04/05/2021
By Mary Lou Kelly

The Finance department at the Manning School of Business invites you to Dan Hu's doctoral dissertation proposal defense on Friday, April 16 from 2 to 4 p.m. via Zoom.

Candidate Name: Dan Hu
Defense Date: Friday, April 16, 2021
Time: 2 to 4 p.m. (EDT time)
Location: Zoom meeting
Proposal Title: Three Essays on Regulation and Capital Market Dynamics
Dissertation Committee:

  • Tunde Kovacs, Associate Professor of Finance (Chair)
  • EunJu Lee, Associate Professor of Finance
  • Li Sun, Associate Professor of Marketing, Entrepreneurship and Innovation
  • Chi Zhang, Assistant Professor of Finance

Abstract

This dissertation aims to study the indirect impact of certain regulations on capital dynamics. The first essay explores climate-change-related shocks and the other two essays examine a firm’s trade-secrets-related protection.

The first essay focuses on the impact of climate-change-related shocks on capital market behavior. In recent years investors have become increasingly concerned about how climate change will affect their portfolios. The existing literature focuses on the effect of environmental performance on asset pricing and financial performance. I study how short sellers take into account environmental pollution in their investment decisions. Using aggregated facility-level toxic release data, I estimate the relation of pollution and short interest in the US between 1987 and 2017. The findings suggest that short interest is significantly higher in polluting firms’ stocks. I find evidence that this relation is due to short sellers’ anticipation of green investors’ divestments and of negative outcomes that polluters face.

The second essay studies firms’ intellectual property protection. Trade secret is the most important form of intellectual property protection and it plays an important role in firms’ business success. Stronger legal protection of a firm’s trade secrets reduces the probability of the misappropriation of trade secrets by its rivals. Whether it affects corporate disclosure and firm stock performance is inconclusive. Using a quasi-experimental setting with the Uniform Trade Secrets Act (UTSA), a regulation that provides stronger legal protection for firms’ trade secrets, I find that firms headquartered in states adopting the UTSA tend to have higher stock price crash risk. The results are robust to controlling for other trade secret laws and the choice of crash risk measures. A detailed mechanism analysis reveals that increased crash risk for firms under the UTSA can be attributed to higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA adoption.

The third essay focuses on the relation between firms’ intellectual property protection and product market dynamics. Stronger protection effectively reduces the probability of trade secrets misappropriation by rivals. Rivals must devote more resources to and adopt more aggressive strategy in order to enhance their market power. Also, stronger protection makes firms rely more on secrecy, which leads to less transparency, more information asymmetry between investors and the firm, and makes raising outside financing harder. The ensuing financing constraints make companies give up some growth opportunities to rivals. Using staggered state-level enactment of the Uniform Trade Secret Act (UTSA), we find that despite stronger trade secret protection, predation risk significantly increases post-UTSA, as it becomes more difficult to capture rivals’ trade secrets post-UTSA through other channels. In cross-sectional analysis, we find that predation risk is more pronounced for industry followers and firms in states with more local rivals. Our further analysis reveals the unintended consequence of UTSA contributing to more concentrated product markets.