Zhichuan (Frank) Li

• Ikram, A.; Li, Z. F.; Minor, D., 2023, "CSR-contingent executive compensation contracts", Journal of Banking and Finance, June 151
  Abstract: Firms have increasingly started tying their executives’ compensation to CSR-related objectives. In this paper, we attempt to understand why firms offer CSR-contingent compensation and the conditions under which such compensation improves corporate social performance. Using hand-collected data from proxy statements, we find that this emerging compensation practice varies significantly across industries and across different CSR categories. Further, well-governed firms are more likely to offer CSR-contingent compensation, and such compensation does lead to higher corporate social standing. Such firms are more likely to offer formula-based, Objective CSR-contingent compensation. However, our results suggest that non-formulaic, Subjective CSR-contingent compensation also helps improve companies’ social performance when firm outcomes are more volatile and unpredictable, and therefore executives’ effort and performance are harder to evaluate, and when firms have better corporate governance.

  Link(s) to publication:

  https://www.sciencedirect.com/science/article/pii/S0378426619302304?via%3Dihub

  http://dx.doi.org/10.1016/j.jbankfin.2019.105655

• Coles, J. L.; Li, Z. F., 2023, "An Empirical Assessment of Empirical Corporate Finance", Journal of Financial and Quantitative Analysis, June 58(4): 1391 - 1430.
  Abstract: We empirically evaluate 20 prominent contributions to a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and apply a single, simple econometric method, the connected-groups approach of Abowd, Karmarz, and Margolis (1999), to appraise the extent to which prevailing empirical specifications explain variation of the dependent variable, differ in composition of fit arising from various classes of independent variables, and exhibit resistance to omitted variable bias and other endogeneity problems. Observed firm characteristics do best in explaining market leverage and CEO pay level and worst for takeover defenses and outcomes. Observed manager characteristics have relatively high power to explain CEO contract design and low power for firm focus and investment policy. Including manager and firm fixed effects, along with firm and manager observables, delivers the best fit for dividend payout, the propensity to adopt antitakeover defenses, firm risk, board size, and firm focus. Unobserved manager attributes deliver a high proportion of explained variation in the dependent variable for executive wealth-performance sensitivity, board independence, board size, and sensitivity of expected executive compensation to firm risk, while unobserved firm attributes provide a high proportion of variation explained for dividend payout, antitakeover defenses, book and market leverage, and corporate cash holdings. Including manager and firm fixed effects significantly alters inference on primary explanatory variables in 17 of the 20 representative specifications

  Link(s) to publication:

  https://journals.scholarsportal.info/details/00221090/v58i0004/1391_aeaoecf.xml

  http://dx.doi.org/10.1017/S0022109022000448

• Bizjak, J. M.; Kalpathy, S. L.; Li, Z. F.; Young, B., 2022, "The Choice of Peers for Relative Performance Evaluation in Executive Compensation", Review of Finance, September 26(5)
  Abstract: Relative performance evaluation (RPE) awards have become an important component of executive compensation. We examine whether RPE awards, particularly the peer group, are structured in a manner consistent with economic theory. For RPE awards using a custom peer group, we find that the custom group is significantly more effective than four plausible alternative peer groups at filtering out common shocks, lowering the cost of compensation, and increasing managerial incentives. For RPE awards using a market index, we find some evidence that firms could have selected a custom set of peers with better filtering properties at a lower cost with similar incentives. For example, firms could have saved around $118,000 in present value terms, on average, for an RPE award had they chosen a custom group comprising their product market peers instead of a market index.

  Link(s) to publication:

  https://academic.oup.com/rof/advance-article/doi/10.1093/rof/rfac016/6564240

  http://dx.doi.org/10.1093/rof/rfac016

• Li, Z. F.; Patel, S.; Ramani, S., 2021, "The Role of Mutual Funds in Corporate Social Responsibility", Journal of Business Ethics, December 174(3): 715 - 737.
  Abstract: This paper examines the role of mutual funds in corporate social responsibility (CSR). Using a fund-level, holdings-based CSR score, we find that CSR-friendly mutual funds improve firms’ CSR standings. This effect is more pronounced for firms with higher mutual fund ownership and stronger corporate governance. We further show that while CSR-friendly mutual funds have influence on almost all CSR categories, they focus on increasing CSR strengths rather than reducing CSR concerns. We also discover that CSR-friendly funds are more likely to vote in favor of CSR proposals, and that firms owned by CSR-friendly funds are more likely to link their CEO compensation to CSR outcomes. These results suggest that actively managed mutual funds, which were previously thought to be indifferent (or even detrimental) to social and ethical issues, play a significant role in corporate social outcomes of the firms they invest in.

