How Risky are the U.S. Corporate Assets? (with Scott Richard, Ivan Shaliastovich, and Amir Yaron) [Presentation at Utah WFC]

Journal of Finance, December 2022

We use market data on corporate bonds and equities to measure the value of U.S. corporate assets and their payouts to investors. In contrast to per share equity dividends, total corporate payouts are very volatile, turn negative when corporations raise capital, and are acyclical. This challenges the notion of risk and return since the risk premium premium  on corporate assets is comparable to the standard equity premium. To reconcile this evidence, we show empirically that  aggregate net issuances are  acyclical and highly volatile, and mask a strong exposure of total payouts' cash components to low-frequency growth risks. We develop an asset-pricing framework to quantitatively assess this economic channel.

De-crypto-ing Signals in Initial Coin Offerings: Evidence of Rational Token Retention (with Deeksha Gupta, and Samuel Rosen)

Management Science, November 2023

Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to alleviate information asymmetry. The underlying technology and the absence of regulation make the ICO market well suited to study this question empirically. Using a hand-collected dataset, we show that ICO issuers that retain a larger fraction of their tokens are more successful in their funding efforts and are more likely to develop a working product. Moreover, we find that retention is a stronger signal when markets are crowded and investors do not have as much time to conduct due diligence.

Market Discipline in the Direct Lending Space (with Tatyana Marchuk, and Samuel Rosen)

Review of Financial Studies, October 2023

Related op-ed in American Banker, June 2024

Using the exclusion of business development companies (BDCs) from stock indexes, this paper studies the effectiveness of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in BDCs' valuations limits their ability to raise new equity capital. Following this funding shock, BDCs do not adjust their capital structure while reducing the risk exposure of their portfolios. We document a greater reduction in risk for BDCs subject to stronger market discipline from their debtholders. BDCs pass through the capital shock to their portfolio firms by reducing their investment intensity. 

Direct Lenders in the U.S. Middle Market (with Tatyana Marchuk, and Samuel Rosen)

Journal of Financial Economics, December 2024

This paper studies the rise of direct lending using a comprehensive dataset of invesments by business development companies (BDCs). We exploit three exogenous shocks to credit supply, including new banking regulations and a major finance company collapse, to establish that BDC capital acts as a substitute for traditional financing. Using firm-level data, we further document that firms' access to BDC funding has stimulated their employment growth and patenting activity. Beyond credit provision, BDCs contribute to firm growth through managerial assistance. We also show that BDC allocations are informative about investment strategies of other private debt funds.

Dynamic Bank Capital Requirements

Basel III requires countercyclical capital buffers to protect the banking system from periods of excessive credit growth and leverage buildup. In this paper, I provide rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 5% and 7% and depends on economic growth, bank credit, and asset prices. The welfare gain of implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.   

Income Inequality, Debt Burden, and COVID-19 (with Deeksha Gupta)

There have been stark differences in the ability of low-income and high-income individuals to protect themselves during the COVID-19 pandemic. Using a triple difference specification, we document that debt burdens contribute to this inequity by disproportionately increasing the cost to low-income individuals of reducing mobility after the start of the pandemic.  This effect is stronger in counties located in states with residential mortgage recourse. Furthermore, the debt burden channel is exacerbated for Black/African-American and Hispanic/Latino borrowers. Additionally, we provide suggestive evidence that this debt burden channel could have contributed to 2.71% more COVID-19 cases.

Corporate Bond Issuance by Financial Institutions (with Tatyana Marchuk, and Ivan Shaliastovich)

Public debt of the financial sector comprises about a quarter of the aggregate market, and more than a third in the investment-grade space. Corporate bond net issuances by financial institutions occur at the inflection points in business, financial, and monetary policy cycles unlike other capital flow measures. High bond net issuances follow periods of high economic growth and market returns, low uncertainty and credit spreads, monetary policy tightening, and predict a subsequent reversal of the cycles.  The effects are mostly driven by large, sophisticated, and heavily regulated financial intermediaries. These institutions actively time their bond net issuances to benefit from accommodating interest rate environments, and to build-up capital in anticipation of future economic slowdowns and tighter regulatory constraints. 

Common Investors Across the Capital Structure: Private Debt Funds as Dual Holders (with Isil Erel, Wei Jiang, and Tatyana Marchuk)

This paper examines the dual role of Business Development Companies (BDCs) as creditors and shareholders in the private direct lending market. Utilizing a comprehensive deal-level database, our analysis shows that dualholder BDCs are more effective monitors than sole lenders, benefiting from enhanced tools for information access and governance. This effectiveness allows them to charge higher loan spreads, while simultaneously reducing credit risk and lowering the borrowing cost of portfolio firms from other lenders. We rule out alternative explanations attributing higher loan spreads to mere compensation for capital injection or to hold-up by a dominant financier. Our findings highlight a critical mechanism through which BDCs serve a market segment - mid-sized firms with low (or even negative) cash flows and a lack of collateral but high growth potentials - that is typically undesired by traditional lenders. 

The Decline in U.S. Public Firms (with Brent Glover, and Rachel Szymanski)

Since its peak in 1996, the number of publicly listed U.S. firms has declined by approximately 50%. In addition, U.S. publicly listed firms are now on average larger and older than they were two decades ago. We collect a set of empirical facts on the changes in the distributions as well as entry and exit rates for public and private firms. We develop a model to evaluate which of two mechanisms — an increase in the cost of being public or a shift in the supply of private firm financing — can explain the decline in US public listings and changes in the firm distribution. We calibrate the model to match the data prior to 1996 and then quantify the extent to which these two mechanisms can explain the changes observed in the data.