Publications
Publications:
"Bonds vs. Equities: Information for Investment" with Huifeng Chang and Adrien d'Avernas. Accepted, Journal of Finance.
Anderson Review non-technical summary
We provide robust empirical evidence that uncovers the reason for the observed closer relationship between the bond market versus the equity market and the macroeoconomy. Our results indicate that the tight bond market-macroeconomy link is not due to dierences in the investor base, but instead to the unique transformations of asset volatility and leverage that credit spreads and equity volatility represent. We focus on the investment channel. Using firm-level data, we find that the sensitivity of investment to equity volatility is highly signicant, but changes sign in the cross section of rms depending on their distance to default. This sign change confounds aggregate inference. We rationalize these findings using a simple structural model of credit risk and investment with debt overhang.
"The Economics of Intangibles" with Nicolas Crouzet, Janice Eberly, and Dimitris Papanikolaou
(Journal of Economic Perspectives, Summer 2022 Volume 36, No. 3, pages 29-52.)
SFS Cavalcade Keynote "Intangible Capital" and Voice Recording.
We define intangibles starting with two fundamental properties, a need for storage and non-rivalry. We show how these primitive features distinguish intangible from tangible capital, and how they can be used to understand the role of intangible assets in driving trends in the macroeconomy and in financial markets.
"Human Capitalists" with Antonio Falato and Mindy Xiaolan (2022 NBER Macro Annual, Forthcoming Chapter 1)
Published Comment - Giovanni L. Violante
Published Comment - Eric Zwick
NBER Macro Annual Published General Discussion
Featured on Marginal Revolution, Bloomberg, and the Financial Post
Anderson Review non-technical summary
The widespread and growing use of equity-based compensation has transformed high-skilled labor from a pure labor input to a class of "human capitalists." High-skilled labor earns substantial income in the form of equity claims to firms' future dividends and capital gains. Equity-based compensation has increased substantially since the 1980s, representing 36 percent of total compensation to high-skilled labor in US manufacturing in recent years. Ignoring equity income causes incorrect measurement of the returns to high-skilled labor, with substantial effects on macroeconomic trends. In manufacturing, the inclusion of equity-based compensation almost eliminates the decline in the high-skilled labor share, and reduces the total decline in the labor share by about one-third. Only by including equity pay does our structural estimation support complementarity between high-skilled labor and physical capital greater than that of Cobb and Douglas (1928). We also provide additional regression evidence of such complementarity.
"Complex Asset Markets" with Hanno Lustig and Lei Zhang. (Journal of Finance, Forthcoming)
Video Presentation, Executive Summary and Video Interview at NBER. Journalist summary at Anderson Review. Related NBER Discussion.
Complex assets appear to have high average returns and high Sharpe ratios. However, despite these attractive attributes, participation in complex assets markets is very limited. We argue that this is because investing in complex assets requires a model, and investors' individual models expose them to investor-specific risk. Investors with higher expertise have better models, and thus face lower risk. We construct a dynamic economy in which the joint distribution of wealth and expertise determines aggregate risk bearing capacity in the long-run equilibrium. In this equilibrium, more complex asset markets, i.e. those which are more difficult to model, have lower participation rates, despite having higher market-level Sharpe ratios, provided that asset complexity and expertise are complementary. In this case, higher expert demand reduces equilibrium required returns, depressing overall participation. Thus, our theory explains why complex assets can have ``permanent alpha'', despite free entry.
"Intangible Value" with Edward Kim and Dimitris Papanikolaou. (Critical Finance Review 2022. Volume 11: No. 2 pp. 299-332.)
Featured in Barrons, Anderson Review, Vox EU, Bank of America Securities Scientific Insights January 2021, NBER Home Page Fall 2020.
Future Proof Video on YouTube (Intangible Value discussed starting around minute 10)
Intangible assets are absent from traditional measures of value, despite their very large (and growing) importance in firms' capital stocks. As a result, the fundamental anchor for value that uses book assets is mismeasured. We propose a simple improvement to the classic value factor (HMLFF) proposed by Fama and French (1992, 1993). Our intangible value factor, HMLINT, prices assets as well as or better than the traditional value factor but yields substantially higher returns. This outperformance holds over the entire sample, as well as in more recent decades in which value has underperformed. We show that this is likely due to the intangible value factor sorting more effectively on productivity, profitability, financial soundness, and on other valuation ratios such as price to earnings or price to sales.
