How Voluntary Information Sharing Systems Form: Evidence from a U.S. Commercial Credit Bureau
Journal of Financial Economics, Forthcoming, with Jose Liberti and Andrew Sutherland
Summary: Market competition is critical for understanding when financial intermediaries adopt information sharing technology and how sharing systems that enhance access to credit form and evolve.
Abstract: We use the introduction of a U.S. commercial credit bureau to study when lenders adopt voluntary information sharing technology and the resulting consequences for competition and credit access. Our results suggest that lenders trade off access to new markets against heightened competition for their own borrowers. Lenders that initially do not adopt lose borrowers to competitors that do, which ultimately compels them to adopt and leads to the formation of an information sharing system. Access to credit improves but only for high-quality borrowers in markets with greater lender adoption. We provide the first direct evidence on when financial intermediaries adopt information sharing technologies and how sharing systems form and evolve.
How Do Laws and Institutions Affect Recovery Rates on Collateral?
Review of Corporate Finance Studies, 9(1), March 2020, Pages 1–4, with Hans Degryse, Vasso Ioannidou, and Jose Liberti
- Review of Corporate Finance Studies Best Paper Award, 2020
- Lead Article and Editor’s Choice
- Published in the Oxford University Press Collection on Responses to Economic Shocks, September 2020
- Presented at the 2017 American Finance Association Annual Meetings, Chicago
- Presented at the 2015 European Finance Association Annual Meetings
- Presented at the 2015 Society for Financial Studies Cavalcade
Summary: The recovery rate on collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency, enhance debt capacity and terms of credit, and increase access to credit.
Abstract: Using unique internal bank data on ex ante appraised liquidation and market values of assets pledged as collateral in sixteen countries, we show that laws and institutions that strengthen creditor protection increase expected recovery rates for collateral. Stronger creditor protection increases expected recovery rates for movable collateral relative to immovable collateral and shifts the composition of collateral toward movable assets, thereby increasing debt capacity through both higher loan-to-values and attenuating the creditor’s liquidation bias. Our results suggest that the recovery rate for collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency and enhance access to credit.
Information Sharing and Spillovers: Evidence from Financial Analysts
Management Science, 65(8), August 2019, with Byoung-Hyoun Hwang and Jose Liberti
- Presented at the 2015 European Finance Association Annual Meetings
- Presented at the 2014 American Finance Association Annual Meetings
Summary: In knowledge-based industries, individuals owe much of their success to the colleagues that surround them consistent with human-capital theories of the firm.
Abstract: We show that information sharing and spillovers within an organization affect individual performance by studying how within–analyst-broker variation in firm coverage prior to mergers and acquisitions (M&A) affects post-M&A earnings forecast accuracy. We find that the same analyst working at the same broker performs substantially better in M&As in which her brokerage covers the target prior to the M&A. This holds particularly true if acquirer- and target-analysts reside in the same locale, if they are part of a smaller team, and if the target-analyst is of higher quality. Our findings point to the importance of information spillovers on individual performance in knowledge-based industries.
Information Sharing and Rating Manipulation
Review of Financial Studies, 90(9), September 2017, with Mariassunta Giannetti and Jose Liberti
- Presented at the 2017 American Finance Association Annual Meetings, Chicago
- Presented at the 2016 Financial Intermediation Research Society (FIRS) Conference, Lisbon
- Presented at the 2016 Utah Winter Finance Conference. Presentation
- Presented at the 7th European Banking Center conference on “Financial Sector Developments and the Performance of Entrepreneurial Firms”, 2015, Tilburg
- Presented at the 12th Annual Conference on Corporate Finance, 2015, Washington University in St. Louis
- Presented at The Economics of Credit Rating Agencies, Credit Ratings and Information Intermediaries Conference, 2015, Tepper School of Business at Carnegie Mellon University
Summary: Lenders strategically manipulate private credit ratings to protect monopolistic rents ahead of making them public.
Abstract: We show that banks manipulate the credit ratings of their borrowers before being compelled to share them with competing banks. Using a unique feature on the timing of information disclosure of a public credit registry, we disentangle the effect of manipulation from learning of credit ratings. We show that banks downgrade high quality borrowers on which they have positive private information to protect their informational rents. Banks also upgrade low quality borrowers with multiple lenders to avoid creditor runs. Our results suggest that manipulation of credit ratings limits
the positive effects of credit registries’ information disclosure on credit allocation.
