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, forthcoming

Conferences: FIRS 2012, CICF 2012

Working Papers:

1. Revolving Doors on Wall Street, (with Jess Cornaggia and Kimberly Cornaggia), Revise and Resubmit: Journal of Financial Economics

Conferences: WFA 2013, NBER Summer Workshop 2013, EFA 2013, SFS Cavalcade 2013, FIRS 2013, CICF 2013, UNC Round Table 2013

Credit analysts often leave rating agencies to work at firms they rate. These analyst transfers provide a unique laboratory for studying revolving door effects. Benchmark rating agencies provide counterfactuals which allow us to measure rating inflation in a difference-in-differences framework. We find that analysts transitioning to managerial positions and to top banks become more favorable to their future employers prior to their transitions. Further, these conflicted ratings become less responsive to changes in market-based measures of hiring firms’ credit quality. Our results reveal the presence of previously untested forces that affect information production by credit analysts.

2. Locations, Proximity, and M&A Transactions (with Ye Cai and Xuan Tian), Revise and Resubmit: 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.

3. Evaluating Investor-Paid Credit Ratings: An Investor Perspective (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 high frequency data of institutional equity trades, we document that ratings issued by EJR, an investor-paid rating agency, elicit significant trading responses from their followers. Moreover, EJR ratings influence how followers react to important information events like earnings announcements and analyst recommendations, in a way suggesting that they may subsume information in these other events. This investor-paid rating advice apparently affords information advantages to its followers: they outperform non-followers, and show improved trading performance after becoming followers.

4. 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.