"OTC Intermediaries" with Bernard Herskovic, Sriram Rajan and Emil Siriwardane. (Review of Financial Studies, Forthcoming)
OTC Intermediaries in the Search and Matching in Macro and Finance Workshop Fall 2020
We provide quantitative estimates of the systemic effects of exit by a key over-the-counter (OTC) intermediary. In our model, risk-averse traders are connected by a core-periphery network. We show that if traders are also averse to concentrated bilateral exposures -- an assumption that we show is supported empirically -- then the incompleteness of the network prevents market participants from fully sharing risks. We quantify the impact of the network structure on prices using the closed-form solution to our model along with proprietary data on all credit default swap (CDS) transactions in the U.S. from 2010-2013. Akin to a stress test, we study how the removal of a single institution affects market outcomes. By our estimates, there are a small number of key OTC intermediaries whose exit can move markets dramatically. Eliminating such a dealer from our calibrated model leads to an increase in credit spreads of over 20%.
"Total Returns to Single Family Rentals" with Andrew Demers. (Real Estate Economics, Spring 2022) (Lead Article).
Data and Code thanks to Wenjing He (Anderson PhD student) for help with the replication code.
Edwin Mills Best Paper Award 2022
Featured in CityLab and USA Today. Journalist summary at Anderson Review.
We develop the stylized facts describing the returns to Single Family Rental assets, including both dividends from rental yields and capital gains from house price appreciation. Our study is over a long time period, and includes a broad and granular cross section, down to the house level in recent years.
"The Cross Section of MBS Returns" with Peter Diep and Scott Richardson (Journal of Finance, September 2021) (Lead Article).
We present a simple, linear asset pricing model of the cross section of Mortgage-Backed Security (MBS) returns. We measure prepayment risk and estimate security risk loadings using real data on prepayment forecasts vs. realizations. Prepayment risks appear to be priced by specialized MBS investors. In particular, we find convincing evidence that prepayment risk prices change sign over time with the sign of the a representative MBS investor's exposure to prepayment risk.
"Government Guarantees and the Valuation of American Banks" with Andrew Atkeson, Adrien d'Avernas, and Pierre-Olivier Weill (NBER Macroeconomics Annual, 2018)
Banks’ ratio of market equity to book equity was close to one until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to one after the 2008 financial crisis. We decompose this variation into two components, franchise value and the value of government guarantees or subsidies. We use a structural valuation framework and bank accounting and capital market data to execute our decomposition.
"Capital Reallocation" with Yu Shi (Annual Review of Financial Economics, 2018) Online Appendix Link to data and code. See also Capital Reallocation and Liquidity (2006 JME) Website.
We update and summarize the stylized facts on Capital Reallocation, and provide a comprehensive literature review with suggested directions for future research. We analyze the effect of reallocation costs and financial frictions on equilibrium prices and quantities in a simple model. Finally, we provide a link between measures of capital reallocation and measures of misallocation and productivity gains.
"Comment on The Rise of Global Corporate Saving, by Peter Chen, Loukas Karabarbounis, and Brent Neiman" SAS Code US Corporate Flows Data
Journal of Monetary Economics, Volume 89, August 2017 pages 20-24.
I discuss the link between corporate finance theory and macroeconomic measurement aimed at improving the use of corporate financial data in macroeconomics. Different concepts of corporate savings are defined, measured, and discussed.
"Measuring the Financial Soundness of US Firms 1926-2012" (with Andrew Atkeson and Pierre-Olivier Weill)
Research in Economics, Volume 71, September 2017 pages 613-635.
We develop a simple, transparent, and robust method, "Distance to Insolvency", for measuring the financial soundness of individual firms using data on their equity volatility, building on the Merton (1974) and Leland (1994) structural models of credit risk. We define Distance to Insolvency as the percentage drop in asset value that renders the firm insolvent, measured in units of the firm’s asset standard deviation. We define insolvency crises as times in which the median firm has a distance to insolvency below one.
Insolvency Crises 1929-2012: Median Distance below 1.
"Aggregate External Financing and Savings Waves" (with Tyler Muir) Eisfeldt Muir Cost of External Finance Data Online Appendix
Journal of Monetary Economics, Volume 84, December 2016 pages 116-133.
We use a structural model, along with information in the cross-section regarding firms' uses of the funds they raise, in order to construct a time series measure of the aggregate cost of external finance for US firms.
