Research

Published and Forthcoming Papers:

Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information, with Philip Bond, Review of Financial Studies, 29(6), pp.1409-1452.

We investigate the consequences of allowing for repeated capital market transactions in a model with asymmetric information between a firm and its investors. All firms in the model possess a profitable project that they need to raise cash to undertake. However, equilibria exist in which firms return cash to investors via share repurchases. Consistent with managerial accounts, some firms directly profit from repurchasing their stock. The ultimate source of these profits is that other firms buy “high” in order to improve the terms of subsequent stock issues, which is again consistent with empirical evidence. Only equilibria with repurchases satisfy a mild refinement. Repurchases lower social welfare by reducing the fraction of firms that invest, even though repurchasing itself carries no deadweight cost. Our model generates a number of empirical predictions.

A Theory of Multiperiod Debt Structure, with Chong Huang and Martin Oehmke, Review of Financial Studies, 32(11), 4447-4500

We develop a theory of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. As firms increase their borrowing, they add periodic risky repayments from the back of the maturity structure, with the time between repayments increasing in cash-flow risk. Cash-flow growth or a significant risk-free cash-flow component limit the number of periodic risky repayments. Firms with significant risk-free cash-flow component choose dispersed maturity profiles with relatively safe repayments every period, rather than riskier, periodic repayments.

A Dynamic Model of Optimal Creditor Dispersion, Journal of Finance, 76(1), 267-316.

Firms often choose to raise capital from multiple creditors even though doing so may lead to inefficient liquidation caused by coordination failure. Potential coordination failure can, however, improve a firm’s incentive to repay its debt, thus increasing its debt capacity. Given this trade-off between higher liquidation risk and enhanced pledgeability, it is important to understand how firms choose the number of creditors and how this decision changes over time. I build a dynamic rollover model to analyze these questions. Consistent with empirical findings, I show that firms optimally increase the number of creditors when they perform badly. Even though having more creditors increases the liquidation probability, allowing for potential coordination failure from multiple creditors is valuable. Policies that commit the creditors to ex post efficient coordination exacerbate rollover difficulty and the reduction in firm value ex ante. Finally, if the firm can renegotiate its debt very frequently, the extra pledgeability from multiple creditors diminishes. The model also generates empirical implications for the firm value, the interest rates, and the probabilities of liquidation, renegotiation, and default.

Equity Issuance Methods and Dilution, with Mike Burkart, accepted at Review of Corporate Finance Studies

We analyze rights offerings and public offerings in a setting where better informed current shareholders strategically choose to subscribe. When all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. When some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the extra income from selling these rights. When firms can choose the floatation method, either all firms choose the same offer method or high and low quality firms opt for rights offerings while firms of intermediate quality select public offerings. 

Working Papers:

Dynamic Runs and Bankruptcy Regulations, with Zhen Zhou, Revise and Resubmit at Review of Financial Studies

The “automatic stay” and “avoidable preference” (the clawback of some pre-bankruptcy repayments), two key provisions in many countries’ bankruptcy codes, seek to avoid creditor runs on insolvent firms. However, by making it harder for creditors to exit around bankruptcy, these provisions could motivate runs ex-ante. We develop a theoretical framework based on the “clock game” and derive the optimal design of these regulations. We show that splitting control among creditors by introducing covenant-lite lending can improve welfare. Furthermore, policies aiming at higher recovery in bankruptcy may backfire. Finally, firms can survive longer by committing to filing for bankruptcy earlier.

Bigger Pie, Bigger Slice: Liquidity Value and IPO Underpricing, with Yang Guo and Yuanzhi Li

Initial public offerings (IPOs) transform private firms into publicly traded ones, thereby improving liquidity of their shares. Better liquidity increases firm value, which we call “liquidity value”. We use a simple model and hypothesize that issuers and IPO investors bargain over the liquidity value, resulting in a discounted offer price, i.e., IPO underpricing. We find supporting evidence that underpricing is positively related to the expected post-IPO liquidity of the issuer, controlling for firm and deal characteristics and market conditions. We also explore two regulation changes as exogenous shocks to issuers’ liquidity before and after IPO, respectively. With a difference-in-differences approach, we find that underpricing is more pronounced with better expected post-IPO liquidity or lower pre-IPO liquidity.

Share Issues versus Share Repurchases, with Philip Bond and Yue Yuan

Almost all firms repurchase shares through open market repurchase (OMR) programs. In contrast, issue methods are more diverse: both at-the-market offerings, analogous to OMR programs, and SEOs, analogous to the rarely-used tender-offer repurchases are used by significant fractions of firms. Moreover, average SEOs are larger than at-the-market offerings. We show that this asymmetry in the diversity of transaction methods in issuances and repurchases and the size-method relation in issuances are natural consequences of the single informational friction of a firm having superior information to investors. Finally, repurchasing firms are likely maximizing long-term shareholders' payoffs rather than boosting short-term share prices.

Market Structure of Intermediation

Finding good products often requires costly screening effort. A skilled intermediary can represent multiple consumers, generating economies of scale in effort costs. However, consumers still need to find skilled intermediaries, re-creating the original screening friction. I provide a model of intermediary market structure, focusing on the number of rounds, sector size, skill distribution, and effort choices along the intermediation chain. Interestingly, even when the intermediary sector is less skilled than consumers, efficient intermediation can still occur. Furthermore, a two-round intermediation chain makes it possible for intermediaries with different skill levels to self-select into different rounds, approximating the first-best outcome: consumers almost certainly receiving good products with negligible screening costs. Finally, even when intermediaries' skill types are unknown, thereby rendering their self-selection ineffective, a sufficiently long chain can restore first-best efficiency. These results shed light on the structure of social media influencers and the asset management industry.

Efficient Integration: Human, Machine, and Generative AI

I study the optimal integration of humans and technologies in multi-layered decision-making processes. Each layer corrects errors made by previous layers but also introduces new errors. The ratio between these two aspects serves as a one-dimensional quality measure that uniformly ranks all technologies. Optimal integration requires higher quality technologies to be applied later. Furthermore, technologies asymmetrically influence human effort. Initial players specialize in correcting errors, while final players focus on avoiding new errors. When error costs depend on unobservable states, a uniform ranking is not generally possible. Consequently, the introduction of new technologies can significantly disrupt the integration of existing ones.

Brown Spinning, with Yang Guo and Jianing Yuan (draft coming soon)

We analyze firms' spinoff choices concerning pollutive subsidiaries when shareholders, potential buyers, and managers exhibit heterogenous environmental preferences. Stronger environmental preferences among managers and shareholders result in more spinoffs. However, the subsidiary is typically sold to prospective buyers who exhibit a weaker environmental preference, leading to escalated pollution production after acquisition. Despite the more pollutive outcome, the ex-post spinoff threat from shareholders induces managers to adopt greener production levels proactively, even if shareholders have lower environmental concern. Notably, spinoffs diminish when agents experience disutility from economy-wide pollution rather than self-generated pollution.