Competition, Markups and Predictable Returns., with Howard Kung and Lukas Schmid.
Review of Financial Studies
Discount rates, debt maturity, and the fiscal theory, with Thilo Kind, Howard Kung, and Gonzalo Morales.
Journal of Finance
Markup Shocks and Asset Prices, with Jun E. Li, and Jincheng Tong.
EFA, Asian Finance Association, Kelley Junior Finance Conference, UT Dallas Fall Finance Conference, Santiago Finance Workshop, SFS Cavalcade Asia, AFA, MFA, Connecticut Finance Conference, HEC-McGill Finance Conference, WFA, UBC Summer Conference, SITE Conference.
We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household’s marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms that have larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.
Nominal Price Rigidities and Credit Risk, with Patrick Augustin, Linxiao Cong, and Michael Weber.
Credit Risk over the Business Cycle Conference, SFS Cavalcade North America, WFA, FSRC Macro Finance Conference.
We develop a capital structure model in which firms feature differential flexibility in adjusting output prices to shocks. Inflexible-price firms have lower profits and higher cash-flow volatility, leading in equilibrium to lower financial leverage, shorter debt duration, higher cost of debt, more stringent debt covenants, and higher precautionary cash holdings. Cash-flow volatility shocks increase the cost of debt more for inflexible-price firms. We confirm these predictions empirically: inflexible-price firms experience a significantly larger increase in credit spreads in response to monetary policy shocks and to the 2008 Lehman Brothers bankruptcy, especially when they face higher pre-shock rollover risk.
Inflation risk and the finance-growth nexus., with Jincheng Tong.
Revise & Resubmit, Review of Economic Studies
SFS Cavalcade, SED Conference, NFA, Credit Markets and the Macroeconomy Conference.
This paper shows that the effect of inflation on asset prices and real aggregates depends on the financial intermediation sector. When firms finance using nominal long-term debt issued by financial intermediaries, unexpected changes in inflation lead to a wealth transfer across sectors. Higher inflation decreases firms' real liabilities and default risk, which helps reduce debt overhang. However, it hurts intermediaries' balance sheet, leading to a contraction in credit. We show theoretically that the ultimate effect of inflation depends on the tightness of financing constraints in the intermediation sector. We find strong empirical evidence consistent with these results. We also show that an inflation policy responding to both financial and real variables can help stabilize our economy.
Firm Product Concentration and Asset Prices., with Nuno Clara, and Howard Kung.
AFA Conference, NFA.
Average product concentration within firms has been declining since the mid-2000s. We find that lower product concentration is associated with lower productivity, expected returns, and idiosyncratic volatility across firms. These empirical relations are explained in a general equilibrium model of multiproduct firms with endogenous firm boundaries. Parameters governing the flexible production technology are identified using the GIV approach of Gabaix and Koijen (2020) by exploiting fat tails in the distribution of product mix. Overall, this paper highlights the importance of firm boundaries for explaining asset prices and firm dynamics.
Q: Risks, Rents, or Growth?, with Howard Kung and Lukas Schmid.
Revise & Resubmit, Journal of Financial Economics
ITAM Finance conference, Mitsui Finance Symposium, EFA, Tepper/LAEF Macro-Finance Conference, AFA, Finance Down Under Conference, ANU Asset Pricing Conference, SFS Cavalcade, NBER Summer Institute.
The dramatic stock market crash of March 2020 was preceded by a prolonged rise in Tobin's Q and a productivity slowdown. Do longer stock market booms and sharper corrections reflect structural changes in the US economy? We address this question about Q by estimating an endogenous growth model featuring realistic risk premia and markups. Our baseline estimates highlight the importance of rising market power for explaining increasing valuation ratios despite declining growth prospects with weakening investment and innovation over the past decade. High industry concentration exacerbates economic downturns and stock market corrections triggered by adverse economic shocks. We provide novel forecasts about growth expectations based on current market valuations using our structural model.
Industry competition, credit spreads, and levered equity returns.
Revise & Resubmit, Review of Financial Studies
Risk Management Conference, WFA, Fixed Income and Financial Institutions Conference, SFS Cavalcade, Young Scholars Finance Consortium, Econometric Society North-America, CICF, European Economic Association - European Econometric Society, NUS Annual Risk Management Conference.
This paper examines the relation between industry competition, credit spreads, and levered equity returns. I build a quantitative model where firms make investment, financing, and default decisions subject to aggregate and idiosyncratic risk. Firms operate in heterogeneous industries that differ by the intensity of product market competition. Higher competition reduces profit opportunities and increases default risk for debtholders. Equityholders are protected against default risk due to the option value arising from limited liability. In equilibrium, competitive industries are characterized by higher credit spreads, but lower expected equity returns. I find strong empirical support for these predictions across concentration terciles.