Finalist, European Investment Forum Research Prize (2021)
Presentations: Nova PhD Countdown, HEC Brownbag, FMA 2021, SGF Conference 2022 (scheduled)
Invited: UBS London Quantitative Research Conference 2022 (scheduled)
Abstract
I study the stock market consequences of digitalization. I propose a novel dynamic measure of digitalization that holistically captures a firm's exposure to computers, data analytics, and programming. I find that digital firms, compared to non-digital firms, have annual realized excess returns which are 6.5% higher over the past two decades. This digital alpha does not appear to be explained by well-known stock return predictors nor firm characteristics such as age, size, profitability, or R&D intensity. Instead, the digital alpha is concentrated in firms which focus on users, a historically neglected party in the production-consumption chain. User-centricity complements digitalization within firms. The digital alpha rises to 9.0% for user-focused firms. I conclude that this figure likely compensates for risk, as user-focused digital firms have greater systematic risk.
Digital firms are more financially constrained. While institutional ownership helps alleviate these constraints, it is not a panacea for digital firms. During crises, there is a disproportionately large and sudden outflow from long-horizon (“dedicated”) institutional owners’ holdings of digital firms. I study how digital firms choose to cater towards institutional investors.
Import penetration into the US manufacturing sector has doubled to 32% from 1989 to 2018. Yet exporting this consumption of the environment to other countries is not a free lunch. An increasingly global supply chain brings new risks: exporter countries will eventually be reluctant to continue trading their environment for economic gain. I quantify how this type of foreign environmental risk flows through supply chains to US industries.
I use textual analysis to examine firms’ climate change disclosure in their annual 10-K reports. Climate change disclosure is increasing over time and not concentrated in specific industries. Through event studies, I find that climate change disclosure may be more informative for market participants during rollbacks - instead of new proposals - of climate change policies.