Research Interests: Delegated Portfolio Management. Market Efficiency and Market Frictions. The Real Impact of Financial Markets (e.g., Short Selling and Financial Globalization). AI and FinTech. The Influence of Social, Environmental, and Cultural Considerations.
Journal Publications and Accepted Papers:
[1] Mengyu Wang, Jeffery Wurgler, and Hong Zhang, 2026, “Policy Uncertainty Reduces Green Innovation,” Journal of Financial Economics 175:104189.
Using China as a testing ground, we find that exogenous weather-driven variability in air pollution leads to fluctuations in green subsidies. Firms exposed to greater weather-induced subsidy variability invest less in green R&D and reduce green employment. This evidence points to a novel source of policy uncertainty: it may arise when policymakers rely only on obvious and salient indicators (e.g., AQI) while overlooking underlying drivers that affect those indicators (e.g., weather fluctuations). Our study highlights a broader policy implication: effective environmental policy depends not only on policy generosity but also on careful policy design.
[2] Massimo Massa, Xiaoqiao Wang, Bohui Zhang, and Hong Zhang, 2025, “The Boundaries of the Law: Can US Private Enforcement Discipline Foreign Firms?,” Journal of International Business Studies, 56:62–83. (UTD 25, FT 50)
o Paper
We find that a US class-action lawsuit against a foreign firm cross-listed in the US reduces the value of its non-US-listed industry peers in the firm's home country. These peer firms subsequently strengthen their governance practices and financial policies to restore shareholder value. Our study reveals an important global reach of US private enforcement: its disciplinary effects extend far beyond US borders.
[3] Sterling Huang, Bo Li, Massimo Massa, Siyuan Yang, and Hong Zhang, 2025, “Borrowing from Friends of Friends: Indirect Social Networks and Bank Loans,” Management Science, 72(5):4144–4172.
We find that bank loans initiated through indirect social connections ("friends of friends") exhibit the opposite pattern from direct connections: they receive lower interest spreads, require less monitoring, and ultimately perform worse, suggesting that banks exhibit favoritism through these indirect relationships. Our study highlights a broader yet novel implication of social networks: indirect connections are not merely extensions of direct relationships but can shape economic outcomes in fundamentally different ways.
[4] Zhe Li, Massimo Massa, and Nianhang Xu, and Hong Zhang, 2025, “A Social Norm Perspective of Information Manipulation in China,” Journal of Financial and Quantitative Analysis, 61(1):370-408.
We document that a leading social norm in China related to alcohol encourages earnings management, suggesting that informal social norms can undermine rule-based corporate disclosure. Evidence from toxic alcohol scandals supports a causal interpretation. Our study indicates that bottom-up informal social norms can be as important as formal institutions in shaping China's market transition.
[5] Massimo Massa, Hong Zhang, and Weikang Zhu, 2025, “M&As and the Value of Control,” Journal of Law and Economics, forthcoming.
Business groups often use “central” firms to retain control of others. When a central firm becomes an M&A target, the buying business group may not obtain the same value of assets through control (VoC) as the selling group has. We observe that M&As involving a high VoC gap exhibit worse short-term and long-term performance, suggesting that the buyer pays a price to buy out the control of the seller but fails to derive the same benefit from the target.
[6] Po-Hsuan Hsu, Sterling Huang, Massimo Massa, Yaru Qian, and Hong Zhang 2025, “Exploratory Innovation: A New Perspective on Family Firms’ Under-diversification Puzzle,” Research Policy, 54:105320. (FT 50)
We propose a new perspective on family firms’ puzzling under-diversification in product spaces: these firms first need to succeed in exploratory innovation so they may diversify into new product markets. Consistent with this notion, family firms produce more exploratory patents than others. This relation is stronger among under-diversified family firms, confirming that such innovation indeed helps family firms diversify business risks.
[7] Massimo Massa, James O’Donovan, and Hong Zhang, 2022, “International Asset Pricing with Strategic Business Groups,” Journal of Financial Economics, 145, 339-361.
Traditional asset pricing assumes that firms are independent. We show that business groups strategically redistribute risk across affiliated firms, creating a new source of systematic risk that helps explain international stock returns beyond traditional risk factors. Our study indicates that ownership structures matter not only for corporate decisions but also for how risk is transmitted and priced in financial markets.
[8] Massimo Massa, Chengwei Wang, Hong Zhang, and Jian Zhang, 2022, “Investing in Low-trust Countries: Trust in the Global Mutual Fund Industry,” Journal of Financial and Quantitative Analysis 57, 240-290.
o Paper Internet Appendix (a simple model extending Guiso et al. (2008) to delegated portfolio management)
We find that social trust encourages investors to delegate more actively managed portfolios to professional fund managers, who reciprocate by delivering superior performance of about 2% per year. Our study indicates that informal institutions such as trust can strengthen delegated investment relationships and thereby enhance the efficiency of financial markets.
[9] Charles Cao, Grant Farnsworth, and Hong Zhang, 2021, “The Economics of Hedge Fund Startups: Theory and Evidence,” Journal of Finance, 76-3, 1427-1469.
o Paper Internet Appendix (it includes an investor-search model and its comparison to the manager-search model)
We extend the classic Berk and Green (2004) model by incorporating investor search frictions in the hedge fund industry. We show that managers have stronger incentives to acquire investment skills when investor demand is low, while fund families arise endogenously to reduce search frictions but weaken performance incentives. Our study indicates that market frictions shape not only investment incentives but also how financial organizations emerge and evolve.
