Working Papers

• Bank Relationship and Corporate Debt Market Shocks (Job Market Paper)

This paper empirically investigates the role of relationship lending when borrowers face a bond market shock. Relationship lending mitigates the information asymmetry between the relationship lender and borrower while deepens that between relationship lenders and uninformed lenders. The first effect is beneficial to the borrower, while the second effect is detrimental. One way to assess the net effect is to focus on bond market shocks that hit firms irrespective of their ratings. The banks can help their relationship borrowers by imposing a loan rate increase lower than the market; or they can take advantage of them by imposing an even higher rate increase. This paper tests the issue and quantifies the loan rate increase in response to the negative bond market shocks: banks raise the rate only by half the magnitude to their relationship borrowers. It implies relationship long-term loans are 26 bps cheaper than non-relationship long-term loans following a standard deviation increase in the shock. The rate difference is statistically and economically significant. It equals the average rate difference between an AAA-rated borrower and a BBB+-rated borrower. The smaller increase in long-term loan rate reduces the need for relationship firms to conduct costly maturity shifting. The benefit is sizable for all firms of all credit ratings. High-rated firms that tilt more to bond market financing should re-evaluate the importance of maintaining bank relationship following the last financial crisis.

• Obsolescence Risk and Value Creation in M&As (joint with Massimo Massa, and Hong Zhang)

We argue that the standard assessment of value creation in M&As does not factor in the value of reducing the opportunity losses of what would have happened if the deal had not taken place (“obsolescence risk”) nor does the market price reflects it. This implies that the market will price with reduced value with respect to the value of the firm before the action as opposed to the counterfactual scenario of what would have happened if the decision had not been taken. Therefore, the CEO, in order to create value by minimizing a loss – i.e., doing a deal or otherwise accepting the worse alternative by doing nothing– will have to accept a drop in price. This represents a good test of the quality of management: “Good governance” firms are the ones in which managers caring about creating value for the shareholders would be willing to complete deals that create value (actual price less counterfactual price) and still induce a stock price drop (actual price after the deal minus actual price before the deal). We econometrically quantify such value and we exploit this measure to define a proxy of the quality of the CEO and its degree of caring for the shareholders. We show that firms tend to choose the most beneficial action if compared to the counterfactual. A higher ability to deliver counterfactual value predicts future firm profitability. While the market penalizes the CEO who takes the right action in the short-run, it learns in the long-run: portfolios based on a high level (top decile) of counterfactual gain command much higher returns if compared to the portfolios based on low level (bottom decile). This suggests that short-term forms of equity-based compensation make it more difficult for firms to handle obsolescence risk, while long-term skin in the game will help.

Education

• Ph.D. Candidate in Finance, INSEAD, 2020 (expected)
• MSc. in Applied Economics (with distinction), City University of Hong Kong, 2010
• Bachelor of Economics, Zhejiang University, 2009

Teaching Experience

• Financial Markets and Valuations (MBA core course), Tutorial Instructor for Prof. Federico Gavazzoni, Jan-Feb 2018
• Corporate Financial Policy (MBA core course), Tutorial Instructor for Prof. Pascal Maenhout, Nov-Dec 2016 & Nov-Dec 2017
• Corporate Financial Policy (MBA core course), Tutorial Instructor for Prof. Pierre Hillion and Prof. Theo Vermaelen, Mar-Apr 2016