Research Interest

empirical corporate finance, capital structure, financing constraints, institutional investors, corporate governance, and innovation

SSRN

SSRN Author Page

Publications

2021, "Tapping into Financial Synergies: Alleviating Financial Constraints Through Acquisitions," Journal of Corporate Finance, forthcoming (with Rohan Williamson)

▪ Abstract: The paper examines whether financially constrained firms are able to use acquisitions to ease their constraints. The results show that acquisitions do ease financing constraints for constrained acquirers. Relative to unconstrained acquires, financially constrained firms are more likely to use undervalued equity to fund acquisitions and to target unconstrained and more liquid firms. Using a propensity score matched sample in a difference-in-difference framework, the results show that constrained acquirers become less constrained post-acquisition and relative to matched non-acquiring firms. This improvement is more pronounced for diversifying acquisitions and constrained firms that acquire rather than issue equity and retain the proceeds. Following acquisition, constrained acquirers raise more debt, increase investments and reduce cash holdings relative to matched non-acquirers, consistent with experiencing reductions in financing constraints. These improvements are not seen for unconstrained acquirers. Finally, the familiar diversification discount is non- existent for financially constrained acquirers.

2018, "Taxes, Bankruptcy Costs, and Capital Structure in For-Profit and Not-For-Profit Hospitals," Health Services Management Research, 31(1), 21-32 (with Sean S.H. Huang and Nathan W. Carroll)

▪ Abstract: About 60% of the U.S. hospitals are not-for-profit (NFP) and it is not clear how traditional theories of capital structure should be adapted to understand the borrowing behavior of NFP hospitals. This paper identifies important determinants of capital structure taken from theories describing for-profit (FP) firms as well as prior literature on NFP hospitals. We examine the differential effects these factors have on the capital structure of FP and NFP hospitals. Specifically, we use a difference-in-differences regression framework to study how differences in leverage between FP and NFP hospitals change in response to key explanatory variables (i.e. tax rates and bankruptcy costs). The sample in this study includes most U.S. short-term general acute hospitals from 2000 to 2012. We find that personal and corporate income taxes and bankruptcy costs have significant and distinct effects on the capital structures of FP and NFP. Specifically, relative to NFP hospitals: (1) higher personal income tax encourages FP hospitals to use less debt, (2) higher corporate income tax encourages FP hospitals to increase their debt usage, and (3) higher expected bankruptcy costs lead FP hospitals to use less debt. Over the past decade, the capital structure of FP hospitals has become more flexible as compared to that of NFP hospitals. This may suggest that NFP hospitals are more constrained by external financing resources. Particularly, our analysis suggests that NFP hospitals operating in states with high corporate taxes but low personal income taxes may face particular challenges of borrowing funds relative to their FP competitors.

2017, "The Effects of Institutional Investor Objectives on Firm Valuation and Governance," Journal of Financial Economics, 126, 171-199 (with Paul Borochin)

▪ Featured in the Columbia Law School Blue Sky Blog on Corporations and the Capital Markets

▪ Abstract: We find that ownership by different types of institutional investors has varying implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation, in both direction and magnitude, relative to fundamentals. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. Similarly, dedicated investors are associated with better future governance characteristics, while transient investors are not. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance.

2017, "Options, Equity Risks, and the Value of Capital Structure Adjustments," Journal of Corporate Finance, 42, 150-178 (with Paul Borochin)

▪ Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2014

▪ Abstract: We use exchange-traded options to identify risks relevant to capital structure adjustments in firms. These forward-looking market-based risk measures provide significant explanatory power in predicting net leverage changes in excess of accounting data. They matter most during contractionary periods and for growth firms. We form market-based indices that capture firms' magnitudes of, and propensity for, net leverage increases. Firms with larger predicted leverage increases outperform firms with lower predicted increases by 3.1% to 3.9% per year in buy-and-hold abnormal returns. Finally, consistent with the quality, leverage, and distress risk puzzles, firms with lower predicted leverage increases are riskier but earn lower abnormal returns.

2017, "Using Option Market Liquidity to Predict REIT Leverage Changes," Journal of Real Estate Finance and Economics, 55, 135-154 (with Paul Borochin, John Glascock, and Ran Lu-Andrews)

▪ Abstract: Recent literature has shown that liquidity is important in explaining price effects for firms and firm decisions. For example, see Morellec (2001) and Bharath et al. (2009). We follow and extend that literature by looking at the liquidity of market based options to forecast REIT capital structure changes. REITs, unlike typical listed firms, tend to have high leverage and a more dynamic capital structure because of regulation. Thus, understanding potential management behavior could be important to investors. By looking at actions of the managers as revealed through the liquidity in the option’s market, we are able to estimate what REIT managers are likely to do in terms of future capital structure changes. We do so using option data which update at higher frequency than traditional accounting characteristics. Our results are similar to those of Borochin and Yang (2016) who study this issue for non-REIT firms. We find that REITs with higher historical volatility or lower option market liquidity (as measured by number of daily unique call options, daily call open interest, and daily volume of option traded) are less likely to increase leverage in the following quarter. REITs with higher option liquidity or lower realized volatility are more likely to increase net long-term debt (issuing more debt or retire less debt) in the following quarter.

