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 )

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

Working Papers:

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

Conferences: Best Paper Award -- Entrepreneurial Finance and Innovation Conference 2015

Existing studies document that technology spillovers, emanated from the research and development of other firms operating in similar technology areas, create positive externalities and promote innovations of technologically related firms. In this paper, we document a potential negative externality of these spillovers. In the presence of large technology spillovers, firms produce products that are more similar to their peers (based on on the similarity measures in Hoberg and Phillips, 2010, 2015). They 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 improvements upon existing technology. Eventually, while spillovers lead firms to engage in more innovations overall, they encourage firms to devote less in “creative innovations” that break new ground. Hence, technology spillovers may potentially deter the creations of creative knowledge.

7. Product Market Threats and Financial Contracting (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 financial contracting. Bolton and Scharfstein (1990) suggest that while performance-sensitive terms in financial contracts mitigate incentive misalignment between creditors and borrowers, they make a borrower more vulnerable to rivals' strategic behavior in product markets that intends to depress the firm's performance, making the performance-sensitive terms binding and raising cost of financing. An optimal response in financial contracts to product market threats is therefore to lower the performance sensitivity of the contracts. We find strong empirical support for this prediction: product market threats significantly moderate the use of performance pricing in bank loans; the effect is more pronounced when the benefit of a lowered performance sensitivity in mitigating the adverse effect of product market threats outweighs its cost in exacerbating borrowers' incentive problems. Our findings reveal the role of an under-explored, yet important element - product market threats, in shaping financial contracting.

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

Conferences: Conference in Credit Risk and Credit Ratings (Basel) 2015, NBER Summer Workshop 2014, EFA 2014

We examine which, how, and why institutional investors—the ultimate consumers of credit ratings—are influenced by investor-paid credit ratings. Using institutional equity trading data, we identify a group of small institutional investors who consistently and significantly trade on ratings issued by EJR (an investor-paid rating agency) as EJR followers. We find that EJR’s rating advice, despite being credit-related information, significantly influence followers’ responses to influential equity trading signals like earnings announcements, as well as trading advice from other information providers like sell-side analyst recommendations. Followers, by putting their money where EJR’s mouth is, benefit from following EJR’s advice: they outperform non-followers, and show improved trading performance after becoming followers.

9. 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.

10. 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.

11. 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.