Charles C.Y. Wang

Assistant Professor of Business Administration

Unit: Accounting and Management

Contact:

(617) 496-9633

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Charles C.Y. Wang is an assistant professor of business administration in the Accounting and Management Unit and teaches the Financial Reporting and Control course in the MBA required curriculum. Professor Wang is a former lecturer in law and economics at Harvard Law School and a past fellow in its Olin Program on Corporate Governance.

In his research, Professor Wang studies empirical asset pricing, equity valuation, corporate governance, and financial regulation. His current focus is on the connections between firm fundamentals and expected returns and on the relationship between governance characteristics and managerial incentives and firm performance. Professor Wang's research has been published in leading journals such as the Journal of Financial Economics and the Journal of Accounting and Economics. Media outlets including The Economist, the Financial Times, The New York Times Dealbook, U.S. News, and Smart Money have cited his research findings.

Professor Wang holds a Ph.D. and an MA in economics from Stanford University and an MS in statistics, also from Stanford. He graduated from Cornell University with a bachelor’s degree in industrial and labor relations. Before his graduate studies, he worked in economic and litigation consulting.

Featured Work

  1. Learning and the Disappearing Association between Governance and Returns with Bebchuk and Cohen

    The correlation between governance indices and abnormal returns documented for 1990-1999 subsequently disappeared. The correlation and its disappearance are both due to market participants’ gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation’s disappearance was associated with increases in market participants’ attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

  2. Boardroom Centrality and Firm Performance

    Firms with central or well-connected boards of directors earn superior risk-adjusted stock returns. Initiating a long position in the most central firms and a short position in the least central firms earns an average risk-adjusted return of 4.68% per year. Firms with central boards also experience higher future growth in return-on-assets (ROA) with analysts failing to fully reflect this information in their earnings forecasts. Return prediction, growth in ROA, and analyst forecast errors are concentrated among firms with high growth opportunities or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms that stand to benefit most from the information communicated and resources exchanged through the network of board members. Overall, our results suggest that board of director networks provide economic benefits that are not immediately reflected in stock prices.

  3. How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment

    This paper examines whether staggered boards reduce firm value or are merely associated with it due to the tendency of low-value firms to maintain staggered boards. To analyze this causal question, we take advantage of a natural experiment involving two recent court rulings, separated by several weeks, that affected in opposite directions the antitakeover force of staggered boards. We find evidence consistent with the hypothesis that the market viewed the antitakeover force of staggered boards as value reducing. Our findings have implications for the long-standing policy debate on the desirability of staggered boards.

Publications

Journal Articles

  1. Golden Parachutes and the Wealth of Shareholders

    Golden parachutes (GPs) have attracted substantial attention from investors and public officials for more than two decades. We find that GPs are associated with higher expected acquisition premiums and that this association is at least partly due to the effect of GPs on executive incentives. However, we also find that firms that adopt GPs experience negative abnormal stock returns both during and subsequent to the period surrounding their adoption. This finding raises the possibility that even though GPs facilitate some value-increasing acquisitions, they do have, on average, an overall negative effect on shareholder wealth; this effect could be due to GPs weakening the force of the market for control and thereby increasing managerial slack, and/or to GPs making it attractive for executives to go along with some value-decreasing acquisitions that do not serve shareholders' long-term interests. Our findings have significant implications for ongoing debates on GPs and suggest the need for additional work identifying the types of GPs that drive the identified correlation between GPs and reduced shareholder value.

    Keywords: Golden parachute; Executive Compensation; corporate governance; Acquisitions; takeovers; acquisition takeover; acquisition likelihood; acquisition premiums; agency costs; managerial slack; Dodd-Frank; Executive Compensation; Acquisition; Corporate Governance; Business and Shareholder Relations;

    Citation:

    Bebchuk, Lucian A., Alma Cohen, and Charles C.Y. Wang. "Golden Parachutes and the Wealth of Shareholders." Journal of Corporate Finance 25 (April 2014): 140–154.
  2. How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment

    The well-established negative correlation between staggered boards (SBs) and firm value could be due to SBs leading to lower value or a reflection of low-value firms' greater propensity to maintain SBs. We analyze the causal question using a natural experiment involving two Delaware court rulings―separated by several weeks and going in opposite directions―that affected the antitakeover force of SBs. We contribute to the long-standing debate on staggered boards by documenting empirical evidence consistent with the market viewing SBs as leading to lower firm value for the affected firms.

