Research

This paper proposes a new mechanism - the Deposit Channel - by which local economic shocks propagate to other regions through multi-market banks. Using China import competition as a local economic shock, I find that there is a significant decline in deposit growth in affected counties. Banks with a significant presence in affected counties - exposed banks - show a reduction in the growth rates of deposits, assets, and loans as well as an increase in their cost of deposit funding. Exposed banks decrease their portfolio loan origination rates by 5%, decrease the share of hard-to-securitize mortgages, and increase their loan denial rates, even in unaffected counties. They bid up the deposit rates in affected counties while keeping them unchanged in unaffected ones. In contrast, asset-side transmission using the share of loans in affected counties as exposure measure does not have any significant impact on bank-level outcomes.

Using cross-sectional heterogeneity in bank's exposure to large-scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, this paper finds that unconventional monetary policy shocks affect long-term deposit rates in the economy. Using a difference-in-differences identification strategy, this paper finds strong effects of the first round of quantitative easing (QE1) on the long-maturity (one to five year) certificate of deposit rates. Highly affected commercial banks decrease their CD rates by 30 to 75 basis points relative to their counterparts. Later rounds of QE (QE2 and QE3) does not seem to have a significant impact. Overall, the evidence is in support of the Reserve-induced balance-sheet channel of unconventional monetary policy transmission, as opposed to the other deposit demand-side factors. The paper highlights an important channel by which reserves affect deposit prices and has implications for monetary policymaking.

This paper uses an unbanked industry to study the impact of government certification on financial access and growth. Marijuana is considered illegal by the Federal law resulting in high financial access costs. I exploit a unique experiment by Washington State that significantly lowered such costs. The enforcement visits by the cannabis board officials to marijuana firms provided certification services resulting in a 19\% increase in the probability of banking access, and 85\% increase in total marijuana sales. The paper highlight the economic value of government certification and finance in the formalization of a shadow industry.

Programs to direct finance to small firms are ubiquitous. We study their real-side effects for target firms, exploiting the discontinuities in eligibility in such a program in India. We show that small firm lending programs can slow real growth. Several robustness, placebo, heterogeneity, and external validation tests as well as extensive margin tests are consistent with such distortionary effects. These findings collectively show that financial constraints matter: they shape how firms form and grow. Firms give up growth for better financing access but in doing so, they distort their growth trajectories by remaining small for longer periods of time.

We examine the relation between creditor rights and relationship banking by exploiting natural variation in creditor rights induced by changes in law. In 2002, a change in bankruptcy law in India significantly increased creditor rights by letting lenders repossess collateral and auction it without court intervention. We argue that the increase in creditor rights reduces the value of soft information gathered by relationship banks, leading firms and banks to shift away from relationship banking. We find empirical evidence consistent with this view. Relationship lending declines after the increase in creditor rights. This shift is more pronounced for banks that may have greater informational advantage, small firms and those not belonging to established business groups, and in geographic areas with low bank competition.

This article uses changes in eligibility for a targeted lending program to study the impact of financial frictions on resource misallocation. Following a policy reform in 2007, certain firms in manufacturing industries became eligible for the directed lending program in India. I first use the policy shock to estimate whether firms are credit constrained. I find that firms which became eligible for the directed credit increase their investments in physical capital (plant, machinery, and computer equipment), increase their inventories, short-term debt, and labor productivity after the policy shock as compared to control firms. At the industry level, the industries that have high exposure to this policy shock exhibit improvement in resource allocation measures. The correlation between productivity (TFPR, TFPQ) and capital share, and productivity (TFPR, TFPQ) and output share, increases significantly, while the measures of revenue productivity dispersion decrease after the policy change as compared to the control industries. This result is robust across multiple measures of productivity estimation (proxy variable, control function approach, cost share method) and industry granularity (4-digit and 2-digit).

We test whether certain active mutual funds are informed, in the sense of Fama and French (2007), about the stocks that they trade mostly with investors outside the active fund industry, which we refer to as outsiders. We first propose a measure of outside trading, that is the degree to which stocks are traded between active funds and outsiders rather than just among active funds. We show that the stocks that are traded mostly between active funds and outsiders, rather than just among themselves, exhibit predictable future performance. Specifically, the stocks that are sold by active funds to outsiders tend to have subsequently low returns and the stocks that are purchased by active funds from outsiders tend to have subsequently high returns, even after controlling for risk. This indicates that active funds that participate in these trades are, on average, informed about the subset of stocks that are traded mostly between active funds and outsiders. Finally, we show that fund returns, after controlling for risk, tend to be positively associated with our fund-level measure of trading with outsiders.