Research

Refereed Publications and Accepted Papers

Angels, entrepreneurship, and employment dynamics: Evidence from investor accreditation rules

Journal of Financial Economics (conditionally accepted)

This paper examines the effects of a shock to angel finance on entrepreneurial activity. Using U.S. Census data, we estimate the state-level fraction of households that lost accreditation status from Dodd–Frank’s elimination of housing wealth in determining accreditation. A larger reduction in the pool of potential investors reduces angel investment, firm entry, and employment at small entrants. Employment increases at small and young incumbents, suggesting competitive effects. Though we document partial substitution, angel finance appears to complement other capital sources in the entrepreneurial ecosystem. Our paper offers insight on the impact of angel finance and where it matters most.

Lindsey, L., Stein, L.C.D., 2025. Angels, entrepreneurship, and employment dynamics: Evidence from investor accreditation rules (Working Paper No. 2939994). SSRN.
PDF

Racial discrimination in asset prices: Evidence from horse betting

Financial Review (accepted)

In the presence of behavioral biases, prices can diverge from fundamentals, and the effects of racial/ethnic bias are evident in many financial and non-financial markets. We investigate the determinants and consequences of discrimination in parimutuel horse betting by assessing return differences across horses whose trainers have racially/ethnically distinctive surnames, which bettors may see as a proxy for quality (accurately or inaccurately) or a source of non-pecuniary returns (due to animus). Bets on horses with nonwhite-named trainers earn higher risk-adjusted returns, and these differences are especially pronounced among riskier bets, which receive lower average returns under the well-known “favorite–longshot” bias. Racial/ethnic return differences are stronger—overall and especially among longshots—for “win” than “place” and “show” bets, among horses with poor prior performance, and in low-stakes races with “fast” conditions. These results are consistent with the effects of discrimination being strongest among less-informed and less-sophisticated bettors.

Barnes, S., Stein, L.C.D., Forthcoming. Racial discrimination in asset prices: Evidence from horse betting. Financial Review.
PDF

Financial inclusion, human capital, and wealth accumulation: Evidence from the Freedman’s Savings Bank

Review of Financial Studies

This paper studies how access to financial services among a previously unbanked group affects human capital, labor market, and wealth outcomes. We use novel data from the Freedman’s Savings Bank—created following the American Civil War to serve free Blacks—employing an instrumental variables strategy exploiting the staggered rollout of bank branches. Families with accounts are more likely to have children in school, be literate, work, and have higher occupational income, business ownership and real estate wealth. Placebo effects are not present using planned but unbuilt branches, or for Whites, suggesting significant positive effects of financial inclusion.

Stein, L.C.D., Yannelis, C., 2020. Financial inclusion, human capital, and wealth accumulation: Evidence from the Freedman’s Savings Bank. Review of Financial Studies 33, 5333–5377.
Review of Financial Studies | PDF

Independent executive directors: How distraction affects their advisory and monitoring roles

Journal of Corporate Finance

Active corporate executives are a popular source of independent directors. Although their knowledge, expertise, and network can bring value to firms on whose boards they sit, independent executive directors may be more likely to be distracted than other directors due to their outside executive roles. Using newly constructed data linking independent directors to their employers, we identify periods when employers’ poor performance may distract them from board service. We find that firms with distracted independent executive directors have lower performance and value, higher CEO compensation, reduced CEO turnover-performance sensitivity, lower earnings quality, and lower M&A performance. These adverse effects are mainly driven by distracted directors who sit on relevant committees, and are stronger for small boards.

Stein, L.C.D., Zhao, H., 2019. Independent executive directors: How distraction affects their advisory and monitoring roles. Journal of Corporate Finance 56, 199–223.
Journal of Corporate Finance | PDF

The visible hand: Race and online market outcomes

Economic Journal

We examine the effect of race on market outcomes by selling iPods through local online classified advertisements throughout the US. Each advertisement features a photograph including a dark or light‐skinned hand, or one with a wrist tattoo. Black sellers receive fewer and lower offers than white sellers, and the correspondence with black sellers indicates lower levels of trust. Black sellers’ outcomes are particularly poor in thin markets (suggesting that discrimination may not ‘survive’ competition among buyers) and those with the most racial isolation and property crime (consistent with channels through which statistical discrimination might operate).

Doleac, J.L., Stein, L.C.D., 2013. The visible hand: Race and online market outcomes. Economic Journal 123, F469–F492.
Economic Journal | PDF

Working Papers

Measuring and mitigating racial disparities in LLMs: Evidence from a mortgage underwriting experiment

SSRN

We evaluate LLM responses to a mortgage underwriting task using real loan application data. Experimentally manipulated race is signaled explicitly or through borrower name/location proxies. Multiple generations of LLMs recommend more denials and higher interest rates for Black applicants than otherwise-identical white applicants, with larger disparities for riskier loans. Simple prompt engineering can cost-effectively mitigate these patterns. Race-blind recommendations correlate strongly with real lender decisions and predict delinquency, but LLMs incorporate racial signals when available despite similar delinquency rates across groups. Our findings show potential costs of adopting this new technology in financial settings and raise important questions for regulators.

