Research

Working Paper
Spencer Yongwook Kwon and Johnny Tang. Working Paper. “Extreme Events and Overreaction to News”. SSRNAbstract

The presence of both systematic under-and-overreaction to news in financial markets is a major puzzle. We propose a systematic predictor of under-and-overreaction to news: the extremeness of the associated distribution of fundamentals. Using a comprehensive database of corporate news events, we identify substantial heterogeneity in both reactions to news and extremeness of fundamentals across types of corporate events. We document overreaction to more extreme event-types, such as leadership changes, M\&A, and customer announcements, and underreaction to less extreme event-types such as earnings announcements. We show this is consistent with diagnostic expectations, a model of belief formation based on the representativeness heuristic. The model further predicts greater trading volume holding fixed fundamentals and more sensitive belief changes to more extreme corporate events, which we confirm in the data. We calibrate our model and show that it quantitatively matches the key features in our data.

Previously titled "Reactions to News and Reasoning By Exemplars"

Revision requested, Review of Economic Studies
Mark Egan, Shan Ge, and Johnny Tang. Working Paper. “Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities”. SSRNAbstract
We examine the drivers of variable annuity sales and the impact of a proposed regulatory change. Variable annuities are popular retirement products with over $2 trillion in assets in the United States. Insurers typically pay brokers a commission for selling variable annuities that ranges from 0% to over 10% of investors' premium payments. Brokers earn higher commissions for selling inferior annuities, in terms of higher expenses and more ex-post complaints. Our results indicate that variable annuity sales are roughly four times as sensitive to brokers' financial interests as to investors'. To help limit conflicts of interest, the Department of Labor proposed a rule in 2016 that would hold brokers to a fiduciary standard when dealing with retirement accounts. We find that after the proposed fiduciary rule, sales of high-expense variable annuities fell by 52% as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products. Based on our structural model estimates, investor welfare improved as a result of the fiduciary rule under conservative assumptions.

Conditionally Accepted, Review of Financial Studies

Johnny Tang. Working Paper. “The Effects of a Global Minimum Tax on Corporate Balance Sheets and Real Activities: Evidence from the Insurance Industry”. SSRNAbstract
How do global minimum taxes affect corporate balance sheets and real activities? I study this question using the introduction of the base erosion and anti-abuse tax (BEAT) on multinational insurance companies operating in the US. I find that the BEAT implementation significantly changed the internal capital allocation of insurers, increased global risk-sharing, and increased product prices in the US. I document three main sets of findings. First, the global minimum tax significantly changed the internal capital allocation of insurance companies and decreased the amount of transfer payments of US insurers to their foreign affiliates by 59%, or $30 billion per year. The changes in allocation were primarily driven by foreign-domiciled insurance groups and insurance groups which used foreign affiliates more extensively prior to the tax reform. Second, the tax increased global risk-sharing, inducing insurers to diversify more risk with external counterparties. Revealed-preference estimates suggest that the total increase in risk-sharing is worth $1.9 billion per year for insurers, equal to 2.9% of insurers’ total net income. Third, insurance companies affected by the minimum tax increased policy prices by 1.03% relative to not-affected insurers.
Presented at: NBER Economic Impacts of Interjurisdictional Tax Competition, University of Waterloo Tax Policy Symposium, Harvard Law School
2020
Johnny Tang. 7/2020. “Individual Heterogeneity and Cultural Attitudes in Credence Goods Provision.” European Economic Review, 126. SSRNAbstract
I study the heterogeneity of credence goods provision in taxi drivers taking detours in New York City. First, I document that there is significant detouring on average by drivers. Second, there is significant heterogeneity in cheating across individuals, yet each individual’s propensity to take detours is stable: drivers who detour almost always detour, while those who do not detour almost never do. Drivers who take longer detours on each trip also take such trips more often. Third, cultural attitudes plausibly explain some of this heterogeneity in behavior across individuals.
taxi_eer_tang2020_finalwp.pdf
(Undergraduate honors thesis)