Research

Working papers:

The Imitation Game: How Encouraging Renegotiation Makes Good Borrowers Bad. With Andra Ghent and Alexei Tchistyi. Revise and Resubmit, Review of Financial Studies.

We show that commercial mortgage borrowers behave opportunistically to obtain principal reductions. We develop a model in which lenders cannot perfectly observe borrowers' use values and renegotiation is costly. We then exploit a tax rule change that reduced the cost of renegotiation. Consistent with the model predictions, borrowers with high private use values of the property are more likely to transfer into special servicing when lenders have a higher capacity to negotiate principal reductions after the rule change. Our results suggest substantial asymmetric information between borrowers and lenders, as well as adverse consequences of principal forgiveness for lenders.

Semifinalist for Best Paper in Financial Institutions Award at 2022 FMA Conference.

Social Connections and Bank Deposit Funding. With Jing Wang.

We show that social connections transmit shocks that influence banks' deposit funding. We find that counties experience an increase in bank deposits when they are more socially connected to counties affected by natural disasters, consistent with heightened precautionary saving incentives. This effect is not driven by physical distance, large disasters that attract significant media coverage, or other cross-county channels, including credit reallocation by multimarket banks, population migration among counties, and depositors who live close to disaster-affected counties. Banks that collect deposits in highly socially-connected counties experience high deposit volatility, but geographic diversification reduces the volatility associated with depositor social connectedness.

Credit Rating Inflation and Corporate Innovation. With Bharad Kannan.

Does credit rating quality affect corporate innovation? Using exogenous variation in rating quality that arises from competition among rating agencies, we show that firms with inflated ratings issue more patents, but their patent quality, as measured by scientific and economic value, declines. We provide evidence that suggests that managers engage in value-reducing patenting activity to exploit a compensation structure that rewards them for the number, but not the quality, of new patents. Our results are stronger in non-technology industries, which suggests that managers strategically exploit innovation when firms do not rely on patenting for value creation.

Risk, Reward, and Ratings: How Firms Use Tax Avoidance to Sustain Inflated Credit Ratings. With Todd Kravet, Trent Krupa, and Sam Piotrowski.

Inflated credit ratings temporarily reduce the cost of debt and mitigate the impact of the tax avoidance risk premium. Consistent with this, we show that rating inflation is positively related to future tax avoidance, particularly for firms with less intense debtholder monitoring. The relation is stronger when managers have greater career concerns, which suggests firms respond differently when the cost of debt is lower due to upwardly-biased ratings compared to when the cost of debt is lower due to high but accurate ratings. Our results indicate that rating inflation temporarily fools some investors and allows firms to engage in short-term risk-shifting through tax avoidance. 

Determinants and Consequences of Return to Office Policies. With Andra Ghent and Vasudha Nair. 

We study the return to office (RTO) policies of publicly-traded firms by hand-collecting a dataset of policy announcements for the Russell 1000 firms. The amount of in-person work firms require varies significantly across industries and cities, and most firms allow some remote work. We then examine RTO policy choice in a model where firms trade off in-person productivity benefits with an in-person wage premium. Consistent with the model's predictions, we find that the feasibility of remote work and office rents determine RTO policy. We find no significant stock market reaction to announcements, which may indicate a lack of consensus on optimal RTO policies.

Works in progress:

Financial constraints and latent financial distress. With Harry Turtle.

We examine the ability of the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) to capture financial constraints in comparison with existing measures of financial constraints. This measure predicts future aggregate defaults and charge-offs for commercial and industrial loans. Next, we confirm that this measure effectively predicts aggregate defaults and financial distress in our Compustat sample with large predictive lead times. In a panel design, we compare our approach with the Whited and Wu (WW, 2006) firm-level financial constraints measure, and find the aggregate SLOOS measure provides comparable adjusted R-squareds. Together, the WW and SLOOS measures provide independent and interaction impacts that effectively predict constraints and distress. As expected, capital expenditures are inversely related to SLOOS, but are unexpectedly positively related to WW's measure.

Green Listings and House Prices. With Waldo Ojeda.

Liquidity and the Default Option: Evidence from Commercial Real Estate. With Crocker Liu and Alexei Tchistyi.

Social Connections and Firm Location Choice. With Alina Arefeva, Morris Davis, and Andra Ghent.

Publications:

Does Main Street Benefit from What Happens on Wall Street? With Andra Ghent. Forthcoming, Journal of Financial and Quantitative Analysis.

Yes. We show that aggregate stock returns predict aggregate US employment, despite the industrial composition of publicly traded firms differing markedly from that of all firms, and the representativeness of public firms declining over time. Using establishment-level data and cross-sectional variation in city and industry employment and returns, we also show that returns predict local and industry labor market outcomes. Our granular approach allows us to include time fixed effects such that the predictive power is not driven by omitted aggregate variables such as monetary policy expectations. Our results are consistent with an alignment of interests between shareholders and labor.

The Impact of Credit Rating Information on Disclosure Quality. With Yung-Ling Chi. Financial Management, 2022, 51, 73---115.

Do credit ratings affect the information content of corporate disclosure? Using novel data on rating analysts to obtain exogenous variation in rating information, we find that greater uncertainty in credit ratings increases the quality of information disclosed by the firm. This is consistent with the firm attempting to reduce overall uncertainty about value by improving the quality of its own disclosure. Our results are consistent with theories in which improvements in one type of information can crowd out other types, and they suggest that policies aimed at improving rating accuracy may in fact reduce the quality of corporate disclosure.

Informational Efficiency in Securitization After Dodd-Frank. With Andra Ghent and Alexei Tchistyi. Review of Financial Studies, 2020, 33, 5131–5172.

We analyze how Dodd-Frank mandated risk retention affects the information investors extract from issuers' retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers was asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

Competition and Credit Ratings After the Fall. With Andra C Ghent. Management Science, 2018, 64, 1672-1692.

We analyze the entry of new credit rating agencies into structured finance products and its effects on rating levels. Our setting is unique as we study a period in which the incumbents' reputation was extremely poor and the benefit of more fee income from inflating ratings was low. We find entrants cater to issuers by issuing higher ratings than incumbents. The entrant ratings are much higher in interest-only (IO) tranches. Ratings by incumbents become more generous as the entrants increase their market share in a product type. We also exploit a feature of structured finance that identifies undisclosed rating shopping.

    Media coverage: Wall Street Journal