Agency Costs of Debt in Conglomerate Firms (2022) - Journal of Financial and Quantitative Analysis
I exploit the introduction of a segment reporting reform (Statement of Financial Accounting Standards No. 131) that reveals new financial information of firms' business units. Firms reported as single-segment before the reform and as multi-segment after the reform suffer a 10% increase in the yield spreads compared to standalone firms. The treatment effect is concentrated on firms with a high volatility in the growth options and a low coinsurance across segment units. I show that the agency costs of debt affect the (non-monotonic) relationship between a conglomerate cost of borrowing and the correlation of its segment cash flows, in times of growing capital markets.
Quarterly Investment Spikes, Stock Returns and the Investment Factor (2023) - with Jan Schnitzler - Journal of Financial Markets
We document a negative link between abnormal fourth quarter capital expenditures and the cross-section of future stock returns. Being an alternative investment proxy, the evidence is closely tied to the asset growth factor, but not fully absorbed by it. The view that ad-hoc investments reflect changing discount rates is supported by the fact that the sign of the relationship reverts with contemporaneous returns. However, further tests also show that high payouts, low debt levels, and high idiosyncratic volatility amplify the reported effect, which is more in line with over-investment problems. Our analysis supports the notion that firms' investment decisions contain intricate but valuable information about stock returns.
Covered on the Invesco INTERNATIONAL AND GLOBAL EQUITIES blog
Survival and Value: the Conglomerate Case (2024) - with Giovanna Nicodano - European Financial Management
This paper investigates the relationship between default probability and value when there is a selection bias due to missing controls for firm' heterogeneous likelihood to survive in the sample. Our model delivers the following implications for the conglomerate case: (a) the sample conglomerate value increases in their default probability (b) the sample conglomerate discount falls together with their excess default probability with respect to focused companies (c) both effects disappear or switch sign when the analyst controls for survival probability. The data support the presence of a selection bias distorting downwards the relative value of sample firms with higher survival probability.
Bank Resolution, Regulatory Arbitrage, and Systemic Risk (2026), with Deyan Radev - unconditional accepted at the Journal of International Money and Finance
Are bank resolution regimes effective enough to improve financial stability? We look at the effect of the new bank resolution reforms on the systemic risk of big financial conglomerates. We find that in developed countries, parents in a stricter resolution regime have lower systemic risk contribution, compared to their foreign subsidiaries. The opposite is true for parents from developing countries. We explain these results as financial conglomerates exploiting differences in resolution tools between parent and subsidiaries, in particular in developing countries where the rule enforcement is weaker. These results suggest that centralized regulation has heterogeneous effects depending on the country's development degree. Improving capital allocation through bail-in reduces systemic risk across the board, which has important implications for policymakers.
Working papers
Subsidiary Debt, Bondholder Losses, and Market Frictions - R&R at Review of Corporate Finance Studies
Using daily security prices, I examine the wealth implications of subsidiary bonds' issuance for parent firm investors. I observe a wealth transfer from parent bondholders to shareholders during the week of bonds' issuance. Consistent with the underinvestment hypothesis, capital investments - particularly in tangible assets - tend to increase in the year following subsidiary bond issuance. After the financial crisis, concerns over liquidity risk reduced the wealth transfer effect. As a result, subsidiary debt became beneficial for parent bondholders. This study demonstrates that credit allocation across a corporate group's affiliates has significant implications for investors' wealth.
Why are countries so important for the composition of corporate debt? - with Sohnke Bartram and René Stulz
We investigate the importance of a firm’s country in explaining its leverage and the composition of its debt from 2006 to 2017 across 56 countries and more than 160,000 firm-year observations. We find that firm characteristics are much more important than country characteristics to explain variation of firm leverage across countries, but firm characteristics are of little help in explaining variation in the ratio of loans to debt across countries. Using machine learning, we find that culture proxies are the most influential country characteristics explaining the composition of debt. We provide limited causal inference for culture and legal origin characteristics.
Conglomerate Betas - with Valentina Raponi and Jan Schnitzler
We document a systematic wedge between conglomerate firms' CAPM betas and segment-implied betas constructed as weighted averages of industry betas. Conglomerates exhibit a negative gap of roughly six percentage points that grows monotonically with the number of segments, the degree of diversification, and the dispersion of segment-level betas. The wedge does not reflect delayed price adjustment: CAPM betas of complex firms neither react more weakly to changes in segment exposure nor exhibit larger Dimson betas. Instead, the weighted aggregation overstates systematic risk because it ignores cross-segment covariance and the ability of internal capital markets to reallocate funds across divisions in bad states, avoiding countercyclical deadweight costs of external finance.
Work in progress
Are firms investing at the wrong cost of capital? - with Jan Schnitzler
The carbon emission fallacy? Diversification’s effect on carbon emission intensity - with Florian Kiesel