Research Papers


4. Locations, Proximity, and M&A Transactions (with Ye Cai and Xuan Tian), Journal of Economics and Management Strategy, 2016 25 (3).

Working Papers:

9. Grit and Credit Risk, (with Jess Cornaggia and Kimberly Cornaggia)

Conferences: WFA 2019, NFA 2019

We analyze how individual grit – the will to perform during difficult or unexpected situations – affects loan default. We capture grit based on individual behavior in a decision analogous to the default decisions: college course withdrawal. With a license to use individually identifiable information collected by the U.S. Department of Education, we show that students who quit college courses when difficult circumstances present are 13.2% more likely to default on their student loans in the future than those exhibiting perseverance. This effect is especially strong when students withdraw from core courses and courses at elite institutions. In contrast to prior literature, we find no evidence that student credit risk is correlated with ethnicity or gender after controlling for individual grit.
Conferences: WFA 2019, CICF 2019, NFA 2019

It is increasingly common that institutional investors simultaneously hold the equity of both industrial firms and financial firms, creating a “bank-firm ownership linkage.” Such linkages are distinct from the conventional relationship banking, which typically involves direct interactions between borrowers and banks. We analyze whether and how these linkages affect informational hold-up problems in the corporate loan market, and find that firms linked to banks other than their current lenders through institutional cross-holdings enjoy significantly lower loan interest rates. This effect is particularly strong when firms face greater information asymmetry and thus subject to more severe hold-up problems. We establish causality by using a difference-in-differences method based on the quasi-natural experiment of financial institution mergers. Overall, our evidence suggests that the bank-firm ownership linkage resulting from institutions’ cross-industry holdings – a previously unexplored network – can facilitate information transmission between borrowers and potential lenders, thereby mitigating informational hold-up..

11. Product Market Threats and Performance-Sensitive Debt (with Einar C. Kjenstad and Xunhua Su)

Conferences: WFA 2013, Summer Institute of Finance 2013, FMA 2013 

This paper examines how product market threats shape the use of performance pricing in loan contracts. Loan contracting faces a trade-off between financial markets and product markets: while using contractual terms that are linked to borrower performance -- such as performance pricing -- mitigates borrower-creditor frictions in financial markets, it makes a borrower vulnerable to product market pressures, which often decline borrower performance and make performance pricing more likely to become binding. Supporting this trade-off, we find that product market threats significantly moderate the use of performance pricing in loan contracts, particularly when the benefit of doing so outweighs its cost in exacerbating borrower-creditor frictions in financial markets.

12. Buying on Certification: Customer Procurement and Credit Ratings (with Kevin Green and Xuan Tian)

Conferences: EFA 2016

We examine how credit ratings affect firm stakeholders, in particular, customers in the supply chain. Public sector customers respond strongly to supplier rating changes: they increase purchases from upgraded firms, and reduce purchases from downgraded firms. This response, however, is not observed for private sector customers. This contrast is likely due to government agents’ desire to respond to ratings, a prevalent and verifiable certification, to signal that their decision-making is aligned with external assessment and to avoid reputational losses. We also find suggestive evidence that powerful politicians use ratings to award government contracts to suppliers located in states they represent.

13. 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.