Research Summary


In the area of equity valuation, Professor Wang explores how firm fundamentals and valuation models can be used to understand expected return variation, with a focus on valuation-implied cost of capital and its use as a proxy for expected returns. In his study of corporate governance, he empirically analyzes the impact of governance arrangements on shareholder value.

Equity Valuation

Professor Wang’s research utilizes valuation theory to explain how firm fundamentals are related to the expected rates of equity returns and their term structures. His research provides strong evidence that valuation-based proxies of expected returns outperform the standard empirical proxies motivated by finance theory. He has shown that such valuation-based proxies may not be perfect. To promote a better understanding of their imperfections, Professor Wang has developed a novel diagnostic procedure to estimate the associations between measurement errors of expected returns proxies and firm characteristics.

Corporate Governance

The characteristics and structure of boards of directors have important implications for firm performance. Professor Wang has found that firms with well-connected boards whose members have strong network connections provide economic benefits that are not immediately reflected in stock prices. Further, well-connected boards are most valuable to firms that stand to benefit most from their networks, such as young or growth organizations. Professor Wang’s research has also helped to settle an issue regarding staggered boards of directors. Staggered boards are known to be negatively correlated with firm valuation, but is this a causal effect? Using two Delaware Chancery and Supreme Court cases as a natural experiment, he found evidence consistent with the market’s view that staggered boards reduce firm value.

In studying the asset-pricing implications of board entrenchment on firm value and stock returns, Professor Wang found that the positive association between good-governance firms and abnormal positive stock returns that was documented for the 1990-1999 decade has subsequently disappeared. His study finds evidence that during the 1990s, market participants and securities analysts did not sufficiently appreciate the difference between good-governance and poor-governance firms, and therefore were more positively surprised by the earnings announcements of good-governance firms. As they learned about and paid more attention to corporate governance in the early 2000s and impounded their value implications into prices, the association between governance and returns disappeared.

Professor Wang’s findings in an examination of golden parachutes indicate that they lead to more acquisitions and acquisition bids, but that they are ultimately associated with lower acquisition premiums. Combining both effects, golden parachutes are associated with a higher expected acquisition premium. His research also finds that firms adopting golden parachutes tend to erode in value and stock returns, both around and after the time of adoption, relative to their industry peers, suggesting that the adverse effects on executive incentives and performance in the absence of acquisition offers may outweigh the shareholder benefit of increased likelihood of takeovers.