Research

How does risk among local firms affect state government finances, and how does tax structure shape states’ exposure and responses? I study these questions by linking stock return volatility to municipal bond spreads and state fiscal outcomes from 2001 to 2021. I find that higher return volatility among locally headquartered firms consistently predicts higher state borrowing costs on general obligation (GO) debt and lower tax revenue collections. Importantly, the estimated revenue decline is larger for general sales tax (GST) than for personal income tax (PIT). Although higher firm risk predicts comparable declines in statewide income and consumption, states raise PIT rates on high-income households while leaving broad-based GST rates largely unchanged. This asymmetric response appears to partly offset PIT revenue losses while leaving GST revenues exposed to tax-base declines. Consequently, states that derive a larger share of general fund revenue from GST face larger increases in borrowing costs and larger declines in tax revenue collections. To deal with these fiscal pressures, these states enact smaller budgets, cut public service spending more deeply, and are more likely to make large rainy day fund drawdowns. Overall, my findings suggest that tax structure and tax rate policy are important determinants of the fiscal consequences of firm risk. Reliance on sales taxes need not provide fiscal stability when local firm risk rises.

We show that household linkages, formed primarily of spousal employment ties, are important in explaining asset managers' skills and their portfolio choices. Mutual fund managers with spouses that work at the executive and C-suite levels obtain monthly gross returns of up to 0.32% above asset managers with non-executive spouses. This effect is driven largely by managers' quarterly stock trades in the industries where their spouses are employed. The spouse-industry stocks bought by executive-spouse-linked managers outperform those bought by the nonexecutive-spouse-linked managers by a large and significant 4.30% in the next quarter. Symmetrically, the stocks sold by executive-spouse linked managers underperform those sold by the nonexecutive-spouse-linked managers by a significant -4.33% in the following quarter. These patterns suggest that spousal relationships facilitate fund managers' comprehension of industry-level information. The linked fund managers' spouse-industry trades predict subsequent earnings surprises and firm level news. Overall, our results highlight the importance of household links to information production in the asset management industry.

We investigate the economic consequences of data breaches on U.S. local governments. Using a stacked difference-in-differences design, we find that breached municipalities experience an increase in municipal bond yield spreads. The effect is concentrated in municipalities with pre-existing weaknesses in general or information system-specific internal controls, suggesting that well-maintained internal controls may mitigate the adverse financing impact of a data breach within government organizations. However, despite such benefits, we find little evidence of internal control improvements among breached municipalities with weak controls. Instead, these municipalities reduce both total expenditures and administrative spending that includes internal control functions in the years after a breach. Overall, our results raise concerns about local governments’ data breach preparedness, which can potentially compromise public service provision.

We investigate the relationship between corporate social responsibility (CSR) and stock returns during economic downturns and the underlying economic mechanisms. First, we successfully replicate two influential studies that reach opposite conclusions on this topic and propose several explanations that may reconcile their findings, including differences in CSR scoring, empirical specifications, and adjustments for systematic risk exposures. We find that high-CSR stocks exhibit time-varying factor loadings, particularly a stronger tilt toward the value factor during bad economic times. From the standpoint of cash flow (CF) vs. discount rate (DR) news, we show that CSR returns are largely driven by aggregate DR shocks, highlighting the role of shifts in investor sentiment and preferences. CSR spread portfolio returns are lower in bad times, but increase in response to positive DR shocks. Finally, we analyze flows to socially responsible (SR) mutual funds and find evidence that is fully consistent with the documented return patterns: while SR funds typically face outflows during downturns, these outflows lessen when aggregate DR shocks increase. These findings suggest that investors in general view CSR as a luxury good, but some investors retain trust in high-CSR firms despite challenging market conditions.

I analyze the role of sentiment in aggregate retail investors’ trading activity. Using mass shootings in the U.S. as exogenous, non-economic, and negative shocks to investor sentiment, I find that retail investors on average net sell stocks of firms headquartered in the states where mass shootings took place in the previous week ("local'' stocks). During the week after mass shootings, local stocks experience around 8% of the sample mean decrease in daily retail share volume order imbalance. Consistent with lower sentiment-driven trading, the retail net divestment from local stocks increases in the number of victims from mass shootings, and is more pronounced following unsolved shootings and shootings with teenage victims. However, such trading behavior does not seem to be rational, as local mass shootings have little impact on local firms' financial and operating performances, as well as local economic conditions. Finally, institutional investors do not react to mass shootings, which suggests that retail investors are more prone to sentiment.