Publications:
1. Justice Good As Random? (with Kristoph Kleiner)
(Journal of Finance forthcoming, Link to paper)
Abstract:
The random assignment of judges/examiners to cases promotes fairness and is routinely exploited for causal identification across social sciences. Analyzing Chapter 11 bankruptcies, we find judicial assignment is not random, but predicted by hedge funds. In our setting, judges decide whether to convert bankruptcies to liquidation, reducing unsecured creditor recovery. Relative to secured hedge funds, cases involving unsecured hedge fund creditors (and hedge fund equity holders) are assigned judges with lower past conversion rates and higher unsecured creditor recovery rates. Effects are greatest when hedge funds are experienced, invested recently, or have connections with/control of the debtor. Extending the analysis, we find experienced legal council can similarly influence assignment. To explain our findings, we show judges are not assigned consecutive large cases, yet most bankruptcy lawyers are unaware of these dynamics; knowledgeable parties can then judge-shop by altering the exact date of filing. We demonstrate the need for control variables and bounded IV specifications when exploiting judge/examiner designs in the presence of sophisticated players.
Presentations:
Bretton Woods Accounting and Finance Conference (2023), AFA Meetings (2023) (presentation by co-author), Paris Winter Finance Conference (2022), Northern Finance Association Meetings (2022), Rice University (2022), Paris Winter Finance Conference (2022), Arizona State University (2022) (presentation by co-author), Indiana University Finance Seminar (2022) (presentation by co-author), IWH-FIN-FIRE Workshop on “Challenges to Financial Stability” (2022), Indiana University Business Law Seminar (2022) (presentation by co-author), Florida State University SunTrust Finance Conference (2022) (presentation by co-author), University of Connecticut Finance Conference (2022) (presentation by co-author), NBER Corporate Finance (2022) (presentation by co-author), University of Texas AIM Investment Conference (2022) (presentation by co-author), MoFir Banking Workshop (2022) (presentation by co-author), Wharton Seminar on Corporate Financial Distress and Restructuring (2022) (presentation by co-author), University of Dayton (2022) (presentation by co-author), Arizona State University (2022) (presentation by co-author), Wabash Finance Conference (2022)
2. Do Private Equity Managers Raise Funds on (Sur)real Returns? Evidence from deal-level data
(Journal of Financial and Quantitative Analysis, 1-34. doi:10.1017/S0022109022000990, Link to Paper) (September, 2022)
Abstract:
Recent studies on agency problems in private equity have fueled the suspicion that fund managers strategically manipulate performance estimates around fundraising times. While these studies rely on aggregated portfolio data, this paper offers the first empirical analysis of "window dressing'' in private equity based on quarterly reported deal-level performance. In contrast to previous findings of a smoking gun at the fund level, I do not find any evidence of inflated performance at the deal level. Observed interim peaks in valuation at the fund level result from lower returns on deals made under pressure to invest unspent capital closer to fundraising.
Presentations:
Conference on Entrepreneurial Financial Management at ESMT Berlin (2017); Conference on Entrepreneurial Financial Management at ESMT Berlin (2017); European Finance Association (2016); UNC Private Equity Research Consortium Conference (2016); Indiana University Finance Seminar (2016); Erasmus University Rotterdam Finance Seminar (2016); University of Nebraska Finance Seminar (2016); Southern Methodist University Finance Seminar (2016); Duke University, Finance Brown Bag (2015)
3. Paying for Performance in Private Equity: Evidence from Management Contracts (with David Robinson, Soenke Sievers and Thomas Hartmann-Wendels) (Management Science 66, 1756-1782, Link to Paper) (April, 2020)
Abstract:
We offer the first empirical analysis connecting the timing of general partner (GP) compensation to private equity fund performance. Using detailed information on limited partnership agreements between private equity limited and general partners, we find that "GP-friendly'' contracts -agreements that pay general partners on a deal-by-deal basis instead of withholding carried interest until a benchmark return has been earned- are associated with higher returns, both gross and net of fees. This is robust to measures of performance persistence, time period effects, and other contract terms, and is related to exit-timing incentives. Timing practices balance GP incentives against limited partner downside protection.
Presentations:
San Francisco Private Capital Symposium (2016); LBS Finance Seminar (2016) (presentation by co-author); European Finance Association (2015); American Finance Association (2013); Caltech/USC Private Equity Conference (2015) (presentation by co-author); University of Maryland Finance Seminar (2015) (presentation by co-author); MIT Sloan Finance Seminar (2014) (presentation by co-author); UNC, 5th Annual Conference on Private Equity Research (2014) (presentation by co-author); Brown Bag Seminar in Economics, Center for Macroeconomic Research, University of Cologne (2014); Duke University, Fuqua School of Business (2013) (presentation by co-author); Department of Banking and Finance, University of Cologne (2012)
3. General Partner Compensation
(In: Cumming, D, Hammer, B. (eds) The Palgrave Encyclopedia of Private Equity, Palgrave Macmillan, Cham. 2023)
4. A Practical, Boring and Potentially Effective Strategy For Reducing Gun Violence,
(with David Robinson) (NC Newsline, September 2023)
Working papers:
1. Credit Market Equivalents and the Valuation of Private Firms (with Lukas Schmid and Roberto Steri) (Revise and Resubmit at Review of Financial Studies, Link to Paper)
Abstract:
We propose valuing leveraged buyout investments by credit market equivalents (CME). We exploit the observation that companies held by PE funds have loans traded in secondary markets. Motivated by Merton’s insight that debt and equity are claims on the same asset, we use deal-level data to construct a stochastic discount factor from loan prices, and derive CME valuations by applying our credit factor model to price buyout cash flows. We find no evidence for buyout outperformance, but underperformance by funds raised during credit booms. Our method works whenever credit and PE markets are sufficiently integrated, for which we provide evidence.