  Link(s) to publication:

  https://link.springer.com/article/10.1007/s10551-020-04618-x#article-info

  http://dx.doi.org/10.1007/s10551-020-04618-x

• Dang, C. D.; Foerster, S. R.; Li, Z. F.; Tang, Z., 2021, "Analyst Talent, Information, and Insider Trading", Journal of Corporate Finance, April 67
  Abstract: We examine 1984-2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm’s information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.jcorpfin.2020.101803

• Kim, S.; Li, Z. F., 2021, "Understanding the Impact of ESG Practices in Corporate Finance", Sustainability, March 13(7): 3746 - 3746.
  Abstract: This study examines the relationship between environmental, social, and governance (ESG) factors and corporate financial performance. Specifically, we study various individual ESG categories, both ESG strengths and concerns, and aggregate ESG factor and their impact on corporate financial performance including profitability and financial risk. We find a positive effect of ESG factors on corporate profitability, and the effect is more pronounced for larger firms. Among different ESG categories, corporate governance has the most significant impact, particularly for firms with weak governance. We also find that ESG variables generally have a positive influence on credit rating. In particular, the social factor has the most significant impact on credit rating, while environmental score surprisingly has a negative effect. Overall, this research provides a rationale for ESG integration in the context of investment management and portfolio construction to maximize value and minimize risk.

  Link(s) to publication:

  https://www.mdpi.com/2071-1050/13/7/3746/htm

  http://dx.doi.org/10.3390/su13073746

• Dunbar, C. G.; Li, Z. F.; Shi, Y. N., 2020, "CEO Risk-Taking Incentives and Corporate Social Responsibility", Journal of Corporate Finance, October 64
  Abstract: We examine how firms adjust CEO risk-taking incentives in response to risk environments associated with their corporate social responsibility (CSR) standing. We find strong evidence that as a firm's CSR status improves (declines), increasing (decreasing) its risk-taking capacity, the firm responds by adjusting compensation contracts to increase (decrease) CEO risk-taking incentives (Vega). One channel of the adjustment is through stock option grants. Further analyses indicate that the positive CSR-Vega association is stronger in firms with better corporate governance and in industries where riskiness is more important. Our evidence indicates that firms are not passive in response to changes in CSR status and firm risk.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.jcorpfin.2020.101714

• Ikram, A.; Li, Z. F.; MacDonald, T., 2020, "CEO pay sensitivity (Delta and Vega) and corporate social responsibility", Sustainability, October 12(19): 7941 - 7941.
  Abstract: We use CEO pay sensitivity to stock performance (delta) and stock volatility (vega) to provide empirical evidence that CEO compensation structure influences firm Corporate Social Responsibility (CSR) performance. We find that delta has no significant effect on CSR, while vega has a strong, causal relationship with CSR. Our findings suggest that CEOs do not view CSR as value enhancing, but as a way to increase their own compensation through vega. Firms that want to improve their social performance should consider vega as an important compensation incentive for executives.

  Link(s) to publication:

  http://dx.doi.org/10.3390/SU12197941

• Dang, C. D.; Li, Z. F., 2020, "Drivers of Research Impact: Evidence from the Top Three Finance Journals", Accounting and Finance, September 60(3): 2759 - 2809.
  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:

  http://dx.doi.org/10.1111/acfi.12350

• Coles, J. L.; Li, Z. F., 2020, "Managerial Attributes, Incentives, and Performance", The Review of Corporate Finance Studies, July 9(2): 256 - 301.
  Abstract: We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explained variation in delta (vega). Second, controlling for manager fixed effects alters parameter estimates and corresponding inference on observed firm and manager characteristics. Third, larger CEO delta (vega) fixed effects predict better firm performance (riskier corporate policies and higher firm risk). These results suggest that the delta (vega) fixed effect captures managerial ability (risk aversion). (JEL G3, G32, G34, J24, J31, J33)

