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- Read the Impact article featuring research from Professor Li
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Professor Li received his PhD degree in Finance from W.P. Carey School of Business, Arizona State University, and two masters degrees (MBA: international business/MIS; MS: Computer Science) from University of Missouri at Kansas City.
His work experience includes various analyst and management positions in an international bank, a personal credit company, a small pharmaceutical consulting firm, and a fortune 500 health care corporation.
Professor Li's research interests reside in empirical corporate finance, particularly corporate governance and executive compensation. He has two goals. One is to better understand the subtle but important effects of various governance mechanisms and contract designs on managers and firms within the standard agency framework. The other is to identify and estimate the role of managerial attributes and non-standard preferences in determining organization structure, policy, and performance.
- HBA: Core Finance
- Masters of Financial Economics: Corporate Finance
- Masters of Science in Management: Finance
- PhD: Financial Research
- PhD in Finance, W.P. Carey School of Business, Arizona State University
Recent Refereed Articles
Jiang, W.; Li, Z. F.; Liu, X.; Wu, J.; Yang, C.,
(Forthcoming), "Clustering of Financial Instruments Using Jump Tail Dependence Coefficient", Statistical Methods & Applications.
Abstract: In this paper, we propose a new clustering procedure for financial instruments. Unlike the prevalent clustering procedures based on time series analysis, our procedure employs the jump tail dependence coefficient as the dissimilarity measure, assuming that the observed logarithm of the pricesindices of the financial instruments are embedded into multidimensional Lévy processes. The efficiency of our proposed clustering procedure is tested by a simulation study. Finally, with the help of the real data of country indices we illustrate that our clustering procedure could help investors avoid potential huge losses when constructing portfolios.
Li, Z. F.; Dang, C. D.,
(Forthcoming), "Drivers of Research Impact: Evidence from the Top Three Finance Journals", Accounting and Finance.
Abstract: We study the characteristics of all the published papers in the top three finance journals (JF, JFE, and RFS) and how these paper characteristics affect the number of citations in Google Scholar and the Web of Science database. We study the universalist perspective (what is said), the social constructivist perspective (who says it), and the presentation perspective (how it is said). First, we find the characteristics in the universalist perspective (quality and domain) remain constant while the characteristics in the other two perspectives increase over time. Second, some characteristics are significantly different between the high impact and the low impact groups. Third, most characteristics provide explanatory power for research impact. Specifically, paper quality, research method, journal placement, and paper age are the most important drivers. Last, different drivers play different roles in JF, JFE, and RFS.
Link(s) to publication:
Coles, J.; Li, Z. F.; Wang, A.,
(Forthcoming), "Industry Tournament Incentives", Review of Financial Studies.
Abstract: We empirically assess industry tournament incentives for CEOs, as measured by the compensation gap between the CEO at her firm and the highest-paid CEO among similar (industry, size) firms. We find that firm performance, firm risk, and the riskiness of firm investment and financial policies are positively associated with the external industry pay gap. The industry tournament effects are stronger when labor market frictions are lower, industry job mobility is higher, and CEO labor market mobility and the probability of the aspirant executive winning are higher.
Li, Z. F.; Lin, A.; Sun, S.; Tucker, A.,
2018, "Risk-adjusted inside debt", Global Finance Journal, February 35: 12 - 42.
Abstract: Compensation theory holds that executive aggression is related to both the level and riskiness of inside debt. However, previous researchers only have examined the level of inside debt. We provide an inside debt metric that is conceptually superior to previously used metrics as it incorporates the riskiness of inside debt. For the overall sample, our metric provides similar fit to prior metrics but is theoretically superior. The relation between our risk-adjusted inside debt metric and corporate conservatism is modestly better for non-investment grade firms, firms experiencing credit rating downgrades, and firms with high credit risk. The results tentatively support that managers are concerned with the risk-adjusted value of their inside debt, i.e., the inside debt adjusted by its default probability and expected recovery rate. Based on our findings for U.S. firms, we expect our metric to offer more explanatory power for economies wherein inside debt is very risky.