Presentations:
NBER Long-Term Asset Management (2023), Financial Economics Research Annual Conference at Reichman University (2023), Midwestern Finance Annual Meeting (2023), ITAM Finance Conference (2023), University of Copenhagen (2022) (presentation by co-author), University of Münster (2022) (presentation by co-author), WashU St. Louis Annual Conference on Corporate Finance (2022), 14th Annual Private Equity Research Symposium (2022), Stockholm School of Economics (2022), Penn State (2022), Tsinghua University (2022), EFA 2022, Cavalcade (2022), FIRS (2021), Western Finance Association (2020); PERC Oxford Symposium (2020, postponed); Duke/UNC Asset Pricing/Entrepreneurship Conference (2020, postponed); UNC Junior Finance Conference (2020, postponed); Southern California Private Equity Conference (2020); Financial Markets and Corporate Decisions Conference in Stockholm (2019) (presentation by co-author)
2. More Guns Lead to More Crime: Evidence from Private Equity Deals (Link to paper)
Abstract:
Using private equity (PE) deals in gun retail chains and comparing individual stores within a county and year, I study if higher gun supply due to profit maximization motives leads to higher crime. I create a granular and novel dataset that matches guns used in crime to firearms licensed stores (FFLs) to parent retail chains to investors. I find that PE-backed FFLs sell more guns traced to homicides, assaults, and robberies. PE-backed dealer stores are less likely to be inspected and are more likely to see an increase in gun law violations. I conduct various robustness tests to argue for the use of PE deals as a gun supply shock. My findings indicate that cost-saving strategies and weak gun law enforcement result in marginal gun sales to criminals as opposed to law abiding citizens.
Presentations:
NBER Economics of Firearm Markets, Crime and Gun Violence (2024), Midwest Economics Association (2024), Boca-ECGI Corporate Finance and Governance Conference (2023)
3. How Private Is Private Equity? (with YoungJun Song)
Abstract:
Contrary to the term “private” equity, we show that more than half of buyout funds invest in publicly traded companies that remain public throughout their holding period. We examine why investors pay private equity fees for such public investments and hypothesize that these deals help solve the information problem in fundraising. Using deal-level data, we find that fund managers act as activist investors to signal quality through observable performance before raising new funds. We find no support for an agency-based explanation. Overall, our evidence suggests that concerns over “volatility laundering” may be overstated.
Presentations:
Chicago Entrepreneurship Workshop (2024), Financial Management Association Annual Meeting (2024), Boca Raton Corporate Finance Conference (2024)
5. Is the Whole Greater Than the Sum of Its Parts? Behavioral Effects of Compensation in Private Equity
Abstract:
This paper examines effort and risk-taking incentive effects to a risk-averse private equity fund manager for a deal-by-deal compensation in comparison to a whole-fund compensation. I show that a deal-by-deal carried interest scheme leads to a higher optimal effort and controllable risk level as opposed to a whole-fund distribution, even compared to an increase in carried interest percentage. These results hold for a venture capital but not for a buyout type fund. The factor of critical importance for my findings is the heterogeneity in portfolio investments' exit times, holding times and outcomes. The model predictions are consistent with the evidence of Hüther et. al. (2014) as well as Robinson and Sensoy (2013) and have broader implications for delegated asset management.
Presentations:
Financial Management Association International Annual Meeting (2014), Department of Banking and Finance, University of Cologne (2014)
Abstract:
This paper analyzes the relation of expected performance-based and fixed compensation in private equity as a function of the investor's contract. A higher variable to fixed compensation may be a way of allowing fund managers of imperfectly observed quality to signal their ability. According to the learning framework, variable to fixed compensation should be lower if there is higher uncertainty about the manager's ability. We use a proprietary and hand-collected dataset that contains information on compensation from limited partnership agreements. Equipped with the actual contract terms that can be linked to various fund managers and fund characteristics, we use the model of Metrick and Yasuda (2010), and its extension form Choi et al. (2011) to estimate the expected variable and fixed manager compensation. We find that both expected variable and fixed compensation increase as a result of the manager's bargaining power. Consistent with the learning framework, a decrease in uncertainty about the manager's ability is associated with higher expected variable compensation.