Research

This paper exploits an influx of Chinese students to US universities from 2000 through 2018 to study synergies between banks' deposit-taking and lending activities. Banks that are more recognizable by Chinese students experience higher deposit inflows and increase their local credit supply. This credit supply expansion only occurs in information sensitive credit markets: small business loans and second lien mortgages. Such increase concentrates in non-tradable sectors and is more pronounced at locations where managers have more autonomy. The results indicate that deposits from local consumers convey private information about the local credit market, which helps banks in information-sensitive lending. 

We test whether measures of influence on regulators affect stress test outcomes.  The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests.  Stress tests have a greater effect on large trading banks’ portfolios; the large banks respond by making more conservative (initial) capital plans; and, despite their more conservative capital plans, the large banks still fail their tests more frequently than other banks. In contrast, while we find no evidence that political or regulatory connections affect the quantitative element of the stress tests, these connected banks do face less scrutiny under its qualitative dimension.

Relative performance evaluation (RPE) intensifies competitive pressure by tying executive compensation to the profits of rivals. We show that these contracts make loan syndication harder by reducing banks’ willingness to participate in loans underwritten by banks named in their RPE contracts. Lead arranger banks which are more frequently named in RPE hold larger shares of the loans they syndicate, and their borrowers face higher spreads. These banks, in turn, lose market share to banks less likely to be named in RPE. Our results highlight the tension between the normal benefits of competition versus the need for cooperation in loan syndication. 

This paper studies banks’ investment in risk management human capital following the Global Financial Crisis and the advent of stress testing. Our results suggest that ‘Too Big to Fail’ distortions may have weakened large banks’ incentive to invest in risk management talent. Stress testing, which focuses on the largest banks, spurred demand for skilled quantitative risk managers, but only narrowly in anticipation of a test and following poor performance on a test. Stress testing does not affect demand for the over 90% of risk management jobs not linked to passing tests, limiting its effectiveness in improving risk management practices.

Bank branch density, defined as the number of a bank’s branches to its total deposits, declined significantly between 2010 and 2022 due to branch closures and a near doubling of deposits. Although banks with low branch density initially benefited from large deposit inflows, their stock prices plummeted during the 2023 Banking Crisis, when they faced significant outflows of uninsured deposits. Our results suggest that by offering digital banking services and higher deposit rates, low-density banks grew faster and attracted large uninsured deposits, yet when economic conditions worsened, those deposit inflows took the form of “hot money” that changed course.

Optimal board size is a fundamental question in corporate governance with prior research linking board size to a firm’s complexity. Typically, complexity is coarsely measured by broad spectrum variables. We propose applying a complexity lexicon to the firm’s annual report as a more focused measure of the underlying construct of complexity. The use of complexity terms (i.e., lawsuits, worldwide, mergers, and derivatives) within annual reports significantly predicts board size. Firms requiring more advice from their directors use more accounting, hedging, international, and organizational form words, while companies requiring more monitoring use more finance and legal complexity terms.

Our paper introduces a new measure of banks’ exposure to interest rate volatility, which we term as banks’ convexity risk. We show that higher convexity risk is associated with higher future volatility of bank balance sheets, lower growth rates of deposits and credit, and an increased demand for precautionary liquid assets. The results hold after controlling for existing measures of bank interest rate risk. Our results suggest that interest rate uncertainty matters for banks with implications for financial stability.

I study the impact of geographic concentration on banks’ liquidity management behaviors during liquidity crises. The results lend support to the view that concentrated banks invest more in private information production. On the asset side, concentrated banks hold loan portfolios that contain more private information, which becomes harder to sell as the environment becomes increasingly illiquid. I show that banks that were more concentrated in the home mortgage market were more likely to increase their liquid assets and reduce new lending during the 2007-2009 liquidity crisis. On the liability side, concentrated banks invest more in private information in deposit markets and have closer connections with local communities, which mitigates liquidity risk. I show that banks with concentrated deposit resources experience higher deposit inflows, and are less likely to hoard liquidity or cut new lending during the liquidity crisis. My results suggest that geographic concentration measured on either side of the balance sheet affects banks’ liquidity management differently.

We exploit changes in the aggregate stock market conditions as an exogenous shock to an individual M&A deal to explore the economic motivations behind these deals. Equity deals exposed to negative stock market returns after deal announcements are less likely to be completed and deliver lower abnormal returns for both acquirers and targets, especially when acquirers' market betas are high. In contrast, cash deals are not affected by the negative post-announcement market conditions. Further analyses indicate that synergies, rather than mispricing, are the leading motive behind deals affected by changes in stock market conditions.