal interpretation. I find that the effect of inside debt on portfolio allocation increases as the interest of equity holders and debt holders diverge. Lastly, I find that funds' investment in inside debt has performance implications: equity funds that underweight high-inside debt firms deliver positive alphas; in contrast, bond funds that overweight inside debt deliver higher alphas.


Cognitive Pain Tolerance and the Disposition Effect

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Using a quasi-natural experiment, we study whether a higher level of cognitive pain tolerance among mutual fund managers predicts a lower level of disposition effect. We identify managers with a higher level of cognitive pain tolerance as those who run marathons. The results indicate that funds with a larger proportion of runner managers are less prone to the disposition effect, and are less likely to disproportionately gamble on their loser stocks. The higher representation of runner managers also leads to larger risk-adjusted excess returns. Overall, these results provide a behavioral explanation for the disposition bias.

Work in Progress

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Information Management, Investment, and the Distribution of Dividend Announcement Returns

The signaling theory posits that dividends contain information about future cash flows, while empirical findings are mixed. For example, average market reaction to dividend cuts is negative while the cuts are not always followed by poor earnings. We document cross-sectional variation in the market reaction to dividend cuts with almost 30 percent of dividend cuts being followed by positive returns. We conjecture that some payout decisions are the firms’ calculated attempts to retain financial resources in anticipation of future investment opportunities. Hence, when a firm communicates its intentions to the market and thus resolves the information asymmetry, the market does not infer a negative signal from dividend cuts.

Batting Average, Homeruns, and Strikeouts in Mutual Fund Industry

We propose a new holding-based measure of skill, batting average, that potentially disentangles skill from luck by capturing managers’ consistency in picking winner stocks. We find that a trading strategy based on batting average outperforms the passive benchmark as well as a similar strategy based on past performance. More importantly, we show that batting average is related to persistence in fund performance: good performance persists in funds with high batting average whereas it does not for funds with low batting average.