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Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets (with Sébastien Pouget) view

Revise and Resubmit at Journal of Corporate Finance

Presented at ESG Workshop @Toulouse Business School 2025, HEC Paris seminar 2024, ESSEC-Amundi chair 2024, Wilfrid Laurier University seminar 2024, EUROFIDAI – ESSEC Paris December Finance Meeting 2023, UC Riverside seminar 2023, USC brownbag seminar 2023, BI brownbag seminar 2023, University of Utah seminar 2023, Chapman University seminar 2023, Manchester business schoool brownbag seminar

Abstract: We empirically study whether carbon emissions affect firms' cost of capital raised on bond markets. We find that firms with higher carbon emissions face higher spreads in the secondary market but not in the primary market. We show that this gap is related to uncertainty about climate concerns that affects differently primary and secondary market. This gap is also affected by the reputation of underwriting dealers: high reputation promotes the incorporation of climate concerns into bond yields. Our findings imply that, on average, carbon emissions do not affect the cost of capital in bond markets, thereby reducing firms' financial incentives for decarbonization.

Leverage Thresholds and the Priority of Capital Structure (with Alan Douglas and Tu Nguyen)

Revise and Resubmit at Review of Corporate Finance Studies

Abstract: This paper presents and tests a theory in which firms manage capital structure using simple rules, largely ignoring leverage until it approaches critical thresholds. We formalize this behavior in a structural agency model in which incentive conflicts gain priority only outside a safe leverage range. We structurally identify firm-specific thresholds averaging 8.7% and 76% debt-to-assets, with variation linked to model-predicted determinants including free cash flow, governance and risk. The model achieves predictive accuracy between 68% and 74%. Our findings help reconcile theoretical predictions with real-world financial decision-making.

Estimating the Firm Investment Equation: Tobin's q with Mismeasurement and Feedback (with Karim Chalak) view

Presented at Cambridge University seminar 2025, North American Summer Meeting of the Econometric Society 2024, University of Warwick seminar 2024, CeMMAP – Turing Economic Data Science Workshop 2024, Aarhus Workshop in Econometrics III 2024, International Symposium on Nonparametric Statistics 2024, University of Manchester Econometrics Lunch 2024, University of Manchester Brown Bag Economics seminars 2024, Southern Economic Association 2024

Abstract: We extend the standard q theory investment equation specification to allow Tobin's q to serve as an error-laden proxy for marginal q while simultaneously directly affecting the firm's investment decision. The latter channel reflects the feedback effect from the financial markets on firms' investment decisions. Using (1) bounds based on auxiliary restrictions on the signs of the coefficients and/or the magnitude of Tobin's q reliability ratio and (2) point estimates obtained using a novel higher order moments estimator, we estimate a nonzero feedback effect from the financial market. Our estimates show that the more precise the signal from the financial market is, the more sensitive the management investment decision to it will be.

Sowing Public Seeds, Reaping Private Blooms: A Q-theoretical Approach to Government Investment (with Zhiyao Chen and Ran Duchin) view

Presented at FMA Annual meeting 2025, Swiss Society for Financial Market Research 2025, Sixth PHBS-CUHKSZ Economics and Finance Workshop 2024, NFA 2024

Abstract: We study government investment across US states and counties in a Q-theoretical framework. We develop novel measures of regional government Qs, derived from municipal bonds, and private sector Qs, derived from a decomposition of corporate Qs. The main findings are that government investment is positively correlated with government Qs and negatively correlated with private sector Qs. We explain these findings with a model in which governments invest to maximize social welfare, considering their impact on private investment. Accordingly, we find stronger effects in regions with large subsidy programs, low levels of corruption, and following adverse employment shocks. Overall, the findings have two key implications: (1) Government investment crowds-in private sector activity, and (2) Governments leverage information from capital markets to inform government investment decisions.

Testing the q-theory under endogenous truncation (with Ilan Cooper, and Moshe Kim) view

Presented at CUNEF University seminar 2025, WFA 2024, SFS Cavalcade North America 2024, University of Cyprus 2024, World Finance Conference 2024, NYU Abu Dhabi seminar 2024, European Winter Meeting of the Econometric Society 2023, EEA-ESEM 2023, FMA 2023, International Conference on Empirical Economics, Finance Down Under 2023, Australasian Finance and Banking Conference 2022, NFN Young Scholars Workshop 2022, BI Oslo Brown Bag 2021, Oslo Metropolitan University seminar 2021

Abstract: Studies often employ truncated samples of publicly listed firms due to the lack of data on private firms. This truncation, however, is not random because listing is a choice for many firms, whereas others cannot list due to their characteristics. The ensuing endogenous truncation entails biased estimates. We develop a novel methodology that corrects for the bias. We apply the methodology to study the determinants of investment. In cross-sectional regressions the bias-corrected investment-q sensitivity turns from significantly slightly negative to significantly positive, thereby lending strong support for the q-theory. Our econometric framework is applicable in various other economic contexts.

