[UPDATED] Segmented Going-Public Markets with Jessica Bai and Miles Zheng
Abstract: We develop a framework of going-public markets with adverse selection in which regulatory liability risk leads traditional bank underwriters to certify safer, larger firms, while bypassing riskier, smaller but potentially value-creating firms. Non-bank intermediaries fill this gap by exploiting lower liability exposure and equity-based incentives. We document systematic segmentation in U.S. public listings: firms going public through Special Purpose Acquisition Companies (SPACs) are smaller, younger, less profitable, and more volatile than traditional IPO firms. Underscoring this risk, SPAC target firms are more likely to go bankrupt, but conditional on survival, grow revenues faster post-listing. Consistent with gap-filling, SPAC deals increased disproportionately in high- relative to low-litigation industries after a Supreme Court ruling that increased IPO litigation costs. However, the incentives that facilitate gap-filling also generate agency conflicts between sponsors and shareholders. We show that agency conflicts intensify during stock market booms but are mitigated by sponsors with more reputational capital at risk. The results highlight how regulatory frictions and intermediary incentives jointly shape the evolution of going-public markets.
Press: Private Equity Findings | Cited in SEC’s 2022 Proposed Rule on SPACs
Presentations: Western Finance Association Annual Meeting, Chicago Booth Rising Scholars Conference, Clemson Finance Research Conference, Annual Private Markets Conference (scheduled)
[UPDATED] The Real Effects of Liquidity Relief: Evidence from Commercial Rent Forbearance (sole-authored)
Abstract: This paper assesses a key trade-off when extending widespread liquidity relief to businesses during an economic recession: the benefit of saving solvent businesses versus the cost of prolonging survival of insolvent businesses. Using data on business establishments and commercial rent forbearance policies during the Covid-19 recession, I employ a difference-in-differences strategy that compares businesses along the border of adjacent cities that differ in liquidity relief. Overall, forbearance liquidity relief preserves 1.6 percentage points of the pre-existing stock of businesses in liquidity-constrained sectors. Moreover, liquidity relief is more effective at reducing closure among more solvent businesses, since these firms are better able to productively use and repay the borrowing. Turning to the short run, the business closure effects are less aligned with solvency, though I find no evidence of businesses strategically closing when liquidity relief comes due. New businesses do not readily replace those that close during the recession, underscoring the value of preserving existing solvent firms.
Presentations: California Institute of Technology, Claremont McKenna College, University of Colorado Boulder, Pennsylvania State University, University of Notre Dame, Federal Reserve Board: Financial Stability Division, Office of Financial Research, University of Maryland, Michigan State University, Georgia Institute of Technology, Federal Reserve Bank of Boston: Research, Boston College, Federal Reserve Bank of Boston: Supervision, Regulation & Credit, FMA Annual Meeting, Bentley University, MFA Annual Meeting, Esade Spring Workshop (scheduled)
