Research

Under current accounting rules, intangible investment must be expensed in the period it is incurred, while tangible investment is capitalized. This means that higher intangible investment reduces a firm’s current earnings. Consequently, firms may cut back on intangible investment to avoid violating earnings-based covenants (EBCs) in the short term. In the data, I find that firms subject to EBCs significantly reduce their intangible investments compared to firms not bound by these covenants when they are concerned about potential violations. I do not find such a pattern for tangible investment. However, this result does not imply that EBCs are bad for firms. EBCs protect lenders by acting as an early intervention mechanism, lowering ex-ante borrowing costs and potentially increasing investment. To assess the macro-level impact of EBCs, I develop a quantitative dynamic model with heterogeneous firms that captures these competing forces. The calibrated model reveals that EBCs on net lead to higher intangible capital and output by lowering borrowing costs. Meanwhile, excluding intangible investment from accounting earnings would lead to further gains in both investment and output.

with Katharina Bergant and Damien Puy

Working Paper

International capital flows are increasingly intermediated by non-bank financial institutions. Focusing on the rise of passive investment vehicles, we examine whether the presence of Exchange Traded Funds (ETFs) makes capital flows to emerging markets more volatile, as well as the potential macroeconomic implications for countries receiving these flows. We find that ETFs are indeed two to three times as sensitive to global uncertainty shocks as traditional mutual funds. However, we find no evidence that countries with a higher share of ETFs in their investor base experience stronger adverse macroeconomic effects, such as lower returns, higher sensitivity of overall portfolio inflows, or higher exchange rate volatility.

Presented at: IMF 6th Annual Macro-Financial Research Conference (coauthor presented).

Working Paper

I study the effect of financial covenants on the investment channel of monetary policy shocks. Using lender-specific financial shocks, which are arguably independent of borrowers’ fundamentals, I find that investment of borrowers with loan contracts containing stricter financial covenants is significantly more (less) responsive to contractionary (expansionary) monetary policy shocks than for borrowers with looser covenants. These findings are not driven by variation across borrowers in default risk, suggesting that financial covenants may serve as an important mechanism through which shocks to lenders can affect monetary policy transmission.

with Tiancheng Sun

Working In Progress

We develop a continuous-time general equilibrium model to explain both the distribution of wealth—including its Pareto tail—and the distribution of private equity ownership. The key mechanism in our model suggests that wealthier individuals, who control more assets and devote more attention to capital markets, are better positioned to invest in high-return private equity, allowing them to grow their wealth faster than those with fewer resources. This systematic return advantage for the wealthy not only explains the high level of wealth inequality but also why private equity is predominantly held by the top 1%.