It's not easy being green (with Jonathan Brogaard, Nataliya Gerasimova, and Maximilian Rohrer) view

Presented at EUROFIDAI-ESSEC Paris December Finance Meeting 2025, 34th Annual Conference on Financial Economics and Accounting 2024, Stavanger university seminar 2023, Australian National University seminar 2023, Fourth BI Conference on Corporate Governance 2023, Monash seminar 2023, University of Waterloo seminar 2023, BI Brown Bag seminar 2022

Abstract: This paper estimates the green cost premium paid by customers using US federal procurement contracts with standardized sustainability clauses. We find that green products cost 25-38% more than comparable non-green alternatives, and up to 188% more after accounting for endogeneity. The premium is mostly transient and driven by regulatory burden and supply chain frictions. These findings suggest that a successful green transition depends not only on investor support, as emphasized in the existing literature, but also on customers' willingness to pay the higher cost of sustainable goods.

Municipal Bond Insurance and Public Infrastructure: Evidence from Drinking Water (with Ashwini Agrawal) view

Presented at AFA 2022, NBER Corporate Finance Program Meeting Spring 2021, Nordic Finance Network (NFN) Young Scholars Finance Webinar 2021, BI brownbag seminar 2021, Durham University Business School seminar 2021, LSE brownbag seminar 2021, University of Nottingham seminar 2021, Asia-Pacific Association of Derivatives (APAD) 2021, Municipal Finance Conference (Brookings Institution) 2021, NFA 2021, Stockholm Business School seminar 2021

Abstract: Although bond insurance intermediaries are frequently relied upon by local governments for external financing, there is significant debate about the value that bond insurers provide. In this paper, we study U.S. drinking water to estimate the real effects of bond insurance on public infrastructure. We show that exogenous reductions in municipalities' access to bond insurance cause local governments to face higher borrowing costs, reduce external bond issuance, decrease investment in water infrastructure, and experience greater drinking water pollution. The evidence supports the view that well-functioning insurance markets for municipal debt have significant real effects on public infrastructure.

Estimating the Feedback Among Credit Rating Agencies and its Impact on the Municipal Bond Market (with Karim Chalak) view

Presented at BI Oslo Brown Bag 2021, Nordic Finance Network (NFN) Young Scholars Finance Webinar 2021, FMA European 2022, International Workshop on Interactive Causal Learning Washington D.C. 2022

Abstract: Local governments often seek credit ratings from multiple agencies for external financing. Rating shopping and catering, the incentives of the rating agencies, and the career incentives of the analysts issuing the ratings may render the ratings interdependent. This paper estimates the feedback among the credit ratings as well as the impact of the ratings on a bond's yield. To this end, we put forward a simultaneous equations model with three features. First, the model allows the bond's latent fundamental (i.e. credit worthiness) and observed characteristics to directly influence its ratings and yield. Second, the model allows each credit rating to influence the other ratings. Third, the model allows each credit rating to influence a bond's yield. To tackle the simultaneity and endogeneity in the model, we make use of higher order moments. We report simulation results that support our novel econometric framework. We report several important empirical findings. First, ceteris paribus, an agency increases its rating in response to another agency increasing its rating. Second, in full equilibrium, the feedback improves the overall quality of the ratings, measured by the reliability ratio. Third, a ceteris paribus increase in a credit rating decreases the bond yield, corroborating the literature's previous findings. Last, we document a separate substantive effect of the latent fundamental on the yield.

Evolution of Debtor Rights view

Presented at Research Conference on "Financial Distress, Bankruptcy, and Corporate Finance", BI Norwegian Business School seminar, CUHK Business School seminar, Federal Reserve Board seminar, Temple University (Fox) seminar, INSEAD seminar, UNSW Business School seminar, Wharton PhD seminar, Trans-Atlantic Doctoral Conference 2018, INSEAD-Wharton Doctoral Consortium 2018

Abstract: Debtor rights vis-a-vis creditor during bankruptcy can evolve over time due to changes in the nature of the prevailing bankruptcy law and its practice. I empirically study such a time-series trend in debtor rights using comprehensive sample of U.S. firms. To this end, I develop a dynamic model to estimate debtor rights and examine its implications. Larger debtor rights make debtors more willing to default, which increases borrowing costs. In response, firms lower leverage ex-ante. This channel helps to match joint distributions of leverage and default probabilities. Structural estimation reveals a change over time: debtor rights increased from 1.2% to 4.4% around the Bankruptcy Reform Act of 1978, and has gradually decreased back to zero in the subsequent four decades.

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