The Journal of Finance

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

Published: 08/01/2017   |   DOI: 10.1111/jofi.12545

KELLY SHUE, RICHARD R. TOWNSEND

We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets

Published: 05/28/2021   |   DOI: 10.1111/jofi.13059

KELLY SHUE, RICHARD R. TOWNSEND

We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.

The Impact of Venture Capital Monitoring

Published: 10/13/2015   |   DOI: 10.1111/jofi.12370

SHAI BERNSTEIN, XAVIER GIROUD, RICHARD R. TOWNSEND

We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.

Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession

Published: 09/24/2020   |   DOI: 10.1111/jofi.12976

SHAI BERNSTEIN, TIMOTHY MCQUADE, RICHARD R. TOWNSEND

We investigate how the deterioration of household balance sheets affects worker productivity, and in turn economic downturns. Specifically, we compare the output of innovative workers who experienced differential declines in housing wealth during the financial crisis but were employed at the same firm and lived in the same metropolitan area. We find that, following a negative wealth shock, innovative workers become less productive and generate lower economic value for their firms. The reduction in innovative output is not driven by workers switching to less innovative firms or positions. These effects are more pronounced among workers at greater risk of financial distress.