Charles C.Y. Wang
Assistant Professor of Business Administration
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.
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.
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;
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.
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: corporate governance;
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;
Identifying Peer Firms: Evidence from EDGAR Search Traffic
Using Internet traffic patterns from the Securities and Exchange Commission Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) website, we show that firms appearing in chronologically adjacent searches by the same individual are fundamentally similar on multiple dimensions. In fact, traffic-based peer firms identified by our algorithm significantly outperform peer firms based on six-digit Global Industry Classification Standard (GICS) groupings in explaining cross-sectional variations in base firms' stock returns, valuation multiples, forecasted and realized growth rates, research and development expenditures, and various other key financial ratios. Our results highlight the usefulness of EDGAR data, as well as the latent intelligence in search traffic patterns.
Keywords: peer firm;
EDGAR search traffic;
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%.
Wang, Charles CY. "Can Implicit Regulation Change Financial Market Behavior? Evidence from Spitzer’s Attack on Market Timers." Working Paper, October 2012.
Golden Parachutes and the Wealth of Shareholders
Golden parachutes have attracted much debate and substantial attention from investors and public officials for more than two decades, and the Dodd-Frank Act recently mandated a shareholder vote on any future adoption of a golden parachute by public firms. We use IRRC data for the period 1990-2006 to provide a comprehensive analysis of the relationship that golden parachutes have both with the evolution of firm value over time and with shareholder opportunities to obtain acquisition premiums. We find that golden parachutes are associated with increased likelihood of either receiving an acquisition offer or being acquired, a lower premium in the event of an acquisition, and higher (unconditional) expected acquisition premiums. Tracking the evolution of firm value over time in firms adopting GPs, we find that firms adopting a GP have a lower industry-adjusted Tobin's Q already in the IRRC volume preceding the adoption, but that their value continues to decline during the inter-volume period of adoption and continues to erode subsequently. A similar pattern is displayed by an analysis of abnormal stock returns prior to the adoption of GPs, during the inter-volume period of adoption, and subsequently.
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;