Working Papers

Title:  Hidden Medical Debt and Consumer Access to Credit (with Elena Loutskina)

Abstract: Credit bureaus face significant frictions in collecting consumer medical debt liabilities data, which spurred an intense ongoing policy debate. Leveraging novel healthcare costs proxies based on Medicare spending data, we evaluate the impact of hidden medical liabilities on consumer credit scoring and access to credit. We document that the traditional creditworthiness measures underestimate the ex-post default for consumers residing in higher healthcare costs markets. Consumers in high-healthcare-cost CBSAs are 36.2% more likely to default than those in low-healthcare-cost CBSAs. These effects are more pronounced among higher risk consumers, those with low credit scores and high DTIs. Lenders internalize these biases and impose higher mortgage rejection rates in high-healthcare-cost CBSAs, particularly for riskier applicants. These effects intensify following a policy shift that partially removed medical liabilities from credit reports without affecting consumer balance sheets. Our findings suggest that limiting the flow of medical liabilities data undermines the predictive accuracy of standard credit metrics, impairs the information value of credit bureau outputs, and leads to less efficient credit allocation.


Title: A Pecking Order in Contingent Convertible Bond Financing (with Linda Allen and Andrea Golfari)

Abstract: We study a pecking order that aligns stockholders’ CoCo financing preferences with the degree of contingent dilution, which specifies whether debt is converted into equity upon CoCo trigger. Using a novel CoCo dilution measure and comprehensive handcollected data across 27 countries, we find that dilutive CoCo issuances (resembling equity issuance) are associated with a negative abnormal announcement return, which is not observable in nondilutive CoCos issuances (resembling debt issues). The announcement effects are more pronounced for CoCos closer to the conversion trigger and Maximum Distributable Amount (MDA) threshold. However, the announcement effects for dilutive CoCos diminish to zero or even reverse to positive effects in periods when aggregate uncertainties related to contingent trigger events are high. During these periods, nondilutive CoCos generate negative returns. The unique contractual features of CoCos offer empirical insights into the divergence between adverse selection and agency costs in pecking order theory.


Title: Risk Perceptions and Corporate Financing Behaviors (with Youngmin Choi and Armen Hovakimian) (R&R, Financial Management)

Abstract: Using a recently developed measure of financial market risk perceptions, we show that risk perceptions affect firm-level corporate financing behavior. Firms tend to adjust their capital structures to cater to investors’ appetite for risk. When perceived risks are low, firms tend to choose more leveraged capital structures to take advantage of higher valuations associated with higher risk exposure. When perceived risks are high, firms tend to deleverage to avoid undervaluation associated with higher risk exposure. Furthermore, in periods of low risk perceptions, bond issue announcement returns tend to be higher, whereas long-run returns tend to decline with leverage.


Title: Zombies in the Syndicated Bank Loan Market: Credit Lines versus Term Loans

Abstract: I document evidence of a potential pitfall of syndicated bank lending that emerges from the aggressive exercise of lines of credit by nonviable zombie firms. Consistent with a nuanced version of Hu and Varas (Journal of Finance 2021) theory, privately informed relationship banks enable zombie firms to build a facade of creditworthiness by allowing aggressive usage of credit lines and restricting amendments that would otherwise signal technical default.  After the reputation-building stage, banks exit these loans by shifting credit risk to non-bank participants in term syndicated bank loans, rather than publicly traded bonds, with the exception of the COVID-19 pandemic period.


Asterisks (*) indicate upcoming presentations