[10] Jennifer (Jie) Li, Massimo Massa, Hong Zhang, and Jian Zhang, 2021, “Air Pollution, Behavioral Bias, and the Disposition Effect in China,” Journal of Financial Economics,142, 641-673.
o Paper
We find that air pollution significantly exacerbates the disposition effect, a well-known behavioral bias that causes retail investors to hold losing stocks too long and sell winning stocks too early. Evidence based on strong winds and the Huai River policy supports a causal interpretation. Our study indicates that air pollution can impose substantial indirect social costs by impairing the quality of financial decision-making.
o Finalist, the 2020 NBS -ONE Research Impact on Practice Award
o Featured by the Network for Business Sustainability (the link).
[11] Si Cheng, Massimo Massa, and Hong Zhang, 2019, “The Unexpected Activeness of Passive Investors: A Worldwide Analysis of ETFs,” Review of Asset Pricing Studies 9-2, 296–355.
o Paper
ETFs are more complicated than low-cost index trackers. Their real investments may deviate from their benchmarks to leverage affiliated banks’ information advantage and help affiliated OEFs. In this regard, ETFs extend banks’ off-balance-sheet and may affect financial stability.
[12] Yawen Jiao, Massimo Massa, and Hong Zhang, 2016, “Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand,” Journal of Financial Economics 122, 544–567.
o Paper
We show that opposite changes in hedge fund holdings and short selling reveal informed trading and allow us to uncover its economic sources. Our study indicates that combining complementary sources of trading information can substantially improve our understanding of how private information is reflected in financial markets.
[13] Massimo Massa, Yanbo Wang, and Hong Zhang, 2016, “Benchmarking and Embedded Currency Risk,” Journal of Financial and Quantitative Analysis 51, 629-654.
o Paper
Benchmarking against an international stock index creates an embedded currency risk to mutual funds. We show that global mutual funds manage this risk by concentrating equity investments on fewer “safe” currencies, constraining funds from achieving the best equity allocation.
[14] Massimo Massa, Wenlan Qian and Weibiao Xu, and Hong Zhang, 2015, “Competition of the Informed: Does Short Selling Affect Insider Trading,” Journal of Financial Economics 118: 268-288.
o Paper Internet Appendix (it includes a simple model extending Kyle (1985) and Holden and Subrahmanyam (1992) to competing informed traders)
We find that the presence of short sellers intensifies competition among informed traders, inducing corporate insiders to trade more aggressively and reveal information more quickly. Our study indicates that competition among informed investors can improve market efficiency by accelerating price discovery.
o A post of the paper is solicited and featured at Harvard Law School Forum on Corporate Governance and Financial Regulation (the link).
[15] Massimo Massa, Bohui Zhang, and Hong Zhang, 2015, “The Invisible Hand of Short Selling: Does Short-Selling Discipline Earnings Management?,” Review of Financial Studies 28: 1701-1736.
o Paper
We find that short selling disciplines firm managers by reducing earnings management. Our study indicates that short selling has real effects on corporate behavior by serving as an external market-based governance mechanism.
o A post of the paper is solicited and featured at Harvard Law School Forum on Corporate Governance and Financial Regulation (the link). The paper also attracts attention from a broad base of readers, ranging from Stephen Bainbridge, the William D. Warren Distinguished Professor of Law at the UCLA School of Law, to “Silicon Investor “, an online discussing board for stock investments.
[16] Chunmei Lin and Massimo Massa, and Hong Zhang, 2014, “Mutual Funds and Information Diffusion: The Role of Country-Level Governance,” Review of Financial Studies 27: 3343-3387.
o Paper
We find that when weak institutions jeopardize public information, institutional investors help disseminate semi-public information through market trading. However, this corrective mechanism creates new risks for financial stability. Our study indicates that weak institutions pose a fundamental challenge that financial markets alone cannot overcome.
o A post of the paper is solicited and featured at Harvard Law School Forum on Corporate Governance and Financial Regulation (the link).
[17] Matt Spiegel and Hong Zhang, 2013, “Mutual Fund Risk and Market Share Adjusted Fund Flows,” Journal of Financial Economics 108-2: 506-528.
o Paper
We show that the widely documented convex relationship between fund flows and performance is largely driven by aggregation bias rather than investor behavior. Using an alternative market-share specification, we find little evidence of true convexity. Our study indicates that empirical specifications can fundamentally shape our understanding of economic behavior and managerial incentives.
[18] Harry Mamaysky, Matt Spiegel, and Hong Zhang, 2008, “Estimating the Dynamics of Mutual Fund Alphas and Betas,” Review of Financial Studies 21(1): 233-264.
o Paper
We develop a dynamic model that uses the Kalman filter to track how mutual fund managers process information over time. The resulting time-varying estimates of managerial skill deliver superior out-of-sample performance. Our study indicates that investment skill is inherently dynamic and therefore requires dynamic models for accurate evaluation.
o Cited by The New York Times (May 18, 2003) and Financial Advisor Magazine (June 2004) as to “have solved a big problem for mutual fund rating systems.” SSRN’s Top Ten download list for “AFA 2004 San Diego Meetings All Time Hits” and “European Finance Association Meetings (EFA) All Time Hits.”
[19] Harry Mamaysky, Matt Spiegel, and Hong Zhang, 2007, “Improved Forecasting of Mutual Fund Alphas and Betas,” Review of Finance 11: 359-400 (the lead article).
o Paper
We show that traditional OLS models often mistake estimation errors for true managerial skill. A simple backtesting procedure that filters out false-positive signals substantially improves out-of-sample forecasting. Our study indicates that effective prediction depends as much on eliminating false signals as on identifying true ones.
Publications in Chinese Journals:
[20] Zhenwei Wang, Yizhe Zhu, and Hong Zhang, 2024, “The Spillover Effects of Environmental Pulishment on Firm-level Productivity”, Journal of Financial Research, 2:113-130. (“环境处罚对企业生产率的溢出效应研究,” 《金融研究》2024年第2期)