Steven Chong Xiao

Culture and R 2

Consistent with predictions from the psychology literature, we find that stock prices co-move more (less) in culturally tight (loose) and collectivistic (individualistic) countries. Culture influences stock price synchronicity by affecting correlations in investors’ trading activities and a country’s information environment. Both market-wide and firm-specific variations are lower in tighter cultures. Individualism is mostly associated with higher firm-specific variations. Trade and financial openness weakens the effect of domestic culture on stock price comovements. These results hold for various robustness checks. Our study suggests that culture is an important omitted variable in the literature that investigates cross-country differences in stock price comovements.

Lending to Innovative Firms

Is bank financing compatible with innovation? We show that an exogenous enhancement in the value of borrowers’ patents, either through greater patent protection or creditor rights over collateral, results in cheaper loans. Using regression discontinuity design, we show that although R&D investment sharply drops following a financial covenant violation, the reduction is concentrated in firms with less productive R&D. Consequently, R&D reduction does not impair innovative output. Our results suggest that the property rights that patents confer to intellectual property and to lenders’ judicious exercise of control rights allow bank loans to be a viable means of financing for innovative firms.

Geographic Clustering of Corruption in the U.S.

We test the hypothesis that U.S. corporations headquartered in states with greater public corruption are also prone to more unethical behavior when operating abroad. We exploit passage of Foreign Corrupt Practices Act (FCPA) that curtailed bribery of foreign officials and find firms in corrupt states, especially those exporting to more corrupt countries, suffer greater performance decline following FCPA, suggesting larger loss from anticipated bribery restrictions. Controlling for industry, firms in corrupt states are more likely to be targets of FCPA enforcement actions. They are also more likely to have paid foreign bribes, as disclosed during pre-FCPA investigations.