The Risk and Return of Impact Investing Funds

(with Jessica Jeffers and Kelly Posenau), September 2023

Conditionally accepted, Journal of Financial Economics

We provide the first analysis of the risk exposure and risk-adjusted performance of impact investing funds, private market funds with dual financial and social goals. We introduce a dataset of impact fund cash flows and exploit distortions in VC performance measures to characterize risk profiles. Impact funds have a lower market β than comparable private market strategies. Accounting for β, impact funds underperform the public market, though not necessarily more so than comparable strategies. We consider alternative pricing models, accounting for sustainability and emerging markets risk. We show investors’ wealth portfolios and taste change the perceived financial merit of impact investing.

Taking the Road Less Traveled? Market Misreaction and Firm Innovation Directions

(with Zunda Winston Xu), March 2024

We propose that public investors react differently to patent issuance news depending on its novelty, and this misreaction exerts a real impact on the firms' future innovation. Using textual analyses of patent documents to measure patent novelty, we find that investors under-react to the issuance of path-breaking innovations while overreact to the trend-following ones. We rationalize the empirical patterns with a bounded-rationality model where investors cannot figure out the true novelty of a patent at issuance due to cognitive limits. This misreaction is economically significant because novel patents bring higher economic value to the firm and have higher social value than non-novel patents. We also find that firms, on average, follow up less on their novel technology and issue fewer future novel patents, after an issuance of novel innovation. Using price pressure from mutual fund redemptions as an instrument, we present causal evidence that novel firms change innovation directions from novelty-seeking to copycat innovations following disappointing returns. The findings highlight that investor misreaction to patent novelty has a real impact on future innovation directions by steering firms away from higher-valued, groundbreaking research.

Associative Memory is Machine Learning

(with Leland Bybee), September 2023

Financial Event Studies

(with Paul Goldsmith-Pinkham)

What do Investors Overreact to? An Empirical Analysis of Long-Term Earnings Growth Forecast

November 2022