    Keywords: Governing and Advisory Boards;

    Citation:

    Cohen, Alma, and Charles C.Y. Wang. "How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment." Journal of Financial Economics 110, no. 3 (December 2013): 627–641.
  3. Boardroom Centrality and Firm Performance

    Firms with central or well-connected boards of directors earn superior risk-adjusted stock returns. Initiating a long position in the most central firms and a short position in the least central firms earns an average risk-adjusted return of 4.68% per year. Firms with central boards also experience higher future growth in return-on-assets (ROA) with analysts failing to fully reflect this information in their earnings forecasts. Return prediction, growth in ROA, and analyst forecast errors are concentrated among firms with high growth opportunities or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms that stand to benefit most from the information communicated and resources exchanged through the network of board members. Overall, our results suggest that board of director networks provide economic benefits that are not immediately reflected in stock prices.

    Keywords: Networks; Governing and Advisory Boards; Forecasting and Prediction; Performance;

    Citation:

    Larcker, David F., Eric C. So, and Charles C.Y. Wang. "Boardroom Centrality and Firm Performance." Journal of Accounting & Economics 55, nos. 2-3 (April–May 2013): 225–250.
  4. Learning and the Disappearing Association Between Governance and Returns

    The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

    Keywords: Corporate Governance; Investment Return; Operations; Performance; Value; Learning; Business Earnings; Behavioral Finance;

    Citation:

    Bebchuk, Lucian A., Alma Cohen, and Charles C.Y. Wang. "Learning and the Disappearing Association Between Governance and Returns." Journal of Financial Economics 108, no. 2 (May 2013): 323–348.

Working Papers

  1. Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

    This paper presents a methodology to study implied cost of capital's (ICC) measurement errors, which are relatively unstudied empirically despite ICCs' popularity as proxies of expected returns. By applying it to the popular implementation of ICCs of Gebhardt, Lee, and Swaminathan (2001)(GLS), I show that the methodology is useful for explaining the variation in GLS measurement errors. I document the first direct empirical evidence that ICC measurement errors can be persistent, can be associated with firms' risk or growth characteristics, and thus confound regression inferences on expected returns. I also show that GLS measurement errors and the spurious correlations they produce are driven not only by analysts' systematic forecast errors but also by functional form assumptions. This finding suggests that correcting for the former alone is unlikely to fully resolve these measurement-error issues. To make robust inferences on expected returns, ICC regressions should be complemented by realized-returns regressions.

    Keywords: Measurement and Metrics; Cost of Capital; Investment Return;

    Citation:

    Wang, Charles C.Y. "Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital." Harvard Business School Working Paper, No. 13-098, May 2013.
  2. Expected Returns Dynamics Implied by Firm Fundamentals

    We provide a tractable stock valuation model to study the dynamics of firm-level expected returns and their valuation impact using two firm fundamentals: book-to-market ratio and ROE. Applying the model to the cross-section of firms, we find that expected returns and expected profitability are highly persistent and time-varying. Our fundamentals-implied estimates of expected returns across time horizons exhibit strong return predictability up to three years ahead, and produce an aggregate equity term structure that tracks economic conditions. The implied term structure is upward sloping during normal or expansion periods, but flattens or inverts during economic downturns or times of high uncertainty. Finally, we show that ignoring the dynamics of expected returns can produce large valuation errors.

    Keywords: term structure; Expected Returns; discount rates; fundamental valuation; Valuation; Investment Return; Corporate Finance;

    Citation:

    Lyle, Matthew, and Charles C.Y. Wang. "Expected Returns Dynamics Implied by Firm Fundamentals." Harvard Business School Working Paper, No. 13-050, November 2012. (Revised March 2013, September 2013.)
  3. Search Based Peer Firms: Aggregating Investor Perceptions Through Internet Co-Searches

    Applying a "co-search" algorithm to Internet traffic at the SEC's EDGAR website, we develop a novel method for identifying economically related peer firms. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms' out-of-sample (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification and are more dynamic, pliable, and concentrated. Our results highlight the potential of the collective wisdom of investors―extracted from co-search patterns―in addressing long-standing benchmarking problems in finance.