Estimated Average Cost of External Finance: US Firms 1980-2010
"Entry and exit in OTC Derivatives Markets" (with Andrew Atkeson and Pierre-Olivier Weill)
Econometrica, November 2015, 2231-2292.
We develop a new framework to address the positive and normative issues surrounding OTC derivatives markets, focusing on entry and exit incentives. We address market resiliency following shocks. See also our policy commentary on Voxeu.org. Working Paper The Market for OTC Derivatives contains stylized facts and positive results.
"The Value and Ownership of Intangible Capital" (with Dimitris Papanikolaou.)
American Economic Review, Papers and Proceedings, May 2014, 189-194.
We use a simple model of the sharing rule between key labor inputs and capital owners, along with accounting data, to measure the fraction of the US capital stock which is owned by key labor and thus missing from book and market values.
Eisfeldt Papanikolaou Aggregate and Industry Organization Capital Data
“Organization Capital and the Cross-Section of Expected Returns” (with Dimitris Papanikolaou.)
Amundi Smith Breeden First Place Paper Award 2013.
Journal of Finance, August 2013, 1365-1406.
The supplementary appendix contains further details.
The UCLA Anderson Blog provides a general audience summary.
We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from the shareholders' perspective. We find that firms with more organization capital have risk adjusted returns that are 4.7% higher than firms with less organization capital.
“CEO Turnover in a Competitive Assignment Framework” (with Camelia Kuhnen)
Journal of Financial Economics, August 2013, 351-372.
We show that both absolute and relative performance driven turnover can be natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics which are either general or firm-specific, and provide unique empirical support for our model.
Eisfeldt Kuhnen CEO Turnover Data: Tab Delimited Text
“Leasing, Ability to Repossess, and Debt Capacity.” (with Adriano Rampini.)
Review of Financial Studies, April 2009, 1621-1657.
We show theoretically why financially constrained firms lease vs. buy, and provide supporting empirical evidence for the key predictions of our model using census data.
“Managerial Incentives, Capital Reallocation, and the Business Cycle.” (with Adriano Rampini.)
Jensen Prize 2008, second place.
Journal of Financial Economics, January 2008, 177-199.
We develop an analytical characterization of the effect of agency costs on capital reallocation and aggregate productivity to show that the agency problem between owners and managers makes bad times worse because capital is less productively deployed. We quantitatively measure the impact of misallocation in the cross section on aggregate productivity.
“New or Used? Investment with Credit Constraints.” (with Adriano Rampini.)
Journal of Monetary Economics, November 2007, 2656-2681.
We argue that the timing of investment cash outflows makes used capital attractive to financially constrained firms, since constrained firms discount future maintenance outflows more heavily. Using census data, we provide empirical support for our model's main predictions.
“Smoothing with Liquid and Illiquid Assets.”
Journal of Monetary Economics, September 2007, 1572-1586.
Explains that the low demand for liquid assets by consumer-savers is due to that fact that, with standard preferences, the auto-correlation of savings is an order of magnitude larger than that of income. Thus, under any reasonable calibration of standard consumption-savings models, consumers' savings are much to smooth to induce substantial liquidity demand.
“Capital Reallocation and Liquidity.” (with Adriano Rampini.)
Journal of Monetary Economics, April 2006, 369-399. (Lead Article).
See updated time series, and a link to Eisfeldt Rampini Capital Reallocation Data, below. For a review of recent research and future research directions, see Capital Reallocation, with Yu Shi.
Documents the fact that the amount of capital reallocation between firms is procyclical, whereas measures of productivity dispersion are countercyclical. Uses a quantitative dynamic model to infer the aggregate dynamics for capital liquidity that reconciles these facts, and argue that capital is less liquid in recessions.
“Endogenous Liquidity in Asset Markets.”
Smith Breeden Distinguished Paper Award.
Journal of Finance, February 2004, 59 1-30. (Lead Article).
Reprinted in “Liquidity and Crises,” edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell (Oxford University Press, 2011)
The working paper contains additional comparative statics and details.
Explores the link between macroeconomic fundamentals and asset market liquidity driven by adverse selection, and demonstrates the magnifying effects of liquidity on investment and volume. Emphasizes the link between risk taking and market liquidity. Explains why exogenous negative shocks alleviate adverse selection, but endogenous shocks from investor risk taking leads to procyclical asset market liquidity.
