Research

Present and future research agenda

Most of my research questions were depicted from particular institutional set-ups, which can be seen as laboratories for the financial sector as a whole. For instance, in diversified firms, multiple business centers exist in different divisions. In a working paper shared with Professors Fernando Anjos, Cláudia Custódio, and Nuno Fernandes, the addition of dedicated financial divisions to non-financial conglomerates is shown to have a positive impact on the efficiency of capital allocation within firms, by playing the role of redistributor and common provider of external financing. The value created by financial diversification is mostly linked to holding divisions, in contrast with vertically integrated financial activities, targeted at exploring firms’ private information.

In private equity, compensation contracts and governance rules are established by an agreement of fund terms', through which managers and investors are associated for the long and fixed time period of a fund’s life. There is little room for manager turnover, or for any contingent rule to be amended. Fund terms are historically known for their complexity and opaqueness to outsiders. In recent years, increased disclosure highlighted a unique setting of highly powered managerial incentives.

In another working paper, I study the relationship between compensation, investment strategies, and performance in private equity. Some funds adopt deal-by-deal carried interest models. Under these rules, bonus payments to General Partners are a function of each deal within the fund. These are paid only when positive deal returns are realized, resembling a portfolio of call options.

I show that deal-by-deal compensation induces greater heterogeneity in portfolio investments. Funds select firms with increased diversification across specific risk factors. Net performance is negatively affected by higher fee payments. This paper uses a new dataset that includes fee and investor cash flow data. In my future research agenda, I intend to expand the time series of this dataset and apply it to the study of other qualitative characteristics of private equity firms.

Covenant violations present a rare opportunity to identify a mechanism of control transfer. The empirical literature has depicted significant reductions in investment and leverage next to technical defaults, both through renegotiation of debt contracts and legal acknowledgment of covenant violations. (Chava and Roberts, 2008; Roberts and Suffi, 2009). Evidence exists of an increased influence of creditors in corporate governance, namely through the appointment of new independent directors (Ferreira, Ferreira, Mariano, 2017) and their influence upon firm policies.

Nonetheless, no evidence has thus far been presented for disinvestment corporate actions. Since disinvestment can transform firms in a structural way that largely survives the time horizon of debt repayment, the extent of its policy implications is beyond doubt. Far-reached and irreversible decisions are often motivated by short-term constraints. Disinvestment can reveal a high degree of creditor interference, signaling a great loss of managerial control to external stakeholders. There is a large potential for welfare transfers from shareholders to creditors in zero or negative-sum games.

In my job market paper, I study the relationship between violations of financial covenants and disinvestment transactions, in non-financial firms. Once covenants are breached, firms disinvest more often both through asset sales and spin-off equity deals. These effects are stronger in firms with higher capital expenditures and investment opportunities.

Disinvestment can be implemented in a faster and more flexible manner through the sale of fixed assets, which occur in larger numbers but with lower average sizes. Asset sales have a higher total volume than equity deals. Equity deals, such as spin-offs, are slower to implement, hence they are less frequent and their size is much larger. Disinvestment differs from adjustments of flow variables, such as investment, financing needs, and payout, for adjusting covenant variables discretely, in one-off effects. Through these discrete adjustments, divesting firms can anticipate their exit from violation status.

In the future, I wish to ascertain whether the presence of hybrid instruments in firm debt structures can mitigate both these effects and any other empirical facts about covenant violations.

I have always been fascinated by the analysis of economic mechanisms, in particular those implying value appropriation and risk transmission. Policy evaluation was a significant part of my doctoral training. In particular, I have a clear penchant for financial stability topics, with a focus on bank supervision. Through my recent teaching and training activities, I have become acquainted with macro-driven research techniques, following a more micro-econometric focus in my Ph.D. In my future research, I am at exploring financial stability angles of corporate bank lending, macroprudential policies, and alternative investment vehicles (such as private equity).