How Collateral Laws Shape Lending and Sectoral Activity
Journal of Financial Economics, 123(1), January 2017, with Charles Calomiris, Mauricio Larrain, and Jose Liberti
- Presented at the 2016 Financial Intermediation Research Society (FIRS) Conference, Lisbon
- Presented at the 2016 American Finance Association Annual Meetings
- Presented at the 2015 European Finance Association Annual Meetings
- Awarded TCW Best Paper at the 2015 China International Conference in Finance
- Presented at the 2015 NBER Law and Economics Program Meeting, Boston
Summary: Collateral laws that discourage the use of collateral other than real estate (immovable) assets impose financing frictions, which in turn create distortions in the allocation of resources that favor immovable-based production.
Abstract: We demonstrate the central importance of creditors’ ability to use “movable” assets as collateral (as distinct from “immovable” real estate) when borrowing from banks. Using a unique cross-country micro-level loan dataset containing loan-to-value ratios for different assets, we find that loan-to-values of loans collateralized with movable assets are lower in countries with weak collateral laws, relative to immovable assets, and that lending is biased towards the use of immovable assets. Using sector-level data, we find that weak movable collateral laws create distortions in the allocation of resources that favor immovable-based production. An analysis of Slovakia’s collateral law reform confirms our findings.
Which Creditors' Rights Drive Financial Deepening and Economic Development?
Journal of Applied Corporate Finance, 28(4), Fall 2016, with Charles Calomiris, Mauricio Larrain, and Jose Liberti
Summary: Reforming collateral laws that discourage the use of collateral other than real estate (immovable) assets is a cost-effective way to increase the supply of credit.
Abstract: Since the 1990s financial economists have documented the essential role of creditors’ rights in making it possible for lenders to provide credit. This article demonstrates the central importance of creditors’ ability to use movable assets as collateral (as distinct from immovable real estate) when borrowing from banks. Using a unique cross-country micro-level loan data set containing loan-to-value ratios for different assets, we find that loan-to-values of loans collateralized with movable assets are lower in countries with weak collateral laws for movable assets, and in those countries lending is biased toward the use of immovable assets. Using sector-level data, we find that weak movable collateral laws create distortions in the allocation of resources that favor immovable-based production and investment. An analysis of Slovakia’s collateral law reform confirms our findings. We also investigate which aspects of movable assets collateralization regimes are most important for facilitating the use of movable assets as collateral. We find that the most important aspects of legal regimes are the registration of collateral interests (which facilitates monitoring of collateral and avoids double pledging) and the ability of creditors to avoid lengthy court proceedings when taking possession of collateral. These findings suggest that it would be relatively easy for many countries to increase the supply of credit because reforming these aspects of legal regimes is cost effective.
Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets
Review of Financial Studies, 29(12), December 2016, with Melissa Porras Prado and Pedro A.C. Saffi
- Lead article and Editor's Choice
- Presented at the 2014 American Finance Association Annual Meeting
- This paper was awarded the CNMV (the Spanish Securities Markets Commission) Prize for the Best Paper in Regulation presented at the Spanish Finance Association Foro de Finanzas, 2010.
Summary: Investors with large or short-term holdings prefer to actively hold shares - rather than lend them to other investors - which limits arbitrage and impedes price efficiency.
Abstract: We examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short-sale constraints. Stocks with lower, more concentrated, short-term, and less passive ownership exhibit lower lending supply, higher costs of shorting, and higher arbitrage risk. These constraints limit the ability of arbitrageurs to take short positions and delay the correction of mispricing. Stocks with more concentrated ownership exhibit smaller announcement-day reactions, larger post-earnings announcement drift, and an additional negative abnormal return of -0.47% in the week following a positive shorting demand shock.
The Anatomy of a Credit Supply Shock: Evidence from an Internal Credit Market
Journal of Financial and Quantitative Analysis, forthcoming, with Jose Liberti
- Presented at the 2013 Utah Winter Finance Conference. Presentation
- Awarded Best Paper on Financial Institutions and Markets at the 2013 Financial Management Association Meetings
- Awarded Best Paper on Financial Institutions Prize at the 2013 Midwest Finance Association Meetings
Summary: Exploiting an exogenous shock to a multinational bank's internal capital market, we find that lending channel effects decrease with stronger banking relationships.
Abstract: We investigate how financial contracting interacts with lending channel effects by tracing the anatomy of a credit supply shock using micro-level data from a multinational bank. Borrowers with stronger lending relationships, higher non-lending revenues, and those that pledge collateral, especially outside assets and real estate, experience less credit rationing. Consistent with a tightening of financing constraints post shock, borrower composition shifts toward larger and less risky firms, and loans exhibit higher collateralization rates. Our analysis highlights the value of relationships and suggests that relationship banking is a channel through which borrowers can mitigate lending channel effects.
