03/30/2022
By Mary Lou Kelly

The Manning School of Business Department of Finance invites you to attend a doctoral dissertation defense by Dan Hu on “Three Essays on Regulation and Capital Market Dynamics.”

Candidate Name: Dan Hu
Date: Wednesday, April 13, 2022
Time: 1 to 3 p.m. (EDT time)
Location: Via Zoom
Thesis/Dissertation Title: Three Essays on Regulation and Capital Market Dynamics
Committee:

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

Abstract:

Enterprises seek to obtain capital to propel them forward. In turn, well-functioning capital markets evaluate enterprises and strive to direct the flow of capital to the best ideas and corporations. Since capital markets are crucial to fueling economies, it is important to maintain the robustness and efficiency of capital markets. Market regulations can help market efficiency and resiliency, but they can also have unintended detrimental consequences.

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

The first essay focuses on the impact of climate-change-related shocks on the US financial system. In recent years investors have become increasingly concerned about how climate change will affect their portfolios. The existing literature primarily focuses on the behavior of environmentally conscientious investors in their investment selection process and the implication of this on asset pricing, corporate policies, and financial performance. I study the behavior of short sellers with respect to climate change, specifically, polluting companies. 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, and the results are not driven by financial crises. I find evidence that this relation is due to short sellers’ anticipation of green investors’ divestments and of negative outcomes that polluters face. Overall, I find that short sellers pay attention to pollution, recognize its effect both on long investors’ behavior and on return distributions, and act accordingly. My results support the argument that short sellers are “informed” investors, including evaluating the consequences of polluting.

The second essay studies the relation between the regulation of firms’ intellectual property protection and stock market crash risk. Specifically, I focus on trade secret protection, which is arguably one of the most important forms of intellectual property protection, playing 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 stock performance is inconclusive. Using a quasi-experimental setting with the Uniform Trade Secrets Act (UTSA) that strengthened the legal protection of a firm’s 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 secrets laws and the choice of crash risk measures. A detailed mechanism analysis reveals that increased crash risk for firms under the UTSA is attributed to higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA. Overall, the results highlight that strengthening trade secrets protection regulation leads to the unexpected negative consequence of stock price crash risk.

The third essay also explores firms’ intellectual property protection but focuses on product market dynamics. Stronger protection effectively reduces the probability of misappropriation of trade secrets by the firm’s rivals. Rivals must devote more resources to and adopt more aggressive strategies in order to enhance their market power. Also, stronger protection makes firms rely more on secrecy and leads to less transparency following the UTSA adoption, raising the bar for outside financing. This added constraint on financing forces companies to give up some opportunities to rivals. Using staggered state-level enactment of the Uniform Trade Secret Act (UTSA), I 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. Additional analysis reveals that, post-UTSA, patent generation declines while R&D and trade secret disclosures increase indicating a substitution effect. Rivals intent to gain market power can do so through both price war and nonprice competition. An unintended consequence is that acquisitions increase following the UTSA passage, leading to less competitive product markets.