Research

Abstract: Prior studies focus on how investors' sustainability preferences incentivize firms to reallocate resources from dirty to clean physical capital. However, the impact of investors' preferences on capital allocation depends critically on whether clean capital and dirty capital are substitutable. I develop a novel empirical strategy showing that dirty capital and clean capital are highly complementary. Theoretically, I explore firms' investment decisions, assuming that investors dislike carbon emissions through both risk and nonpecuniary utility channels. Given the current level of complementarity, investors' preferences have a limited impact on investment decisions, underscoring the need for technological innovation to address this production friction. 

Abstract: Realized default rates and losses are too low relative to high corporate credit spreads in the data. I explain this "credit spread puzzle" through a dynamic capital structure model with long-term bonds and disaster risk. In contrast to models with one-period bonds, long-term bonds serve as hedge investments under disaster risk concerns, generating different economic mechanisms. I explore the effects at firm level. Disaster risk affects corporate credit spreads through default risk, risk premium, and corporate capital structure. In disaster states, default risk dominates other channels due to firms' high likelihood of default. In normal times, the disaster risk premium induces lower optimal capital levels, which leads to higher leverage and credit spreads. When exploring the effect of real and financing frictions in the model, I find that both lead firms to act conservatively and reduce their leverage, giving rise to lower credit spreads. However, I also find that, after a disaster, financially constrained firms lose more equity value, and their credit spreads sharply increase in the model. 

Abstract: With administrative data, we test whether institutional ownership with a social preference is related to employee-level gender equality. We show that the gender pay gap, which is the unexplained part of the lower wages of female employees, does not have a significant relation with socially responsible investments. Next, we show that female directorship strengthens the relation between socially responsible investments and the gender pay gap. When there are female directors, socially responsible investments have a robust correlation with a lower gender pay gap. This is because female directorship alleviates information asymmetry in gender equality.

Findings: We estimate a structural model to demonstrate that the heterogeneity in investors’ relative risk aversion significantly explains the time variation in the aggregate equity premium empirically.