2011, "An Empirical Model of Optimal Capital Structure," Journal of Applied Corporate Finance, 23 (4), 44-69 (with Jules van Binsbergen and John Graham)

▪ Featured in the Harvard Law School Forum on Corporate Governance and Financial Regulation and the Dow Jones Banking Intelligence

▪ Abstract: We study optimal capital structure by first estimating firm-specific cost and benefit functions for debt. The benefit functions are downward sloping reflecting that the incremental value of debt declines as more debt is used. The cost functions are upward sloping, reflecting the rising costs that occur as a firm increases its use of debt. The cost functions vary by firm to reflect the firm’s characteristics such as asset collateral and redeployability, asset size, the book-to-market ratio, profitability, and whether the firm pays dividends. We use these cost and benefit functions to produce a firm-specific recommendation of the optimal amount of debt that a given company should use. In textbook economics, equilibrium occurs where supply equals demand. Analogously, optimal capital structure occurs where the marginal benefit equals the marginal cost of debt. We illustrate optimal debt choices for specific firms such as Barnes & Noble, Coca-Cola, Six Flags, and Performance Food Group, among others. We also calculate the cost of being underlevered for companies that use too little debt, the cost of being overlevered for companies that use too much debt, and the net benefit of debt usage for those that are correctly levered. Finally, we provide formulas that can be easily used to approximate the cost of debt function, and in turn to determine the optimal amount of debt, for any given firm.

2010, "The Cost of Debt," Journal of Finance, 65, 2089-2136 (with Jules van Binsbergen and John Graham)

▪ Featured in the NBER Digest and the Harvard Law School Form on Corporate Governance and Financial Regulation

▪ Nominated for the Brattle Prize (best annual corporate finance paper in JF)

▪ Abstract: We use exogenous variation in tax benefit functions to estimate firm-specific cost of debt functions that are conditional on company characteristics such as collateral, size, and book-to-market. By integrating the area between the benefit and cost functions, we estimate that the equilibrium net benefit of debt is 3.5% of asset value, resulting from an estimated gross benefit (cost) of debt equal to 10.4% (6.9%) of asset value. We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute only half of the total ex ante costs of debt.

FEDS Notes

2020, "What Drove Recent Trends in Corporate Bonds and Loans Usage?," (with Jacob Bochner and Min Wei)

▪ Summary: In this note, we use firm-level data to shed light on these trends by examining what factors have influenced firms' usage of bond and loan financing and how the composition of bond and loan financing has changed since 2004. Overall, we find that the recent growth in IG bonds largely reflects an expansion in the larger, IG-rated segment of firms and their increased usage of bonds. At the same time, HY or unrated, smaller firms have taken the opportunity to issue more floating rate products, as investor demand for such products soared amid low interest rates. The increased loan usage by these firms, together with a larger share of HY firms, contributed to the growth in leveraged loans.

2019, "Spike in 2019Q1 Leverage Ratios: The Impact of Operating Leases," (with Dino Palazzo)

▪ Summary: In this note, we show that the key driver of the 2019:Q1 increase in the leverage ratio appears to be a change in accounting rules – which requires the inclusion of operating leases as financial liabilities on U.S. corporations' balance sheets – and also provide a methodology for adjusting the leverage ratio to allow for cleaner historical comparisons.

Working Papers

"Collateral, Risk, and Borrowing Capacity" with Panos Markou and Ryan Williams

▪ Revise and resubmit at the Review of Corporate Finance Studies

▪ Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2018

▪ Abstract: We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The concurrent increase in gold prices during the 2008-2009 financial crisis provides a positive shock to the collateral value of gold firms, in contrast to the average firm that experienced a negative liquidity shock. Using a difference-in-differences framework, we find that gold firms experience more credit availability via their bank lines of credit during the crisis period relative to non-gold firms. Consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior, we find this effect prevalent only in financially non-distressed firms with less potential for agency problems and whose credit lines are secured with the firms’ assets. The greater credit availability is also limited to unhedged firms more exposed to price risk.

