with Ram Yamarthy, latest version June 2022, Journal of Monetary Economics (2022)
with Evgeny Lyandres and Daniel Rabetti, latest version September 2021, Management Science (2022)
We compile a comprehensive dataset of initial coin offerings (ICOs) from 19 data sources including 11 ICO aggregators. We alleviate severe limitations of available ICO data by performing the first systematic analysis of ICO data quality. We use our dataset to study determinants of ICO funding success as well as post-ICO operating performance and provide evidence on some novel determinants of initial and longer-term ICO success. Finally, we show that post-ICO operating performance is positively associated with contemporaneous token returns and is generally negatively associated with token return volatility, suggesting that post-ICO operating performance has financial ramifications.
with Juliane Begenau, Journal of Financial Economics (2021)
Journal of Financial Economics Editor's choice
World Finance Conference Best Paper Award
Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.
with Xiaoji Lin and Fan Yang, Journal of Monetary Economics (2020)
A dynamic model featuring a stochastic technology frontier shows significant impact of technology adoption for asset prices. In equilibrium, firms operating with old capital are riskier because costly technology adoption restricts their flexibilities in upgrading to the latest technology, making them more exposed to technology frontier shocks. Consistent with the model predictions, a long-short portfolio sorted on firm-level capital age earns an average value-weighted return of 9% per year among U.S. public companies. A proxy for technology frontier shocks captures the variation of the capital age portfolios with a positive risk price, corroborating the model mechanism.
Annals of Finance (2019)
This paper explores the effects of a firm’s cash flow systematic risk on its optimal capital structure. In a model where firms are allowed to borrow resources from a competitive lending sector, those with cash flows more correlated with the aggregate economy (i.e., firms with riskier assets in place) choose a lower leverage given their higher expected financing costs. On the other hand, less risky firms, having lower expected financing costs, optimally choose to issue more debt to exploit a tax advantage. The model predicts that cash flow systematic risk is negative correlated with leverage and corporate bond yields.
with Gian Luca Clementi, Journal of Finance (2019)
We confront the one-factor production-based asset pricing model with the evidence on firm-level investment, to uncover that it produces implications for the dynamics of capital that are seriously at odds with the evidence. The data shows that, upon being hit by adverse profitability shocks, large public firms have ample latitude to divest their least productive assets and downsize. In turn, this reduces the risk faced by their shareholders and the returns that they are likely to demand. It follows that when the frictions to capital adjustment are shaped to respect the evidence on investment, the model–generated cross–sectional dispersion of returns is only a small fraction of what documented in the data. Our conclusions hold true even when either operating or labor leverage are modeled in ways that were shown to be promising in the extant literature.
A reply to by Bai, Li, Xue, and Zhang
with Evgeny Lyandres, Journal of Financial and Quantitative Analysis (2016)
WU Gutmann Center Best Paper Award, The European Winter Finance Summit
We demonstrate theoretically and empirically that strategic considerations are important in shaping cash policies of innovative firms. In our model, firms decide whether to invest ininnovation while facing uncertainty regarding the structure of ensuing product markets. Cash holdings reduce innovative firms’ dependence on external financing and, therefore, serve as a commitment device for future investment. We show that firms’ equilibrium cash holdings are related to expected intensity of competition in future product markets and that this relationis affected by the degree of financial constraints that firms face. We test our model using a sample of firms that are direct competitors in innovation. Consistent with the strategic motive for hoarding cash, we show that firms’ cash holdings are negatively affected by their rivals’ cash holding choices, more so when competition is expected to be intense. In addition, we examine two instances of exogenous shocks to firms’ costs of external financing and show that financial constrains influence the relation between firms’ cash holdings and expected competition intensity in ways consistent with the model’s predictions.
with Gian Luca Clementi, American Economic Journal: Macroeconomics (2016)
Do firm entry and exit play a major role in shaping aggregate dynamics? Our answeris yes. Entry and exit amplify and propagate the effects of aggregate shocks. In turn, this leads to greater persistence and unconditional variation of aggregate time series. These results stem from well-documented features of firm dynamics such as pro–cyclical entry and the negative association between age and growth. In the aftermath of a positive aggregate productivity shock, the number of entrants increases. Since the new firms are smaller than the incumbents, as in the data, the initial impact on aggregate dynamics is negligible. However, as the common productivity component reverts to its unconditional mean, the new entrants that survive grow larger over time, generating a wider and longer expansion than in a scenario without entry or exit. Thetheory also identifies a causal link between the drop in establishments at the outsetof the great recession and the painstakingly slow speed of the recovery from it.
