Research Papers


1. The Economics of Solicited and Unsolicited Credit Ratings, (with Paolo Fulghieri and Gunter Strobl)
Review of Financial Studies, 2014 27 (2).

Conferences: WFA 2011, AFA 2012, EFA 2011, New York Fed/NUY Conference 2011, Texas Finance Festival 2011, UBC Winter Finance Conference 2011, WashU Corporate Finance Conference 2011

2. Can Investor-Paid Credit Rating Agencies Improve the Information Quality of Issuer-Paid Raters? Journal of Financial Economics, 2014 111 (2).  [Internet Appendix]

Conferences: WFA 2012, FIRS 2012, CICF 2012

3. Do Lenders Still Monitor When They Can Securitize Loans?, (with Yihui Wang)   Review of Financial Studies, 2014 27 (8).  [Internet Appendix]

Conferences: FIRS 2012, CICF 2012

4. Revolving Doors on Wall Street, (with Jess Cornaggia and Kimberly Cornaggia), Journal of Financial Economics, forthcoming. [Internet Appendix]

Conferences: CFEA 2014, Erasmus Credit Rating Conference 2014, WFA 2013, NBER Summer Workshop 2013, EFA 2013, SFS Cavalcade 2013, FIRS 2013, CICF 2013, UNC Round Table 2013

Media: Bloomberg News (February 24, 2015 )

Working Papers:

5. Locations, Proximity, and M&A Transactions (with Ye Cai and Xuan Tian),Conditionally Accepted, Journal of Economics and Management Strategy

We examine how a firms’ geographic location affects acquisition decisions and values created in takeover transactions. We analyze both the individual and interaction effects of three dimensions of firms’ locations: (1) the proximity between an acquirer and a target, (2) the target’s location, and (3) the acquirer’s location. We show that a firm located in an urban area has a higher takeover exposure, and generates a higher acquirer announcement return. More importantly, the target’s urban location attenuates the negative effect of a long distance between the target and the acquirer on value creation as documented in the existing literature. This attenuation effect further interacts with the acquirer’s location, and is particularly strong when the acquirer does not have easy transportation to the target, and hence, the target’s urban location becomes especially valuable in facilitating accessibility. Our findings reveal a previously untested force—firm locations, in addition to proximity—that can impact takeover transactions. They suggest that firm locations play an important role in facilitating the dissemination of soft information and helping increase information-based synergies.

6. Follow the Money: Investor Trading around Investor-Paid Credit Rating Changes (with Utpal Bhattacharya and Kelsey Wei) 

Conferences: NBER Summer Workshop 2014, EFA 2014

We examine how investor-paid credit ratings influence the investment behavior and performance of institutional investors—the ultimate consumers of credit ratings. Using daily data of institutional equity trades, we identify a group of investors who respond significantly and persistently to ratings issued by EJR, an investor-paid rating agency, as EJR responders. These responders react more to EJR rating information than to other important information events such as earnings announcements and analyst recommendations, suggesting that EJR ratings contain incremental value beyond that embedded in these other investment signals. This investor-paid rating advice apparently affords information advantages to its responders: they outperform other institutions, and show improved trading performance after becoming responders.

7. Risk Management and MBS Investment of Financial Institutions (with Jane Chen, Eric Higgins, and Hong Zou)

Conferences: CICF 2015, AFC 2015

We study whether strong risk management constrains financial institutions’ investment in mortgage-backed securities (MBS) prior to the 2008 financial crisis. We employ U.S. insurance companies as a laboratory, which provides a cleaner setting than banks whose MBS holding are confounded by their participation in the MBS creation and underwriting process. We find that strong risk management constrains insurers from investing in MBS prior to the crisis. This is especially the case for the MBS that are highly rated by credit rating agencies but turn out to be the most toxic during the crisis. Importantly, the function of risk management hinges on the nature of reporting regulations that differ between property & casualty (P&C) and life insurers. Risk management only appears to play its role for P&C insurers (governed by the mark-to-market accounting rule), but not for life insurers (governed by the historical cost accounting rule). Lastly, strong risk management appears to have a real effect on firms’ product market competitiveness: it mitigates the negative spillover of MBS investment to insurers’ subsequent underwriting business. Our results have important policymaking implications for regulations regarding risk management in financial institutions.

8. Buying on Certification: Government Procurement and Credit Ratings (with Xuan Tian)

This paper examines how the federal government responds to a change in supplier firms’ credit rating certification during government procurement. We find that the government significantly increases the spending on firms that receive a positive rating certification, and lowers spending on firms that receive a negative certification. This effect is more pronounced in industries that are heavily dependent on government spending, is concentrated in firms whose credit conditions are close to crossing the investment–speculative rating threshold, and is stronger when the government’s perception of a firm’s credit worthiness is changed the most. In contrast, a firm’s non-government customers do not exhibit such a significant response. Rating agencies’ positive certification appears to lead a firm to adopt more aggressive pricing strategies, and enables it to collect a premium from government customers. These findings highlight a significant impact of credit rating certification on government spending, and potentially, on taxpayers’ wealth.

9. Deterring "Creative" Innovation: A Potential Negative Externality of Technology Spillovers (with Seong K. Byun, and Jong-Min Oh)

In this paper we examine how technology spillovers affect firms’ human capital accumulation and inventor turnovers. While existing studies have documented that technology spillovers create positive externalities and promote innovations of technologically related firms, we propose a potential negative externality of these spillovers. In the presence of large spillovers, firms become less likely to acquire star innovators, who are the main drivers of generating patents with significant impact, and more likely to accumulate regular innovators, who tend to make incremental improvement upon existing technology. Consequently, while spillovers lead firms to engage in more innovations overall, they encourage firms to devote less in “creative innovations” that break new ground. Our findings suggest that technology spillovers may potentially deter the creations of creative knowledge.

10. The Issuer-pays Rating Model and Rating Inflation: Evidence from Corporate Credit Ratings, (with    Gunter Strobl)

Conferences: FIRS 2012,  EFA 2011, WashU Corporate Finance Conference 2011

This paper provides evidence that the conflict of interest caused by the issuer-pays rating model leads to inflated corporate credit ratings. Comparing the ratings issued by Standard & Poor's Ratings Services (S&P) which follows this business model to those issued by the Egan-Jones Rating Company (EJR) which does not, we demonstrate that the difference between the two is more pronounced when S&P's conflict of interest is particularly severe: firms with more short-term debt, a newly appointed CEO or CFO, and a lower percentage of past bond issues rated by S&P are significantly more likely to receive a rating from S&P that exceeds their rating from EJR. However, we find no evidence that these variables are related to corporate bond yield spreads, which suggests that investors may be unaware of S&P's incentive to issue inflated credit ratings.

Work in progress:

11. Predation Risk and Loan Performance Pricing (with Einar C. Kjenstad and Xunhua Su)