Welcome to my webpage. I am a researcher interested in:
Financial and Information Economics
Contracts and Securities Design
History of Finance
Theory of Economic policy
Abstract: We show that in the limited-commitment framework of Donaldson et al. (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm’s financing constraint. We derive this conclusion using the same contracts considered by the authors and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a non state-contingent secured debt contract, which differs from the ones they consider.
Optimal security design under asymmetric information and profit manipulation (with K. Koufopoulos and R. Kozhan), The Review of Corporate Finance Studies, Volume 8, Issue 1, 1 March 2019, Pages 146–173
Abstract: We consider a model of external financing in which entrepreneurs are privately informed about the quality of their projects and seek funds from competitive financiers. The literature restricts attention to monotonic, or “manipulation proof,” securities and finds that straight debt is the uniquely optimal contract. Monotonicity is commonly justified by the argument that it would endogenously arise if the entrepreneur can window dress the realized earnings before contract maturity. We explicitly characterize the optimal contracts when entrepreneurs engage in window dressing and/or output diversion and derive necessary and sufficient conditions for straight debt to be optimal. Contrary to conventional wisdom, debt is often suboptimal, and it is never uniquely optimal. Optimal contracts are non-monotonic and induce profit manipulation in equilibrium. They can be implemented as performance-sensitive debt.
Finance Theory Working papers:
Abstract: We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm’s cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too high. An increase in pledgeability, or, more broadly, creditor rights, can either promote re-investment in zombie firms, which increases other firms’ cost of capital, or it can lead to inefficient under-investment, depending on the composition of equilibrium credit demand. Thus, greater pledgeability can reduce net social surplus, and even trigger a Pareto loss.
Separating equilibria, under-pricing and security design, with Dan Bernhardt and Kostas Koufopoulos, 2020 ---- Revise & Resubmit at JFE
Abstract: Classical security design papers equate competitive capital markets to securities being fairly-priced in expectation. We revisit Nachman and Noe (1994)'s adverse selection setting, modeling capital-market competition as free entry of investors, and allowing firms to propose prices of securities, as happens in private securities placements and bank lending. In addition to equilibria with pooling on fairly-priced debt, we find: separating equilibria, in which high types issue under-priced debt, while low types issue more-informationally-sensitive securities (e.g., equity); and equilibria with pooling on under-priced debt. We provide theoretical foundations for the pecking-order theory of external finance, and positive profits for uninformed lenders.
Abstract: We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of ‘soft’ information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing.
Abstract: We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm’s cash flows. Bad-news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case, while no disclosure leads to higher borrowing costs. Given a capital structure, disclosure reduces the firm’s de-fault risk by lowering its pay-for-performance sensitivity. However, disclosure may lower both firm value and managerial rents at the financing stage, as it induces a reduction in the firm’s initial liquidity. The model reconciles the empirical evidence on the causes and effects of providing earnings guidance, especially for loss firms
Abstract: I introduce heterogeneous degrees of transparency in a standard costly-state-verification model. I show that the optimal capital structure can be implemented by a simple mixture of debt and equity. Optimal leverage decreases with profitability (both past and expected), in contrast to most competing theories -- such as trade-off models. When firms can choose their degree of transparency at a cost, the model delivers a theory about the decision to go public.
Abstract: We study a costly-state-verification model with limited commitment. We characterize the optimal amount of strategic default and micro-found the frequency with which default turns into bankruptcy, as opposed to triggering an out-of-court restructuring
Economic Theory Working papers:
Abstract: This paper derives conditions under which the introduction of a third-party agent solves the renegotiation-proofness problem of Moore and Repullo (1988)-type mechanisms, without introducing the potential for other agents to collude with the third-party. The key novelties of our mechanism are: (i) the introduction of a third-party agent only off-equilibrium and with some probability; (ii) the fact that both its existence and its identity are unknown to the other agents. We show that under these conditions, which are satisfied in many empirical applications, a hidden third-party agent can restore the implementation of the efficient allocation. If this agent does not observe the state of the world, we provide a sufficient condition for implementation to succeed.
Empirical Working Papers:
Exchange rates and political uncertainty: the Brexit case with P. Manasse and G. Moramarco, 2020
Abstract: We study the impact of political risk on exchange rates. We focus on the Brexit Referendum as it provides a natural experiment where both ex- change rate expectations and a time-varying political risk factor can be measured directly. We build a simple portfolio model which predicts that an increase in the Leave probability triggers a depreciation of the British Pound, both on account of exchange rate expectations and of political risk. We estimate the model for multilateral and bilateral British Pound exchange rates. The results confirm the model’s main implications.
Abstract: We study momentum and its predictability within equities listed at the London Stock Exchange (1820-1930). At the time, this was the largest and most liquid stock market and it was thinly regulated, making for a good laboratory to perform out-of-sample tests. Cross-sectionally, we find that the size and market factors are highly profitable, while long-term reversals are not. Momentum is the most profitable and volatile factor. Its returns resemble an echo: they are high in long- term formation portfolios, and vanish in short-term ones. We uncover momentum in dividends as well. When controlling for dividend momentum, price momentum loses significance and profitability. In the time-series, despite the presence of a few momentum crashes, dynamically hedged portfolios do not improve the performance of static momentum.