Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads (with Cem Demiroglu and Christopher James), Journal of Financial Economics, 2022.
Past studies find that commercial loan spreads are “sticky” in the sense that they do not fully respond to changes in open market rates or observable firm credit risk characteristics. In this paper, we provide evidence that the appearance of stickiness arises, in part, because the intensity of bank screening varies inversely with changes in both observable firm credit risk characteristics and credit market conditions. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing or misallocation of credit.
When Do CDS Spreads Lead? Rating Events, Private Entities, and Firm-Specific Information Flows (with Jongsub Lee and Andy Naranjo), Journal of Financial Economics, 2018
We find that credit default swap (CDS) spreads contribute significantly to price discovery in financial markets when firm-specific credit information is prominent. Using 3,470 S&P rating notch and watch changes for US public and private entities from 2001–2013, we show that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities such as stocks and bonds of the same firm. Credit information unidirectionally flows from CDS to bonds, particularly for private entities whose stocks are not concurrently trading in markets. We further find that CDS returns significantly predict stock returns, particularly their idiosyncratic components.
Are ESG Ratings Relevant? Evidence from Dividend Cuts
I find that the market reactions to dividend cuts are significantly less severe when the underlying firms have high Environmental, Social, and Governance (ESG) ratings. Among different components of ESG ratings, I find that the environmental pillar rating contributes most significantly to my findings. I further document that high ESG performance premium tends to partially substitute for dividend premium. Overall, my findings are consistent with the notion that negative demand shocks from dividend cuts are absorbed with milder reactions when firms are favored by ESG-motivated investors.
Liquidity in the Cross Section of OTC Assets (with Semih Uslu), Revise and Resubmit, Management Science
We develop a dynamic model of a multi-asset over-the-counter (OTC) market that operates via search and bargaining and empirically test its implications regarding liquidity in the cross section of assets. The key novelty in our model is that investors can hold and manage portfolios of OTC-traded assets. We characterize the stationary equilibrium in closed form and derive natural proxies for asset-specific measures of market liquidity including trade volume, price dispersion, and price impact. Our theoretical results uncover how the general equilibrium (GE) effects shape the patterns of liquidity measures in the cross section of OTC-traded assets. For example, heightened search frictions in one asset trigger fire sales in other assets by increasing other assets’ trade volume but also making them trade with larger price impact and price dispersion. Based on data from the US corporate bond market and the CDS market, our empirical tests confirm these key cross-sectional liquidity implications of our general-equilibrium OTC framework.
Climate Policy and Financial Constraints