Email: davidson.heath@eccles.utah.edu Phone: 801-581-3948 Office: SFEBB 7217
Teaching
FINAN 6022 - Financial Management Most recent evals
Distinguished Teaching Award 2018
Brady Faculty Teaching Award 2020
Distinguished Teaching Award 2023
Distinguished Teaching Award 2025
Working Papers
The Economics of Investor Engagement with Daniele Macciocchi and Matt Ringgenberg
Institutional investors engage with their portfolio companies to communicate information and preferences. Using a discrete choice model and novel data on engagement, we find that the costs and benefits of engagement vary across funds and firms, with passive funds engaging relatively less than active funds due to their lower fees. Contrary to concerns that passive investing generates negative externalities, we find that society and investors benefit from the rise of passive investing because active funds exhibit diseconomies of scale but passive funds do not. Our results highlight a misalignment between the socially optimal and privately optimal behavior of institutional investors.
All Shareholder Votes Are Not Created Equal with Da Huang and Chong Shu
Do firm managers listen more to some shareholders than others? We show that directors facing the same level of dissent are twice as likely to leave the board when the dissent originates from active fund shareholders rather than passive ones. This phenomenon is driven by the stronger disciplinary threat posed by active funds rather than by any informational advantage. As a result, despite the large holdings of the “Big Three” passive asset managers, we find that their votes carry the same weight as those of an average active fund. Our findings highlight that shareholder democracy depends not only on the vote tally, but also on who casts the votes.
Teamwork and the Homophily Trap: Evidence from Open Source Software with Nathan Seegert and Jeffrey Yang
We investigate team diversity and productivity in the setting of open source software. We find that team diversity is low relative to the contributor pool, with the most mass at the lowest level of diversity (monoculture). This pattern is explained by homophily, the preference to associate with similar people, which leads to teams becoming trapped in low-diversity equilibria. Our results are robust to instrumenting changes in team diversity using teams’ exposure to country-level changes in Internet access. Teams that escape the “homophily trap” add more diversity and increase productivity relative to teams that do not.
Published and Forthcoming Papers
ETF Sampling and Index Arbitrage with Jonathan Brogaard and Da Huang
Accepted, Journal of Financial and Quantitative Analysis
This paper shows that exchange-traded funds (ETFs) “sample” their indexes, systematically underweighting or omitting illiquid index stocks. As a result, arbitrage activity between the ETF and its index has heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs reduces liquidity and price efficiency and increases volatility and co-movement for liquid stocks, but has no effect on illiquid stocks. Our results demonstrate that the effects of passive investing on asset markets depend on how passive funds replicate their target index.
Does Socially Responsible Investing Change Firm Behavior? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Review of Finance (2023) - Pagano and Zechner Award
Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet both in the cross-section and using an exogenous shock to SRI capital, we find SRI funds do not significantly change firm behavior. Moreover, we find little evidence they try to impact firm behavior using shareholder proposals. Our results suggest SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct, but do not follow through on their promise of impact. Replication Code
Reusing Natural Experiments with Matt Ringgenberg, Mehrdad Samadi and Ingrid Werner
Journal of Finance (2023) - Brattle Prize, Distinguished Paper
After a natural experiment is first used, other researchers often reuse the setting, examining different outcomes based on causal chain arguments. Using simulation evidence combined with two extensively studied natural experiments, business combination laws and the Regulation SHO pilot, we show that the repeated use of a natural experiment significantly increases the likelihood of false discoveries. To correct this, we propose multiple testing methods which account for dependence across tests and we show evidence of their efficacy. Replication Code
Market Returns and Interim Risk in Mergers with Mark Mitchell
A primary concern in mergers and acquisitions is the risk the deal may be cancelled before it is completed. We document that this “interim risk” varies asymmetrically with the aggregate market return. Deals tend to be renegotiated when the market rises but cancelled when the market crashes. These effects are conditional on the method of payment and the contracting stage of the deal, consistent with a mechanism of ex post renegotiation. Variation in interim risk over time alters the method of payment in mergers and the firms that are targeted and acquired. Replication Code
On Index Investing with Jeff Coles and Matt Ringgenberg
Journal of Financial Economics (2022) - Lead Article
We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equilibrium in which investors choose to gather private information whenever it is profitable. As index investing increases, there are fewer privately-informed active investors (so overall information production drops), but the mix of investors adjusts until the returns to active investing are unchanged. As a result, passive investing does not undermine price efficiency. Replication Code
Profitability and financial leverage: Evidence from a quasi-natural experiment with Giorgo Sertsios
The relationship between profitability and leverage has been controversial in the capital structure literature. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms. We find that treated firms increase their profitability throughout the treatment period. However, they only transiently reduce financial leverage, gradually reverting to their pre-shock level. Firms respond differently according to size, with large firms gradually adjusting their leverage towards a new target and small firms reducing it. The patterns are broadly consistent with dynamic trade-off models with both fixed and variable adjustment costs. Replication Code
Do Index Funds Monitor? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Review of Financial Studies (2022)
Passively managed index funds now hold over 30% of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (i) they are less likely to vote against firm management on contentious governance issues; (ii) there is no evidence they engage effectively publicly or privately, and (iii) they lead to less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds is decreasing the alignment of incentives between beneficial owners and firm management and shifting control from investors to managers. Internet Appendix Replication Code
The Strategic Effects of Trademark Protection with Chris Mace
Review of Financial Studies (2020)
We study the effects of trademark protection on firms’ profits and strategy using the 1996 Federal Trademark Dilution Act, which granted additional legal protection to selected trademarks. We find that the FTDA raised treated firms’ operating profits and was followed by a spike in trademark lawsuits and lower entry and exit in affected product markets. Treated firms reduced R&D spending, produced fewer patents and new products, and recalled a higher number of unsafe products. Our results suggest that stronger trademark protection negatively affected innovation and product quality. Internet Appendix Replication Code U.S. Trademarks to Compustat Bridge File
Bias-Corrected Estimation of Price Impact in Securities Litigation with Taylor Dove and J.B. Heaton
American Law and Economics Review (2019)
The single-firm event studies that securities litigants use to detect the impact of a corrective disclosure on a firm’s stock price have low statistical power. As a result, observed price impacts are biased against defendants and systematically overestimate the effect on firm value. We use the empirical distribution of daily stock returns to analyze the bias and develop bias-corrected estimators of price impact in securities litigation. Because of low statistical power, the ex ante incentives against committing securities fraud are also too low. We analyze the adjustment for optimal deterrence and find that it is material, but is nowhere equal to the opposing truncation bias. Replication Code
Macroeconomic Factors in Oil Futures Markets
This paper documents new evidence against perfect risk spanning in crude oil futures, and develops an affine futures pricing model that allows for unspanned macroeconomic factors. Compared to previous estimates, the oil spot premium is more volatile and strongly procyclical which suggests that previous models miss the majority of variation in oil risk premiums. The estimates reveal a dynamic two-way relationship between oil futures and economic activity: productivity shocks are associated with higher oil prices, while oil price shocks affect economic activity by lowering future consumption spending. Unspanned macro factors also affect the valuation of real options. Internet Appendix Replication Code
Old Working Papers
Convergence Failure in CBOT Wheat Futures
Massive convergence failures in CBOT agricultural contracts in 2007-2008 were caused by caps on the fees that storage providers could charge holders of delivery certificates.