Luke Stein, Ph.D.
Assistant Professor of Finance
The effect of uncertainty on investment: evidence from equity options
with Elizabeth Stone
There is wide debate over the impact of uncertainty on firm behavior, due to the difficulty both of measuring uncertainty and of identifying causality. This paper takes three steps that attempt to address these challenges. First, we develop an instrumental variables strategy that exploits firms’ differential exposure to energy and currency prices and volatility. For example, airlines are negatively affected by high oil prices while oil refiners benefit from them, but both are sensitive to oil price volatility; retailers, in comparison, are not particularly sensitive to either the level or volatility of oil prices. Second, we use the expected volatility of stock prices as implied by equity options to obtain forward-looking measures of uncertainty over firms’ business conditions. Finally, we examine how uncertainty affects a range of outcomes: capital investment, hiring, research and development, and advertising. We find that uncertainty depresses capital investment, hiring, and advertising, but encourages R&D spending. This perhaps-surprising result for R&D is consistent with a theoretical literature emphasizing that long investment lags create valuable real put options which offset the effects of call options lost when projects are started. Aggregating across our panel of Compustat firms, we find that rising uncertainty accounts for roughly a third of the fall in capital investment and hiring that occurred in 2008–10.
Economic uncertainty and earnings manipulation
with Charles C.Y. Wang
In the presence of managerial short-termism and asymmetric information about skill and effort provision, firms may opportunistically shift earnings from uncertain to more certain times. We document that firms report more negative discretionary accruals when financial markets are less certain about their future prospects. Stock-price responses to earnings surprises are moderated when firm-level uncertainty is high, consistent with performance being attributed more to luck rather than skill and effort, which can create incentives to shift earnings toward lower-uncertainty periods. We show that the resulting opportunistic earnings management is concentrated in CEOs, firms, and periods where such incentives are likely to be strongest: (1) where CEO wealth is sensitive to change in the share price, (2) where announced earnings are particularly likely to be an important source of information about managerial ability and effort, and (3) before implementation of Sarbanes-Oxley made opportunistic earnings management more challenging. Our evidence highlights a novel channel through which uncertainty affects managerial decision making in the presence of agency conflicts.
with Hong Zhao
When members of a board of directors are distracted by outside obligations, they may be less effective in their advisory and monitoring roles. Prior research on the adverse effects of director distraction — largely focused on directors who sit on multiple boards — offers mixed evidence, presumably because these ‘‘busy’’ board members may also be particularly effective ones. We focus instead on time-varying attention shocks to independent directors who are primarily employed at outside firms. Using newly constructed data that links directors to their employers, we identify periods when poor performance at a director's employing firm may distract her from board service. We find that firms with distracted directors have lower performance and value, higher CEO compensation, reduced CEO turnover-performance sensitivity, lower earnings quality, and lower M&A performance. These effects are driven by distracted directors who sit on relevant committees, and are stronger for small boards, where each individual director may be more important. Taken together, our evidence suggests that independent executive directors play an important governance role, but their effectiveness suffers when they are distracted by events at their employing firm.
[Latest version ]
Angels, entrepreneurship, and employment dynamics: evidence from investor accreditation rules
with Laura Lindsey
This paper examines the effects of a shock to angel finance on entrepreneurial activity and employment. Using public micro data from the U.S. Census, we construct a state-level estimate of the fraction of accredited investors likely affected by Dodd-Frank's elimination of housing wealth in the determination of accreditation status. We demonstrate that a larger reduction in the pool of potential angels negatively affects firm entry and reduces employment levels at small entrants. Employment increases at small and young incumbents as workers are absorbed, and wages for the startup sector decline. Angel finance appears to be a complement to organized venture capital and is more important in lower startup-capital-intensive and less concentrated industries. Our paper quantifies the impact of angel finance at the margin and offers insight on the geographies and sectors where it matters most.
Tax-timing options and the demand for idiosyncratic volatility
with Oliver Boguth
Investors have a choice over when to incur taxes on individual investments, and typically benefit from delaying the realization of capital gains while harvesting losses. This option means that the effective tax rate on capital losses exceeds the one on capital gains, resulting in a convex after-tax payoff. Convexity creates a demand for idiosyncratic volatility (IVOL) within a well-diversified portfolio, and can therefore explain the puzzling negative relation between IVOL and expected stock returns. A simple model with tax-timing options predicts that the demand for idiosyncratic volatility increases with the tax rate, the nominal interest rate, and unrealized capital gains, and we show that all three measures predict the IVOL premium in the time-series. In the cross-section, we show that the magnitude of the IVOL premium increases with investors’ average tax exposure.
Race, skin color, and economic outcomes in early twentieth-century America
with Roy Mill
We study the effect of race on economic outcomes using unique data from the first half of the twentieth century, a period in which skin color was explicitly coded in U.S. censuses as “White,” “Black,” or “Mulatto.” We construct a panel of siblings by digitizing and matching records across the 1910 and 1940 censuses, identifying all 12,000 African-American families in which enumerators classified some children as light-skinned (“Mulatto”) and others as dark-skinned (“Black”). Siblings coded “Mulatto” when they were children (in 1910) earned similar wages as adults (in 1940) as their Black siblings. This within-family earnings difference is substantially lower than the Black-Mulatto earnings difference in the general population, suggesting that skin color in itself played only a small role in the earnings gap. In the second half of the paper, we focus on individuals who “passed for White,” an important social phenomenon at the time. To do so, we identify individuals coded “Mulatto” as children but “White” as adults. Passing meant that individuals changed their racial affiliation by changing their social presentation while skin color remained unchanged. Comparing passers to their siblings who did not pass, we find that passing was associated with substantially higher earnings, suggesting that social presentations of race could have significant consequences for economic outcomes.
The “visible hand”: race and online market outcomes
with Jennifer Doleac
The Economic Journal, 123 (572), F469–F492, Nov. 2013
We examine the effect of race on market outcomes by selling iPods through local online classified advertisements throughout the United States. Each advertisement features a photograph including a dark- or light-skinned hand, or one with a wrist tattoo. Black sellers receive fewer and lower offers than white sellers, and the correspondence with black sellers indicates lower levels of trust. Black sellers’ outcomes are particularly poor in thin markets (suggesting that discrimination may not “survive” competition among buyers) and those with the most racial isolation and property crime (consistent with channels through which statistical discrimination might operate).
Finalist for 2016 Huizingh Outstanding Undergraduate Teacher Award (W. P. Carey School of Business’ annual award to an instructor “dedicated to inspiring students through excellence in teaching and mentoring”)
Recipient of 2011–12 Gores Award (Stanford University's “highest award for excellence in teaching”)
Instructor, Arizona State University
Instructor, Stanford University
Intermediate Microeconomics (Economics 50)
Microeconomic Theory for Non-Economics Ph.D. Students (Economics 202N) [slides ]
Online High School Microeconomics (EPGY OHS Economics 20)
Teaching Assistant, Stanford University
Introduction to Financial Economics (Economics 140)
First-Year Ph.D. Macroeconomics (Economics 210) [notes ]
Managerial Economics for MBAs (GSB Management Economics 200)
Economics for Sloan Fellows (GSB Management Economics 209)
Emergency Medical Technician Training (Surgery 111a/211a)
Sean Flynn (Ph.D. expected 2017)
Hong Zhao (Ph.D. expected 2017)
Past: Qi Dong (King Fahd University of Petroleum and Minerals, Ph.D. 2015), Yung-Ling Chi (National Chung Hsing University, Ph.D. 2016)