Bowen, D.E., Price, S.M., Stein, L.C.D., Yang, K., 2024. Measuring and mitigating racial disparities in LLMs: Evidence from a mortgage underwriting experiment (Working Paper No. 4812158). SSRN.
SSRN | PDF

The gendered impacts of perceived skin tone: Evidence from African-American siblings in 1870–1940

National Bureau of Economic Research

We study differences in economic outcomes by perceived skin tone among African Americans using full-count U.S. decennial census data from the late-19th and early-20th centuries. Comparing children coded as “Black” or “Mulatto” by census enumerators and linking these children across population censuses, we first document large gaps in educational attainment and income among African Americans with darker and lighter perceived skin tones. To disentangle the drivers of these gaps, we identify all 36,329 families in which enumerators assigned same-gender siblings different Black/Mulatto classifications. Relative to sisters coded as Mulatto, sisters coded as Black had lower educational attainment, were less likely to marry, and had lower-earning, less-educated husbands. These patterns are consistent with more severe contemporaneous discrimination against African American women with darker perceived skin tones. In contrast, we find similar educational attainment, marital outcomes, and incomes among differently-classified brothers. Men perceived as African Americans of any skin tone faced similar contemporaneous discrimination, consistent with the “one-drop” racial classification rule that grouped together individuals with any known Black ancestry. Lower incomes for African American men perceived as having darker skin tone in the general population were driven by differences in opportunities and resources that varied across families, likely reflecting the impacts of historical or family-level discrimination.

Abramitzky, R., Conway, J., Mill, R., Stein, L.C.D., 2023. The gendered impacts of perceived skin tone: Evidence from African-American siblings in 1870–1940 (Working Paper No. 31016). NBER.
National Bureau of Economic Research | PDF

Tax-timing options and the demand for idiosyncratic volatility

SSRN

Investors have a choice over when to incur taxes on individual investments, and typically benefit from delaying the realization of capital gains while harvesting losses. This option implies that the effective tax rate on capital losses exceeds the one on capital gains, resulting in a convex after-tax payoff. Convexity creates a demand for idiosyncratic volatility (IVOL) within a well-diversified portfolio, and can therefore explain the puzzling negative relation between IVOL and expected stock returns. A simple model with tax-timing options predicts that the demand for idiosyncratic volatility increases with the tax rate, the nominal interest rate, and unrealized capital gains, and we show that all three measures predict the IVOL premium in the time-series. In the cross-section, we show that the magnitude of the IVOL premium increases with investors’ average tax exposure.

Boguth, O., Stein, L.C.D., 2017. Tax-timing options and the demand for idiosyncratic volatility (Working Paper No. 2945779). SSRN.
SSRN | PDF

Economic uncertainty and earnings management

HBS Accounting & Management

In the presence of managerial short-termism and asymmetric information about skill and effort provision, firms may opportunistically shift earnings from uncertain to more certain times. We document that firms report more negative discretionary accruals when financial markets are less certain about their future prospects. Stock-price responses to earnings surprises are moderated when firm-level uncertainty is high, consistent with performance being attributed more to luck rather than skill and effort, which can create incentives to shift earnings toward lower-uncertainty periods. We show that the resulting opportunistic earnings management is concentrated in CEOs, firms, and periods where such incentives are likely to be strongest: (1) where CEO wealth is sensitive to change in the share price, (2) where announced earnings are particularly likely to be an important source of information about managerial ability and effort, and (3) before implementation of Sarbanes-Oxley made opportunistic earnings management more challenging. Our evidence highlights a novel channel through which uncertainty affects managerial decision making in the presence of agency conflicts.

Stein, L.C.D., Wang, C.C.Y., 2016. Economic uncertainty and earnings management (Working Paper No. 16–103). Harvard Business School Accounting & Management Unit.
HBS Accounting & Management | PDF

The effect of uncertainty on investment, hiring, and R&D: Causal evidence from equity options

SSRN

There is wide debate over the impact of uncertainty on firm behavior, due to the difficulty both of measuring uncertainty and of identifying causality. This paper takes three steps that attempt to address these challenges. First, we develop an instrumental variables strategy that exploits firms’ differential exposure to energy and currency prices and volatility. For example, airlines are negatively affected by high oil prices while oil refiners benefit from them, but both are sensitive to oil price volatility; retailers, in comparison, are not particularly sensitive to either the level or volatility of oil prices. Second, we use the expected volatility of stock prices as implied by equity options to obtain forward-looking measures of uncertainty over firms’ business conditions. Finally, we examine how uncertainty affects a range of outcomes: capital investment, hiring, research and development, and advertising. We find that uncertainty depresses capital investment, hiring, and advertising, but encourages R&D spending. This perhaps-surprising result for R&D is consistent with a theoretical literature emphasizing that long investment lags create valuable real put options which offset the effects of call options lost when projects are started. Aggregating across our panel of Compustat firms, we find that rising uncertainty accounts for roughly a third of the fall in capital investment and hiring that occurred in 2008-10.

Stein, L.C.D., Stone, E., 2013. The effect of uncertainty on investment, hiring, and R&D: Causal evidence from equity options (Working Paper No. 1649108). SSRN.
SSRN | PDF

Luke C.D. Stein, Ph.D.

Research

Refereed Publications and Accepted Papers

Working Papers