Kopecky, K.; Li, Z. F.; Sugrue, T. F.; Tucker, A. L.,
2018, "Revisiting M&M with Taxes: An Alternative Equilibrating Process", International Journal of Financial Studies , January 6(1).
Abstract: Modigliani and Miller present an equity-quantity shifting equilibrating process to achieve an optimal firm value in the presence of corporate taxes. However, in the era in which they derived their various propositions regarding the relation between a firm’s value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today’s standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of the Modigliani and Miller theorem in terms of its predictions for debt use and restores the prospect of capital structure irrelevancy despite the existence of corporate taxes
Dang, C. D.; Li, Z. F.; Yang, C.,
2018, "Measuring Firm Size in Empirical Corporate Finance", Journal of Banking & Finance, January 86: 159 - 176.
Abstract: In empirical corporate finance, firm size is commonly used as an important, fundamental firm characteristic. However, no research comprehensively assesses the sensitivity of empirical results in corporate finance to different measures of firm size. This paper fills this hole by providing empirical evidence for a measurement effect in the size effect. In particular, we examine the influences of employing different proxies (total assets, total sales, and market capitalization) of firm size in 20 prominent areas in empirical corporate finance research. We highlight several empirical implications. First, in most areas of corporate finance the coefficients of firm size measures are robust in sign and statistical significance. Second, the coefficients on regressors other than firm size often change sign and significance when different size measures are used. Unfortunately, this suggests that some previous studies are not robust to different firm size proxies. Third, the goodness of fit measured by R-squared also varies with different size measures, suggesting that some measures are more relevant than others in different situations. Fourth, different proxies capture different aspects of firm size, and thus have different implications. Therefore, the choice of size measures needs both theoretical and empirical justification. Finally, our empirical assessment provides guidance to empirical corporate finance researchers who must use firm size measures in their work.
Li, Z. F.; Li, T.; Minor, D.,
2016, "A Test of Agency Theory: CEO Power, Firm Value, and Corporate Social Responsibility", International Journal of Managerial Finance, October 12(5): 611 - 628.
Abstract: Purpose The purpose of this paper is to explore whether firms with powerful chief executive officers (CEOs) tend to invest (more) in corporate social responsibility (CSR) activities as the over-investment hypothesis based on classical agency theory predicts. Designmethodologyapproach This paper tests an alternative hypothesis that if CSR investment is indeed an agency cost like the over-investment hypothesis suggests, then those activities may destroy firm value. Findings Using CEO pay slice (Bebchuk et al., 2011), CEO tenure, and CEO duality to measure CEO power, the authors show that CEO power is negatively correlated with firm’s choice to engage in CSR and with the level of CSR activities in the firm. Furthermore, the results suggest that CSR activities are in fact value enhancing in that as firms engage in more CSR activities their value increases. Originalityvalue The first paper to study CEO power and CSR and their impact on firm value.
Link(s) to publication:
Hong, B.; Li, Z. F.; Minor, D.,
2016, "Corporate Governance and Executive Compensation for Corporate Social Responsibility", Journal of Business Ethics, June 136(1): 199 - 213.
Abstract: We link the corporate governance literature in financial economics to the agency cost perspective of corporate social responsibility (CSR) to derive theoretical predictions about the relationship between corporate governance and the existence of executive compensation incentives for CSR. We test our predictions using novel executive compensation contract data, and find that firms with more shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes. Also, providing executives with direct incentives for CSR is an effective tool to increase firm social performance. The findings provide evidence identifying corporate governance as a determinant of managerial incentives for social performance, and suggest that CSR activities are more likely to be beneficial to shareholders, as opposed to an agency cost.
Link(s) to publication:
Li, Z. F.,
2016, "Endogeneity in CEO power: A survey and experiment", Investment Analysts Journal, May 45(3): 149 - 162.