"The Effect of Institutional Ownership Types on Innovation and Competition" with Paul Borochin and Rongrong Zhang

▪ Featured in the Harvard Law School Forum on Corporate Governance and Financial Regulation

▪ Abstract: In corporate innovation, the type of institutional ownership matters. Using exogenous shocks from mergers of financial institutions, we identify two countervailing effects of common ownership on corporate innovation. Higher common ownership by focused, long-term dedicated institutional investors promotes innovation output and impact, as measured by number of patents and non-self citations. Meanwhile, higher common ownership by diversified, short-term transient investors discourages these. Moreover, the effects of common ownership by diversified, long-term quasi-indexing institutions on innovation vary with industry competitiveness. Evidence suggests that common ownership affects innovation through the channels of firm valuation and financing constraint. These results contribute to an ongoing debate on the effects of common institutional ownership on competition.

"Network Centrality of Customers and Suppliers" with Rongrong Zhang

▪ Abstract: We construct network centrality measures for customer and supplier industries in the U.S. economy. Consistent with Ahern, et al. (2014), we find central suppliers have higher levels of systematic risk than central customers and therefore more exposed to sectoral shocks. We posit that central suppliers have incentives to channel funds to their customers. Our empirical results are consistent with such a view. We find that the cash to cashflow sensitivity and value of cash is significantly higher for central suppliers than non-central firms, even among those financially unconstrained. In contrast, central customers have no cash to cash flow sensitivity, consistent with supplier trade credit redistribution helping to relieve customers’ financial constraints. Using the 2008 financial crisis as an exogenous shock, we document that central suppliers with high pre-crisis liquidity decrease their investment, while only customers without central suppliers are sensitive to the crisis.

"Defendant Cash Holdings in Patent Litigation: The Impact on Shareholder Value" with David Tan

▪ Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2015

▪ Abstract: We explore the importance of cash for shaping rivalry outside the product domain by studying its implications for firms defending against patent litigation by rivals. War chests of cash can make firms more formidable targets, reducing rivals' expected gains from litigation. However, cash holdings have agency costs and carry the risk of allowing value-destroying litigation spending. We find that while defendant cash holdings reduce plaintiffs' abnormal returns from litigation, they also reduce defendants' own abnormal returns and result in greater joint loss of shareholder value for both sides. In addition, we find that defendant cash holdings are associated with cases progressing to later and more expensive stages of litigation.

"Equity and Debt Financing Constraints"

▪ Abstract: I construct a structural model in which firms maximize value conditional on being restricted from issuing equity and unsecured debt. Using GMM estimation, I find that a model with both equity and debt constraints fits better than models without constraints or with only one constraint. The estimated financing constraint measures are consistent with financing behavior and firm characteristics believed of constrained firms, with debt being the limiting constraint. Furthermore, equity constrained firms decrease R&D expenses over the next period while debt constrained firms decrease capital expenditure. Finally, I find a positive but insignificant risk premium for debt constraints amounting to 3.0% over one year that does not exist for equity constraints.

"Changes in Institutional Ownership: Liquidity, Activism, and Firm Performance" with Wady Haddaji

▪ Abstract: We document a negative (positive) relationship between firm performance and changes in the ownership of large (small) institutional investors. Small investors "exit" while blockholders increase their holdings following poor performance. We find evidence that large investors increase ownership following poor performance to protect the value of initial holdings and to benefit from undertaking value-enhancing interventions. We observe that poorly performing firms in which blockholders increase their ownership experience more aggressive restructuring policies than firms in which blockholders reduce their ownership. Finally, we find that firms with passive investors recover faster than firms with active investors following poor performance.

"Patent Litigation and Cost of Capital" with David Tan

▪ Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2013

▪ Abstract: Involvement in patent litigation creates substantial direct and indirect costs for firms. We present evidence that pairs of firms involved in patent litigation are more evenly-matched in financial profiles than pairs of firms not involved in litigation. We take advantage of a novel, hand-collected data set that combines data on observed instances of patent litigation with product-level data to form dyadic plaintiffs-defendant pairs at risk of litigation in the semiconductor industry from 1984 to 2000. Product-level data for more than 200,000 semiconductor devices coupled with firm patent data allows us to construct fine-grained controls for risk of litigation between pairs of potential litigants. We consider several variables associated with a firm’s cost of capital: 1) the Whited and Wu (2006) index for financing constraints, 2) analyst coverage, and 3) institutional ownership concentration. We find evidence that, controlling for technological and product overlap, pairs of firms involved in litigation are more similar in terms of financing constraint, analyst coverage, and institutional ownership concentration than pairs of firms not involved in litigation.

Work in Progress

"Corporate Bonds versus Loans" with Kirstin Hubrich, Michael Smolyansky, Gustavo Suarez, and Min Wei

"Gap-Filling Theory and Monetary Policy" with Nitish Sinha and Michael Smolyansky

"Cash Holdings in U.S. Hospitals: Evidence from the Affordable Care Act" with Sean S.H. Huang