Journal of Financial Economics (2012)
In this paper I develop and empirically test a model that highlights how the correlation between cash flows and a source of aggregate risk affects a firm’s optimal cash holding policy. In the model, riskier firms (i.e.,firms with a higher correlation between cash flows and the aggregate shock) are more likely to use costly external funding to finance their growth option exercises and have higher optimal savings. This precautionary savings motive implies a positive relation between expected equity returns and cash holdings. In addition, this positive relation is stronger for firms with less valuable growth options. Using a data set of US pubiccompanies, I find evidence consistent with the model’s predictions.
with Diego Bonelli and Ram Yamarthy, latest version November 2024
Using inflation swap prices, we study how expected inflation is priced in firm-level credit spreads and equity returns, and uncover evidence of a time-varying inflation sensitivity. In times of market-perceived “good inflation,” when inflation news is more positively correlated with real economic growth, movements in expected inflation substantially reduce corporate credit spreads and raise equity valuations. Meanwhile in times of “bad inflation,” these effects are attenuated and the opposite can take place. These dynamics naturally arise in an equilibrium asset pricing model with a timevarying inflation-growth relationship and persistent macroeconomic expectations
with Raffaele Corvino and Federico Maglione, latest version November 2024
We show that the market value of leverage is generally lower than the corresponding book leverage, displays pronounced time variation, and tends to spike during periods of financial markets turmoil. More importantly, and contrary to book leverage, fluctuations in market leverage exhibit a declining time trend following the Global Financial Crisis. These results owe to a new estimation methodology that jointly uses information from both equity and credit markets to generate a high frequency estimate of market leverage at the firm-level, in real-time. Using our nowcasting procedure, we also develop a real-time measure of financial soundness and show that market leverage is an important driver of financial markets' time-varying fragility.
with Antonio Gil de Rubio Cruz, Emilio Osambela, Francisco Palomino, and Gustavo Suarez, latest version November 2023
U.S. stocks' response to inflation surprises is, on average, robustly negative. Stocks' response to positive inflation surprises shows much more pronounced time-series variability than their response to negative inflation surprises. In our sample, stocks react significantly to positive inflation surprises only when there is a contemporaneous change in monetary policy expectations. In the cross-section, firms with low net leverage, large market capitalization, high market beta, low book-to-market, and low market power (i.e. low markups) are especially susceptible to inflation surprises.
with Marco Casiraghi and Thomas McGregor, latest version November 2020
This paper investigates the role of business dynamism in the transmission of monetary policy by exploiting the variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions to interpret our findings. The model’s results are consistent with the empirical evidence.
with Mamdouh Medhat, latest version June 2020
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity financing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a significant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones related to R&D expenditures and cash-based operating profitability.
With R. David McLean, latest version April 2018
We study the motives for long-term debt issues. The primary use of debt issue proceeds is repurchasing noncurrent debt. These repurchases combined with rollovers consume 57% of proceeds, so most debt issues are not used for investment and operations and do not impact leverage. Regardless of proceed use, debt issues are associated with overoptimistic analysts’ earnings forecasts and subsequent earnings declines. Even among liquidity squeezed firms, earnings optimism is a deciding factor in issuance decisions, as lower optimism leads to fewer debt issues and reduced investment. Our findings suggest that firm-specific sentiment has a first-order impact on debt issue decisions.
with Gian Luca Clementi, latest version January 2015
We show that, in the context of the neoclassical model of investment with mean reverting and log–normally distributed productivity shocks, information on the asymptotic distribution of the investment rate does not identify the parameters of the stochastic process. This likely explains why a variety of recent models with firm–level heterogeneity – both in macroeconomics and finance – are able to generate sensible cross–sectional investment rate moments in spite of assuming radically different values for the persistence and volatility of the shocks. Information on investment rates does entail a restriction on the two parameters, which in turn implies that – contingent on the curvature of the production function – not all recent estimates of the parameters will be consistent with empirically plausible cross–sectional investment rate moments.
FEDS Notes (2023)
with Christine Dobridge and Rebecca John, FEDS Notes (2022)
with Jack McCoy, Michele Modugno, and Steve A. Sharpe, FEDS Notes (2020)
We develop novel macroeconomic surprise indices to identify the impact of macroeconomic releases on aggregate stock market returns over the FOMC cycle. We find that the aggregate stock prices are positively correlated with our real economic activity news index and negatively correlated with our price news index.
with Jie Yang, FEDS Notes (2019)
In this note, we show that the key driver of the 2019:Q1 increase in the leverage ratio appears to be a change in accounting rules – which requires the inclusion of operating leases as financial liabilities on U.S. corporations' balance sheets – and also provide a methodology for adjusting the leverage ratio to allow for cleaner historical comparisons.
The views expressed here are the views of the author and do not necessarily represent the views of the Federal Reserve Board of Governors, the Federal Reserve System, or the Federal Open Market Committee.