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. Do Financial Regulations Shape the Functioning of Financial Institutions’ Risk Management in ABS Investment?  (with Xuanjuan Jane Chen, Eric Higgins, and Hong Zou), Revise and Resubmit, Review of Financial Studies

Conferences: EFA 2016, 2016 Fixed Income and Financial Institutions Conference, CICF 2015, AFC 2015

We show that installing stronger risk management into financial institutions – a proposal widely considered following the 2008 financial crisis – is insufficient in constraining institutions’ exposure to securities with substantial risk, particularly asset-backed securities. Financial regulations instead significantly shape the functioning of risk management. Risk management plays an important role in constraining ABS investment when institutions face mark-to-market reporting in interaction with capital requirements; this role, however, is marginal when capital requirements are combined with historical-cost-accounting. Financial regulations affect risk management functions through two channels: stimulating risk managers’ efforts in uncovering ABS risk and curbing executives’ incentives to take excessive risk.

7. 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.

8. Technology Spillovers and Product Market Strategies (with Seong K. Byun, and Jong-Min Oh)

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

We show that technology spillovers spark imitation in product markets and lead firms to create products that are similar to each other. This effect is the strongest during the first two years of a firm’s exposure to large technology spillovers; it then subsides, but does not reverse, in the following five years. In the cross-section, the effect of technology spillovers on promoting a firm’s product imitation is stronger when the firm faces short-term earning pressure from financial market participants, or when the firm has more financial slack that makes imitation more feasible. Ultimately, technology spillovers lead firms to retain fewer star inventors in the human capital base – who are the drivers of innovations that break fresh ground, and shift firms’ patent profiles from radical innovations toward incremental innovations.

9. 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.

10. 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.

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.