Research

Academic Publications

1) Origins of Too-Big-to-Fail Policy in the United States (with Edward S. Prescott), Financial History Review, 27(1), 1-15, 2020

• Abstract: This article traces the origin of too-big-to-fail policy in modern US banking to the bailout of the $1.2b Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation's use of the Essentiality Doctrine and Federal Reserve lending. A discussion of this doctrine is used to illustrate how legal constraints on regulators may become less constraining over time

Working Papers

1) Learning by Lending Securities 

• Revise and Resubmit: Journal of Financial Economics

• Abstract: Short sellers convey negative information to securities lenders when borrowing shares. I model how this information generates novel interactions between institutional investors’ equilibrium lending, trading, and governance decisions. First, lower lending fees enhance information quality by facilitating more shorting, yet they also encourage lenders to recall shares to boost their trading profits. Second, index funds cannot trade on lending market information, allowing them to attract more shorting demand and thereby improve price efficiency—despite increasing lending fees. Third, securities lenders can improve firm value through better-informed governance decisions; surprisingly, this outcome can also benefit short sellers, as lenders compensate them with lower fees to preserve the flow of information. Finally, contrary to conventional wisdom, recalling shares to vote can harm firm value by discouraging short sellers from borrowing, making lenders’ votes less informed.

• Winner: Finance Theory Group's best job market paper award (2025). 

2) The Consequences of Index Investing on Managerial Incentives

• Abstract: This paper explores how index investing impacts managerial compensation in a moral hazard setting. With index investing, effort is reflected not only in the manager’s stock price but also in the stock prices of all other constituent firms through the synchronized asset demands of index investors. Thus, the prices of other constituent firms are positively related to and contain unique information about the manager’s effort. The optimal contract puts a positive weight on the index’s price to enhance the effort sensitivity of the manager’s pay, not to reduce risk. Relative performance evaluation is, therefore, not optimal in this setting. Common ownership does not affect the sign of this contract parameter; it only amplifies the magnitude.

3) Expertise, Structure, and Reputation of Corporate Boards (with Doron Levit)

• Abstract: This paper studies the optimal structure of the board with an emphasis on the expertise of directors. The analysis provides three main results. First, the expertise of a value-maximizing board can harm shareholder value. Second, it is optimal to design a board whose members are biased against the manager, especially when their expertise is high. Third, directors’ desire to demonstrate expertise can shift power from the board to the manager on the expense of shareholders. The effect of these reputation concerns is amplified when the communication within the boardroom is transparent.

4) The Stick or the Carrot? The Role of Regulation and Liquidity in Activist Short-Termism (with Adrian Aycan Corum)

• Abstract: We study a model of activist short-termism, where the activist can sell his stake in the target before the impact of his intervention is realized. Lower liquidity or policies that make activists' exit harder can increase firm value if there is only moral hazard (where the activist's intervention creates more value if he exerts effort) or only adverse selection (where some interventions destroy value while others create value). However, these changes destroy total firm value when both moral hazard and adverse selection are present. Policies that reward long-termism can also destroy total firm value, but with a lower likelihood.

Other Publications

1) The 1970s Origins of Too-Big-to-Fail (with Edward S. Prescott), Federal Reserve Bank of Cleveland Economic Commentary, 2017