Dan Luo
I received my Ph.D. in Finance from Stanford Graduate School of Business in June 2022. Before joining CUHK Business School as an Assistant Professor of Finance in July 2023, I worked at the University of Chicago Booth School of Business as a postdoc researcher.
Email: danluo@cuhk.edu.hk
Publications
with Liang Dai and Ming Yang
Review of Financial Studies, 2024
We find that disclosing bank-specific information reallocates systemic risk, but whether it mitigates systemic bank runs depends on the nature of information disclosed. Disclosure reveals banks’ resilience to adverse shocks, and shifts systemic risk from weak to strong banks. Yet, only disclosure of banks’ exposure to systemic risk can mitigate systemic bank runs because it shifts systemic risk from more vulnerable banks to those less vulnerable. Disclosure of banks’ idiosyncratic shortfalls of funds does not differentiate such exposure, rendering the resulting reallocation of systemic risk ineffective in mitigating systemic runs.
Working Papers
Revise and resubmit at Journal of Finance
Loyalty programs (LPs) are widely prevalent and typically analyzed in economic research for their role in boosting income. This paper uncovers a novel role of LPs as financing instruments. The rewards issued to and redeemed by consumers cause shifts in firms’ present and future cash flows, effectively creating a form of borrowing from consumers. We document three stylized facts about LPs in the airline and hotel industries: 1) LPs serve as significant financing sources, with co-branded credit card programs contributing a large portion; 2) rewards are issued through broad consumption but are redeemed predominantly for consumption related to the issuing firm; 3) LPs generate countercyclical cash flows. We then build a dynamic model of LPs as financing instruments. The model features convenient rewards, which consumers can freely redeem. As a result, the funds raised through LPs emerge endogenously in equilibrium as a result of the interplay between reward issuance and redemption. The model suggests that 1) firms supplying high-value, low-frequency services can leverage LPs more effectively for financing; 2) LP financing has special cyclical natures that are attractive to highly cyclical firms; 3) firms should aim to decouple reward issuance from their business; 4) firms should limit consumers’ discretion to purchase or transfer rewards.
with Ming Yang
Reject and resubmit at American Economic Review
Charles River Associates Award For the Best Paper on Corporate Finance at WFA 2023
We study multi-agent security design in the presence of coordination frictions. A principal intends to develop a project whose value increases with an unknown state and the level of agents’ participation. To motivate the participation of ex ante homogeneous agents, the principal offers them multiple monotone securities backed by the project value. More participation results in a higher project value and thus higher security payment to participating agents, making participation decisions strategic complements. Miscoordination arises because agents cannot precisely infer others’ decisions from noisy signals about the state. We identify two objects in security design—"payoff sensitivity" and "perception of participation"—that determine the impact of miscoordination. To mitigate the adverse impact of miscoordination, the two objects should be matched assortatively over agents. This mechanism implies a multi-tranche security structure in which senior-tranche holders are more robust to potential miscoordination and participate more aggressively, helping alleviate the junior-tranche holders’ fear of miscoordination. We find that the principal’s ability to differentiate agents in security format is crucial to whether differentiation is desirable.
with Michael Weber, Zhishu Yang, and Jacky Qi Zhang
Best Research Paper Award in Finance at RSFE 2023
This paper studies the reallocation of funds through wholesale funding markets and its effects on credit supply. The negotiable certificate of deposit (NCD) market plays a primary role in the reallocation of funds following monetary policy interventions. State banks are conservative in their lending, which prevents full reallocation of funds when they lend on the NCD market, but not when they borrow. Following a shift in state banks’ positions on the NCD market from lending to borrowing, nonstate banks’ lending relative to state banks’ lending increased, and firms borrowed more loans from nonstate banks.
Much of corporate managers’ incentive is related to the stock price, so a firm can design the corporate information environment to tackle its manager’s moral hazard problem. We analyze a model in which the manager needs to exert costly effort to start a risky, long-term project and the project gives the manager opportunities to make credible disclosure. The optimal disclosure to motivate effort is the manager’s strategic disclosure because it protects the manager from the downside of the project and induces the rational stock market to punish nondisclosure. A more transparent information regime is not always preferred, because it may reduce the manager’s discretion on disclosure. We also derive the optimal disclosure when both the effort and the project choice are considered.
with Jennifer (Jie) Li, Neil D. Pearson, and Qi Zhang
We exploit demand shocks created as investor funds are frozen and unfrozen during Chinese IPOs to estimate their impact on the aggregate Chinese stock market. Using brokerage account records, we observe the selling and buying as investors raise cash to subscribe for IPOs and then reinvest the funds that supported unsuccessful subscriptions. These shocks are predictable, and convey no information to the market. Using an instrumental variables estimator, we find that flows have large price impacts, with a 10 bps demand shock increasing the aggregate market level by approximately 40 bps. Such large impacts are inconsistent with many models.
A Dynamic Delegated-investment Model of SPACs
with Jian Sun
We study SPACs in a finite-horizon continuous-time delegated investment model. Due to the misalignment in incentives, the sponsor has an increasing incentive to propose unprofitable deals to the investor as the SPAC approaches its deadline. As a response, the investor redeems shares more aggressively over time. The investor's current redemption reduces the sponsor's expected payoff from proposing unprofitable deals, but future redemption reduces his expected payoff from waiting. We discuss the welfare implications of SPAC designs related to investors' redemption: 1) prohibiting the investor from redeeming shares in late periods can be a Pareto improvement; 2) coupling the investor's deal rejection with redemption benefits the sponsor; 3) the participation of investors with behavioral biases can be a Pareto improvement.
Journal of Finance, 2025
The Finance Theory Group (FTG) 2022 “best paper in finance theory on the job market” prize
The Brattle Group Ph.D. Candidate Awards For Outstanding Research at WFA 2022
An entrepreneur makes offers to multiple investors to fund a project that requires a minimum investment. Concerned about other investors’ decisions, each investor strategically communicates the information about the project’s quality to others. When investors have conflicts of interest, those with contractually stronger incentives to invest attempt to persuade others to invest, which induces a cascade likewise causing more investors to invest and persuade. Depending on the project’s ex ante quality, the entrepreneur may promise investors different returns to create conflicts of interest and induce persuasion, or may promise investors an identical return to align their interests and induce truthful communication. The paper illustrates a new motivation for syndication and hierarchy within a syndicate.