    Keywords: peer firm; EDGAR search traffic; revealed preference; co-search; Information Acquisition; Data and Data Sets; Search Technology; Internet; Mathematical Methods; Corporate Finance;

    Citation:

    Lee, Charles M.C., Paul Ma, and Charles C.Y. Wang. "Search Based Peer Firms: Aggregating Investor Perceptions Through Internet Co-Searches." Harvard Business School Working Paper, No. 13-048, November 2012. (Revised September 2013, March 2014.)
  4. Can Implicit Regulation Change Financial Market Behavior? Evidence from Spitzer's Attack on Market Timers

    This paper explores a natural experiment setup from the 2003-2004 mutual fund scandals to evaluate the effectiveness of implicit regulation on financial markets behavior. On average, buy-and-hold investors lost 218 basis points annually from 1998 to 2002 to market timers. Buy-and-hold investors suffered further economic losses from higher cash holdings, portfolio turnover, fund fees, and substantially lower fund performance that resulted from market timing fund churn. Intensified threat of regulation from the 2003-2004 scandals resulted in the industry's self-regulation by, among other things, voluntary adoption of fair value pricing. I find strong evidence that their self-regulation reduced the market timing motive as well as fund churn in international mutual funds in the post-2004 period, and reduced dilution by 93%.

    Keywords: Financial Markets; Market Timing; United States;

    Citation:

    Wang, Charles C.Y. "Can Implicit Regulation Change Financial Market Behavior? Evidence from Spitzer's Attack on Market Timers." Working Paper, 2012.
  5. Evaluating the Implied Cost of Capital Estimates

    Characterizing a firm's true (but unobservable) expected returns as the normative benchmark, we develop a two-dimensional framework for evaluating the relative performance of implied cost-of-capital (ICC) estimates. First, in time-series, variations in ICC estimates should reflect changes in true expected returns rather than changes in measurement errors. Second, cross-sectionally, ICC estimates should predict future realized returns. Using this framework, we compare seven alternative ICC measures and show that several perform quite well along both dimensions, and all do much better than Beta-based estimates. In addition, we provide evidence on the importance of appropriate matching between the earnings forecasting method (analyst vs. mechanical) and the valuation model. Overall, our evidence provides significant support for the broader adoption of ICCs as firm-level expected return proxies.

    Keywords: implied cost of capital; Expected Returns; Cost of Capital; Forecasting and Prediction; Investment Return;

    Citation:

    Lee, Charles M.C., Eric C. So, and Charles C.Y. Wang. "Evaluating the Implied Cost of Capital Estimates." Working Paper, September 2011.

Cases and Teaching Materials

  1. Cisco Systems and Offshore Cash

    Citation:

    Gow, Ian D., and Charles C.Y. Wang. "Cisco Systems and Offshore Cash." Harvard Business School Case 114-027, September 2013.
  2. Say on Pay: Qualcomm, Inc. Shareholders Vote 'Maybe' in 2012

    This case centers around Qualcomm shareholders' 2012 Say-on-Pay vote and the dispute between the Institutional Shareholder Services and management regarding the appropriateness of the CEO's compensation plan. Was ISS right that Qualcomm CEO's pay was inflated and justified by benchmarking to aspirational peers? Or was management correct that its CEO's pay is warranted by Qualcomm's recent firm performance?

    Keywords: Executive Compensation; ISS; proxy advisor; investor communication; investor relations; peers; Say-on-Pay; benchmarking; peer group; corporate governance; compensation committees; board of directors; Governing and Advisory Boards; Executive Compensation; Corporate Governance; Business and Shareholder Relations; Telecommunications Industry;

    Citation:

    Srinivasan, Suraj, Charles C.Y. Wang, and Kelly Baker. "Say on Pay: Qualcomm, Inc. Shareholders Vote 'Maybe' in 2012." Harvard Business School Case 114-005, July 2013. (Revised January 2014.)

    Research Summary

  1. Overview

    In the area of equity valuation, Professor Wang explores how firm fundamentals and valuation models can be used to understand expected return variation, with a focus on valuation-implied cost of capital and its use as a proxy for expected returns. In his study of corporate governance, he empirically analyzes the impact of governance arrangements on shareholder value.
  2. Equity Valuation

    Professor Wang’s research utilizes valuation theory to explain how firm fundamentals are related to the expected rates of equity returns and their term structures. His research provides strong evidence that valuation-based proxies of expected returns outperform the standard empirical proxies motivated by finance theory. He has shown that such valuation-based proxies may not be perfect. To promote a better understanding of their imperfections, Professor Wang has developed a novel diagnostic procedure to estimate the associations between measurement errors of expected returns proxies and firm characteristics.

  3. Corporate Governance

    The characteristics and structure of boards of directors have important implications for firm performance. Professor Wang has found that firms with well-connected boards whose members have strong network connections provide economic benefits that are not immediately reflected in stock prices. Further, well-connected boards are most valuable to firms that stand to benefit most from their networks, such as young or growth organizations. Professor Wang’s research has also helped to settle an issue regarding staggered boards of directors. Staggered boards are known to be negatively correlated with firm valuation, but is this a causal effect? Using two Delaware Chancery and Supreme Court cases as a natural experiment, he found evidence consistent with the market’s view that staggered boards reduce firm value.