Multinational Firms, Internal Capital Markets, and the Value of Global Diversification
Quarterly Journal of Finance, 6(2), June 2016
Summary: Better corporate governance promotes ”winner-picking” transfers in internal capital markets within multinational firms.
Abstract: Over the period 1980-2007 multinational firms' investment grew four times faster than worldwide GDP. Yet the evidence on whether global diversification is valuable is inconclusive. This paper uses detailed FDI data for 251 UK multinational firms and 4,676 subsidiaries to show that multinational firms exhibit, on average, a global diversification premium compared with a country-industry matched portfolio of focused firms. I investigate this result and show that the premium is greater for multinational firms with better governance, both in absolute terms and relative to focused firms. Further, the value premium is positively related to ”winner-picking” transfers in internal capital markets, and more so for better-governed firms. The results are robust to alternate specifications, endogeneity, and self-selection. The findings help explain why multinational firms' investment and global diversification have significantly increased over the past three decades.
The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market
Journal of Finance, 70(5), October 2015, with Reena Aggarwal and Pedro A.C. Saffi
- Presented at the 2011 Western Finance Association Annual Meetings
- Presented at the 2011 European Finance Association Annual Meetings
- Presented at the 2013 Annual Finance Association Annual Meetings
Institutional investors recall stock from the equity lending market to exercise their vote in shareholder meetings.
Abstract: This paper investigates the voting preferences of institutional investors using the unique setting of the securities lending market. Institutional investors restrict lendable supply and/or call back loaned shares prior to the proxy record date to exercise voting rights. Recall is higher for investors with greater incentives to monitor and exert governance, for firms with poor performance and weak governance, and for proposals where the returns to governance are likely to be higher such as those relating to corporate control. Loan demand and the borrowing fee also increase around the record date. In the subsequent vote outcome we find higher share recall to be associated with less support for management and more support for shareholder proposals. Our results indicate that institutions value their vote and use the proxy process as an important channel for affecting corporate governance.
Do Cash Stockpiles Fuel Cash Acquisitions?
Journal of Corporate Finance, 23, 2013, 128–149, with Lee Pinkowitz and Rohan Williamson
- Presented at the 2012 American Finance Association Annual Meetings
Cash-rich firms pay with stock, not cash, when making acquisitions.
Abstract: U.S. firms currently hold a $2 trillion cash stockpile. We examine if cash stockpiles fuel cash acquisitions by studying the method of payment decision for cash-rich firms. Surprisingly,cash-rich firms are 23% less likely to make cash bids than stock bids, relative to firms that are not cash rich. We examine several potential explanations related to omitted variable bias and endogeneity and the result remains. More specifically, the results are robust to explanations related to agency, financial constraints, tax-related explanations, equity overvaluation, and capital structure. Our evidence implies that the link between cash stockpiles and cash acquisitions is not obvious.
Finance and Efficiency: Do Bank Regulations Matter?
Review of Finance, 15(1), 2011, 135-17, with Viral V. Acharya and Jean Imbs
Banking deregulation affects the sectoral specialization of output, and improves the efficiency of real allocation.
Abstract: We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play, which we study in the context of mean-variance portfolio theory applied to sectoral returns. We find the reallocation is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The findings suggest that improving bank access to branching affects the sectoral specialization of output, in a manner that depends on the variance-covariance properties of sectoral returns, rather than on their average only.
Boards, Auditors, Attorneys and Compliance with Mandatory SEC Disclosure Rules
Managerial & Decision Economics, 34 (7-8), 2013, with Preeti Choudhary and Jason D. Schloetzer
A survey of financial disclosure in which we present some of the first evidence that corporate attorneys affect financial disclosure.
Abstract: We survey the empirical literature on the determinants of firms’ compliance with mandatory SEC disclosure rules. We begin with a discussion of the role of boards of directors, public accounting firms, and corporate attorneys in the preparation and review of mandatory disclosures. We then organize current research into three broad types of variation in compliance: completeness, timeliness, and readability. Our review highlights three interesting areas for future research: (1) studies that examine the relations between completeness, timeliness, and readability within the same research design; (2) studies that assess whether boards of directors, public accounting firms, and corporate attorneys view disclosure compliance as a general firm policy; and (3) studies that investigate the influence of corporate attorneys on mandatory disclosure, as well as studies of disclosure issues that require collaboration between auditors and corporate attorneys. As a first step to address the latter agenda, we provide new empirical evidence regarding the impact of corporate attorneys on disclosure compliance.