David Xiaoyu Xu

Replacing deteriorated assets in a secondary market protects senior debt but hurts equity, especially when others also promised to do so when issuing big AAA tranches.

Financial Market Structure and the Supply of Safe Assets: An Analysis of the Leveraged Loan Market [Internet Appendix]

QCGBF Young Economist Prize, Finalist
FMCG Best Paper Award in Banking/Financial Institution

This paper develops an equilibrium model in which collateralized loan obligations (CLOs) issue safe and risky securities backed by dynamic portfolios of leveraged loans. Consistent with empirical evidence, the endogenous market structure consists of two groups of financial intermediaries: CLOs and lenders that do not securitize loans. Trading with non-securitized lenders allows CLOs to issue larger safe tranches ex ante but generates price pressure in downturns. Since intermediaries do not internalize their effect on loan prices, there is excessive entry into operating CLOs, and the market underproduces safe assets. A recent regulation that reduced CLO entry could exacerbate the inefficiency.

Abnormal returns when stock trading restarts. Don't forget that mutual fund investors are watching.

Fund Flows in the Shadow of Stock Trading Regulation (with Xiang Kang)

Best Paper Award, 16th Conference on Asia-Pacific Financial Markets

Trading suspension, a widely adopted regulatory rule, prevents information from being incorporated into stock prices. Using a sample of 3,205 long-lasting suspension events between 2004-2018, we show that mutual funds holding suspended stocks generally fail to adjust for stale prices, generating stale net asset values (NAVs). We find that investors exploit predictable fund performance that quickly realizes after trading resumes: flows positively respond to firm-specific news about suspended stocks in fund portfolios. Portfolio disclosure plays a key informational role in distorting flows. Our findings suggest that regulatory interventions on trading activities can create negative externalities among mutual fund investors.

An empirical setting where acquiring private information can literally cost days.

The Geography of Information Acquisition (with Honghui Chen, Yuanyu Qu, Tao Shen, and Qinghai Wang), Journal of Financial and Quantitative Analysis, forthcoming

Using detailed data on company visits by Chinese mutual funds, we provide direct evidence of mutual fund information acquisition activities and the consequent informational advantages mutual funds establish in local firms. Mutual funds are more likely to visit local and nearby firms both in and outside of their portfolios, but the ease of travel between fund and firm locations can substantially alleviate geographic distance constraints. Company visits by mutual funds are strongly associated with both fund trading activities and fund trading performance. Our results show that geographic constraints and costly information acquisition amplify information asymmetry in financial markets.

This version subsumes my work previously circulated as:
Costly Information Acquisition and Investment Decisions: Quasi-Experimental Evidence