  Link(s) to publication:

  http://dx.doi.org/10.1093/rcfs/cfaa004

• Li, Z. F.; Minor, D. B.; Wang, J.; Yu, C., 2019, "A learning curve of the market: Chasing alpha of socially responsible firms", Journal of Economic Dynamics and Control, December 109
  Abstract: This paper explores stock market reactions to corporate social performance. We construct a value-weighted portfolio based on the list of “100 Best CSR companies in the world” published on the Forbes’ website by Reputation Institute. This portfolio yields statistically significant annual abnormal returns of 1.81% and 1.26%, by controlling for Carhart four factors and Fama-French five factors, respectively (2.41% and 1.84%, respectively for an equal-weighted portfolio). Moreover, such abnormal returns decrease as time passes, especially after the inaugural publication of the CSR lists in 2013. Furthermore, we find that companies with better social performance are more likely to have positive earnings surprises, and that their returns are more sensitive to earnings surprises. The results have three implications: firstly, CSR reputation contributes positively to a firm's short-term superior equity performance; secondly, the CSR lists facilitate market correction of mispricing intangibles such as CSR reputation — abnormal returns decrease as the market gradually learns about the value of firms’ social performance; lastly, the paper contributes to the socially responsible investing (SRI) screens and provides guidance for investors who would like to do well financially by doing good socially.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.jedc.2019.103772

• Li, Z. F.; Morris, T.; Young, B., 2019, "The effect of corporate visibility on corporate social responsibility", Sustainability, July 11(13)
  Abstract: Outside of direct ownership, the general public may feel it is an implicit stakeholder of a firm. As the public becomes more vested in a firm's actions, the firm may be more likely to engage in Corporate Social Responsibility (CSR) activities. We proxy for the public's stake in a firm with public visibility. Based on 3400 unique newspaper publications from 1994-2008, we measure visibility for the S&P 500 firms with the frequency of print articles per year concerning the firm. We find that visibility has a signficant, positive relationship with the CSR rating. Evidence also suggests this relationship may be causal and working in one direction, from visibility to CSR. While the existing literature provides other factors that influence CSR, visibility proves to have the most significant impact when tested alongside those other factors. Visibility also has a mediating effect on the relationship between CSR rating and firm size. CSR rating and firm size relate negatively for the lowest visibility firms and positively for the highest. This paper provides strong evidence that visibility is an important factor to consider for studies on corporate social performance.

  Link(s) to publication:

  http://dx.doi.org/10.3390/su11133698

• Li, Z. F.; Thibodeau, C., 2019, "CSR-contingent executive compensation incentive and earnings management", Sustainability, January 11(12)
  Abstract: This paper empirically studies the connection between earnings management and corporate social performance, conditional on the existence of CSR-contingent executive compensation contracts, an emerging practice to link executive compensation to corporate social performance. We find that executives are more likely to manipulate earnings to achieve their personal compensation goals when CSR rating is low, as well as their CSR-contingent compensation. Because of public pressure on their excessive total compensation, corporate executives see no need to manipulate earnings to increase compensation when their CSR-contingent compensation is already high. Our results suggest that earnings management and CSR-contingent compensation are substitute tools to serve the interests of executives, which is an agency problem that was never previously studied. Additionally, we explore how managerial characteristics affect earnings management, driven by the incentive effects of CSR-linked compensation.

  Link(s) to publication:

  http://dx.doi.org/10.3390/su10023421

• Jan 1 1900 12:00AM, W.; Jan 1 1900 12:00AM, Z. F.; Jan 1 1900 12:00AM, X.; Jan 1 1900 12:00AM, J.; Jan 1 1900 12:00AM, C., 2018, "Clustering of Financial Instruments Using Jump Tail Dependence Coefficient", Statistical Methods & Applications, August 27(3): 491 - 513.
  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.

  Link(s) to publication:

  https://link.springer.com/article/10.1007/s10260-017-0411-1

  http://dx.doi.org/10.1007/s10260-017-0411-1

• Coles, J.; Li, Z. F.; Wang, A., 2018, "Industry Tournament Incentives", Review of Financial Studies, April 31(4): 1418 - 1459.
  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.

  Link(s) to publication:

  https://academic.oup.com/rfs/article/31/4/1418/3896050

  http://dx.doi.org/10.1093/rfs/hhx064

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