    In studying the asset-pricing implications of board entrenchment on firm value and stock returns, Professor Wang found that the positive association between good-governance firms and abnormal positive stock returns that was documented for the 1990-1999 decade has subsequently disappeared. His study finds evidence that during the 1990s, market participants and securities analysts did not sufficiently appreciate the difference between good-governance and poor-governance firms, and therefore were more positively surprised by the earnings announcements of good-governance firms. As they learned about and paid more attention to corporate governance in the early 2000s and impounded their value implications into prices, the association between governance and returns disappeared.

    Professor Wang’s findings in an examination of golden parachutes indicate that they lead to more acquisitions and acquisition bids, but that they are ultimately associated with lower acquisition premiums. Combining both effects, golden parachutes are associated with a higher expected acquisition premium. His research also finds that firms adopting golden parachutes tend to erode in value and stock returns, both around and after the time of adoption, relative to their industry peers, suggesting that the adverse effects on executive incentives and performance in the absence of acquisition offers may outweigh the shareholder benefit of increased likelihood of takeovers.

    Teaching

  1. Overview

    Professor Wang currently teaches the first year required core class in Financial Reporting and Control. He has also taught empirical law and economics, financial economics, and applied econometrics. Financial Reporting and Control (FRC) is a course about how leaders can design and use performance measurement systems to build more effective organizations. Throughout their careers, business leaders are required to measure and evaluate their organization's economic performance, improve resource allocation and strategy implementation within their organizations, and build accountability for performance through effective external and internal governance. Top leadership in most organizations must also communicate performance information to external investors and other capital providers to ensure that their organizations are able to access capital on favorable terms. In FRC, we learn key concepts and frameworks that guide the effective design and use of performance measurement systems to accomplish these multiple complex goals.

    Keywords: Financial Accounting; managerial accounting; valuation; Investments; econometrics;

    Awards & Honors

  1. Charles C.Y. Wang: Winner of the 2013 Academic Research Award from the IRRC Institute (Investor Responsibility Research Center Institute) for his paper with Lucian A. Bebchuk and Alma Cohen, "Learning and the Disappearing Association Between Governance and Returns" (Journal of Financial Economics, 2013).

  2. Charles C.Y. Wang: Awarded the 2011-2012 Bradley Graduate Fellowship from the Stanford Institute for Economic Policy Research (SIEPR).

  3. Charles C.Y. Wang: Received a 2011 Centennial Teaching Assistant Award from Stanford University.

  4. Charles C.Y. Wang: Received a 2010 George P. Schultz Graduate Student Fellowship in Economic Policy from the Stanford Institute for Economic Policy Research (SIEPR).

  5. Charles C.Y. Wang: Won the Outstanding Teaching Assistant Award from Stanford University, 2008–2010.

  6. Charles C.Y. Wang: Received a Stanford University Graduate Fellowship, 2006–2008.

Media and Other Notable Mentions

Wall Street Journal
1/15/2013

Ray Fisman and Tim Sullivan

Chauffeur-driven limousines, millions in stock options, golden parachutes. It's no wonder bosses' pay and perks can rankle. Here's why the best ones are worth it.

FS Insight
12/13/2012

Jeroen Derwall

A significant number of institutional investors publicly state a conviction that using environmental, social, and corporate governance (ESG) information in portfolio selection will help them generate better investment returns in comparison to their benchmarks or competitors. But can a performance-driven investment case be a sustainable motivation for adopting responsible investing?

Evolved Employer
02/19/2013

Melissa J. Anderson

US News and World Report
November, 14 2012

One of the unpleasant facts about investing in equity funds is the idea that you're paying for all sorts of things you probably shouldn't be—this obscure management fee, that needless trading cost. Can we add CEO extravagance to the pile?

Smart Money
9/13/2012

Ian Salisbury

New York Times
10/24/2012

Lucian A. Bebchuk

DealBook (New York Times)
09/12/2012
Financial Times
05/2/2012
Conference Board
4/13/2012
M & A Law Prof Blog
February 2, 2011
Truth on the Market
February 2, 2011
Project Syndicate
November 26, 2010
DealBook (New York Times)
11/12/2010

Steven M. Davidoff

Corporate Board Member
Third Quarter 2010

Blog Posts

Harvard Law School Forum on Corporate Governance and Financial Regulation
4/17/2012
Harvard Law School Forum on Corporate Governance and Financial Regulation
2/07/2011
Harvard Law School Forum on Corporate Governance and Financial Regulation
12/8/2010