Abstract: The endogeneity problem has always been one, if not the only, obstacle to understanding the true relationship between different aspects of empirical corporate finance. Variables are typically endogenous, instruments are scarce, and causality relations are complicated. As the first attempt to summarise different econometric methods that are commonly used to address endogeneity concerns in the context of corporate governance, we explore the relation between CEO power and firm performance, as an experiment, to illustrate how these methods can be used to mitigate the endogeneity problem and by how much. After carefully dealing with the endogeneity issues, we find strong evidence that the true relationship between CEO power and subsequent firm performance is negative, suggesting CEOs are overpowered in some firms. Furthermore, we show that all the prevailing econometric remedies are generally effective in mitigating the endogeneity problem to some degree (i.e., to correct the sign from positive to negative), but quantitatively the effects vary considerably. Among all the remedies, GMM has the greatest correction effect on the bias, followed by instrumental variables, fixed effect models, lagged dependent variables and the addition of more control variables. As for a combination of the methods, firm fixed effects, year fixed effects and the addition of more meaningful control variables appear to work as well, even without a valid instrumental variable.
Link(s) to publication:
Li, Z. F.,
2014, "Mutual Monitoring and Corporate Governance", Journal of Banking & Finance, August 45: 255 - 269.
Abstract: Mutual monitoring in a well-structured authority system can mitigate the agency problem. I empirically examine whether the number two executive in a firm, if given authority, incentive, and channels for communication and influence, is able to monitor and constrain the potentially self-interested CEO. I find strong evidence that: (1) measures of the presence and extent of mutual monitoring from the No. 2 executive are positively related to future firm value (Tobin’s Q) (2) the beneficial effect is more pronounced for firms with stronger incentives for the No. 2 to monitor and with higher information asymmetry between the boards and the CEOs and (3) mutual monitoring is a substitute for other governance mechanisms. The results suggest that mutual monitoring provides important checks and balances on CEO power.
Link(s) to publication:
Works in Progress
- Mutual Monitoring and Agency Problems
- Managerial Attributes, Incentives, and Performance (with Jeff Coles)
- An Empirical Assessment of Empirical Corporate Finance (with Jeff Coles)
- Don’t Cover Me: Analyst Innate Ability and Insider Trading (with Chongyu Dang, Stephen Foerster, and Zhenyang Tang)
- Drivers of Research Impact: Evidence from the Top Three Finance Journals (with Chongyu Dang)
- Selection of Peer Firms in Relative Performance Evaluation (RPE) Awards (with John Bizjak, Swaminathan Kalpathy, and Brian Young)
- Corporate Social Responsibility and CEO Risk-Taking Incentives (with Craig Dunbar and Yaqi Shi)
Honours & Awards
- The Best Paper Award, Global Finance Association Annual Conference, Fresno, CA 2016
- The Best Paper Award, World Business Institute Annual Conference, Toronto, Canada 2016
- Best Doctoral Student Paper Award, Academy Of Behavioral Finance Annual Meeting 2011, UCLA
- Associate Editor of Journal of Accounting, Finance and Economics (JAFE)
- Guest Editor, Special Issue on Risk Management and Business Valuation in M&A Transactions, Journal of Management Control
- Best Doctoral Student Paper Award, Academy of Behavioral Finance Annual Meeting 2011, UCLA
- Block Grant Fellow, ASU, 2009-2012
- Associate Director of Strategic Planning, Cardinal Health, Inc., Overland Park, KS, 2004-2006
- Senior Project Manager, Beckloff Associates, Inc., Overland Park, KS, 2003-2004
- Project Manager, Shanghai Credit Information Services Co., Ltd., Shanghai, China, 1999
- Financial Analyst, Shanghai Pudong Development Bank, Shanghai, China, 1997-1999
- Financial Theory & Research Methods
- Financial Management
- Corporate Finance