"Pandemic Tail Risk" (with M. Breugem, R. Marfè, L. Schoenleber)

Abstract: This paper studies the measurement of forward-looking tail risk in US equity markets around the COVID-19 outbreak. We document that financial markets are informative about how pandemic risk has spread in the economy in advance of the actual outbreak. While the tail risk of the market index did not respond before the outbreak, investors identified less pandemic-resilient economic sectors whose tail risk boomed in advance of both the market drawdown and the implementation of social distancing provisions. This pattern is consistent across different methodologies for measuring forward-looking tail risk, using option contracts, and across various horizons.

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"Default Risk Premium and Asset Prices" (with G. Fusai)

Abstract: We estimate a standard structural model of credit risk to draw insights about the premium demanded by investors for bearing default risk, using data on credit default swaps and market capitalization. We pin down the daily market value of assets for a set of non-financial firms and uncover cross-sectional heterogeneity in terms of the magnitude and time variation of the premium. By exploring the link between asset and default risk premia, we show that this heterogeneity closely depends on the relationship between the firm-specific market value of the assets and the business cycle.

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"Dynamic Ownership and Private Benefits" (with M. Breugem)

Abstract: We quantify private benefits of control by estimating a structural model of optimal shareholding using data on the ownership dynamics of Italian public companies. In the model, shareholders must maintain a minimum stake in the company to extract control benefits, which leads to infrequent trading of large blocks, and which is consistent with the empirical evidence. We estimate that control benefits account for 2% (4%) of the market value of the equity (block), and controlling shareholders earn a sizeable premium from the block holding on top of the market value of the shares. Also, we provide evidence that large block ownership and ownership persistence are associated with higher stock returns.

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"The Relative Pricing of Sovereign Credit Risk After the Eurozone Crisis" (with F. Ruggiero)

Abstract: We investigate whether riskier European countries compensate their debtholders properly by paying sufficiently higher bond yields than those of safer European countries, during and after the sovereign debt crisis of 2010-2012. Using the relative pricing between credit default swap (CDS) spreads and bond yields, we show that an inconsistent cross-sectional relationship between sovereign default risk and sovereign bond yields emerges during the crisis period for all European countries. However, after the announcement of the Outright Monetary Transaction (OMT) program by the European Central Bank, the consistent cross-sectional relationship between default risk and bond yields is restored for the Eurozone countries only, a result likely due to a reduction in transaction costs.

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"Hedging Permanent Income Shocks" (with F. Bagliano, C. Fugazza, G. Nicodano)

Abstract: The exposure of earnings to an aggregate shock implies co-movements across individuals’ income shocks. We model such co-movements to estimate the individual correlations between permanent earnings shocks and a latent aggregate shock. We similarly estimate their correlations with stock market returns. These correlation estimates retain statistical significance in predicting both portfolio choice and participation when other measures do not. They explain participation both out-of-sample and for the same individual over time. Results, based on both Dutch and US data, support the theoretical prediction that individuals rely on asset markets to help hedge their earnings’ shocks.

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"Market Leverage and Financial Soundness" (with F. Maglione and D. Palazzo)

Abstract: The market value of leverage is generally lower than the corresponding book leverage, displays pronounced time variation, and spikes during periods of financial market turmoil. More importantly, and contrary to book leverage, market leverage fluctuations exhibit a declining time trend following the Global Financial Crisis. These results owe to an estimation methodology that jointly uses timely information from equity and credit markets to generate a high frequency estimate of firm-level market leverage. Using our methodology, we develop a novel measure of financial soundness for the U.S. non-financial corporate sector that we use to track economic crises in real time.

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"Control Motivations and Firm Growth" (with A. Ellul, A. Piccolo, S. Sacchetto)

Abstract: This paper investigates how the control motivations of large shareholders affect firm growth through their influence on financing decisions. We use family blockholding as our laboratory since these blockholders have strong preferences to keep a tight grip on firm control. Using data on a large panel of European private firms, we estimate a structural model of firm control, financing decisions, and managerial effort in a setting with corporate taxation, costly bankruptcy, adverse selection, and agency issues to explain why firms with a control-motivated blockholder grow less compared to firms without such type of shareholders. The structural model allows us to disentangle control motivations from other frictions of importance. Our estimates indicate that family blockholders' reluctance to issue equity and dilute control explains 66% of the growth differential between firms with control-motivated blockholders and those without in our sample.

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“The education premium in returns to wealth” (with E. Castagno and F. Ruggiero)

Abstract: Using individual-level data from the Survey on Household Income and Wealth (SHIW), we estimate the extra-returns to wealth earned by highly educated individuals (education premium). Importantly, we quantify the fraction of the premium attributable to financial investment decisions, such as stock market participation and asset allocation. We find that college-graduated individuals earn annual returns to wealth that are 3.7% higher than those of their non-college-graduated peers, and we find that 19% of the extra-returns (0.7%) is due to the higher propensity to invest in the stock market. We show that this effect is particularly sizeable for college-graduated individuals with a major in Economics. Furthermore, we find that a university degree delivers 0.4% extra-returns to wealth as a result of the larger risky share of financial wealth held by college-graduated individuals. Finally, to rationalize our empirical results, we explore two economic mechanisms, namely portfolio diversification and participation persistence over time, both of which indicate a significant beneficial effect of education on returns to wealth.

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"Skills, Education and Wealth Inequality" (with E. Castagno and F. Ruggiero)

Abstract: We study the link between individual skills, education, and wealth inequality through the channel of financial investment decisions, both empirically and theoretically. We provide empirical evidence using individual-level data from the Dutch Household Survey (DHS). We document a positive and sizeable effect of education on both the level and returns to wealth due to the impact of education on stock market participation, after controlling for unobserved, individual ability. Next, we present a simple model of individuals with heterogeneous ability in evaluating investment opportunities and a welfare-maximizing policymaker who subsidizes education using taxes on capital income. The key model insight reveals that education improves individuals’ evaluation skills and prevents otherwise unskilled investors from making detrimental investment decisions, thus closing the gap between the top and bottom tails of wealth distribution. Our results suggest that policymakers can exploit the role of education to alleviate wealth inequality by promoting the stock market participation of unskilled individuals.

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"Indebted Bidder Merges with Indebted Target" (with T. Dimopulos and S. Sacchetto)

Abstract: We investigate two important questions about corporate mergers and acquisitions. First, we provide new evidence on the empirical question “who buys whom?”, by showing that acquiring firms tend to target companies with similar features in terms of profitability, market valuation, and capital structure. Second, we show that the acquisition may produce heterogeneous impact on the risk profile of the acquiring company.  The acquisition, in fact, may either improve risk diversification or jeopardize the financial and economic conditions of the buyer. We plan to strength our results and provide additional economic implications by using a structural approach, estimating a dynamic model of optimal corporate investment and financing policy. 

Updated draft coming soon!