Faculty Sites

Luke Stein, Ph.D.

Assistant Professor of Finance

Finance Division
Babson College
224 Tomasso Hall
231 Forest Street
Babson Park, MA 02457

781-239-5060
lcdstein@babson.edu
http://lukestein.com

photo of luke stein

Refereed Publications

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

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.

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

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.

The “visible hand”: Race and online market outcomes

We examine the effect of race on market outcomes by selling iPods through local online classified advertisements throughout the United States. 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).

Working papers

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

Revision requested, The Journal of Financial Economics

This paper examines the effects of a shock to angel finance on entrepreneurial activity and employment. 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 firm entry and employment at small entrants, particularly in areas with alternate sources of financing. Employment increases at small and young incumbents, and relative wages for the startup sector decline, especially for high-skilled workers and industries. These results suggest that angels are an important source of entrepreneurial finance to high-quality, competitive firms.

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

with Ran AbramitzkyJacob Conway, and Roy Mill

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.

(This paper subsumes portions of (and supersedes) an earlier working paper coauthored with Roy Mill)

Economic uncertainty and earnings 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 empirically that when financial markets are less certain about a firm’s future value, the firm reports more negative discretionary accruals. 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 document 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.

Tax-timing options and the demand for idiosyncratic volatility

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.

The effect of uncertainty on investment: Evidence from equity options

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.

Teaching

Recipient of Deans’ Award for Excellence in Graduate Teaching (Babson College’s annual award to one faculty member for ‘‘excellence and innovative practices in teaching’’)

Recipient of 2022 Thomas Kennedy Award for Teaching Excellence (Babson College’s annual “Graduate Faculty of the Year” awarded annually by graduating class to one faculty member “who personifies teaching excellence at the graduate level and whose personal standards of quality and caring extend beyond the classroom”)

Recipient of 2019 Huizingh Outstanding Undergraduate Teacher Award (ASU W.P. Carey School of Business’ annual award to an instructor “dedicated to inspiring students through excellence in teaching and mentoring”)

Recipient of 2011–12 Gores Award (Stanford University’s “highest award for excellence in teaching”)

Instructor, Babson College

Instructor, Arizona State University

  • Managerial Finance (Finance 302)

  • Identification Strategies in Corporate Finance (Finance 791)

Instructor, Stanford University

  • Intermediate Microeconomics (Economics 50)

  • Microeconomic Theory for Non-Economics Ph.D. Students (Economics 202N) [slides]

  • Online High School Microeconomics (EPGY OHS Economics 20)

Teaching Assistant, Stanford University

  • Introduction to Financial Economics (Economics 140)

  • First-Year Ph.D. Macroeconomics (Economics 210) [notes]

  • Managerial Economics for MBAs (GSB Management Economics 200)

  • Economics for Sloan Fellows (GSB Management Economics 209)

  • Emergency Medical Technician Training (Surgery 111a/211a)

Advising

Graduate

  • Anthony Rice (Ph.D. 2021), Chinese University of Hong Kong

  • Sean Flynn (Ph.D. 2017), Cornell University via. Colorado State University

  • Hong Zhao (Ph.D. 2017), NEOMA Business School

  • Yung-Ling Chi (Ph.D. 2016), National Chung Hsing University

  • Qi Dong (Ph.D. 2015), King Fahd University of Petroleum and Minerals

Undergraduate