Featured New Work (since 2025)
Featured New Work (since 2025)
Embedded Files
Abstract:“Buy Now, Pay Later” (BNPL) is a key innovation in consumer payments. It bundles the sale of a product with a subsidized loan, effectively offering lower prices to low-creditworthiness customers. BNPL thereby allows merchants to price discriminate among customers with different willingness-to-pay. Consistent with a price-discrimination mechanism, we show that BNPL increases sales by 20%, driven by low-creditworthiness customers and products where market power is larger. We find that the benefits of offering BNPL significantly outweigh the costs for the merchant. Our findings help to explain the surge in popularity of BNPL in e-commerce around the world.
Abstract: This paper studies the role of private equity (PE) in stabilizing the financial system in the crisis. Using detailed and proprietary failed bank data from the FDIC combined with information on PE investors, we provide some of the first evidence on PE’s involvement in acquisition and resolution of failed banks during the crisis. PE acquisitions accounted for nearly a quarter of all failed bank assets acquired in the crisis between 2009 and 2014. We find that PEs typically acquire underperforming banks that are riskier than bank-acquired banks. Further, PE failed bank acquisitions are in areas where the neighboring banks were also in distress, and hence had lower ability to acquire. PE-acquired failed banks recovered better than those acquired by banks, measured using the ability to maintain branch operations and deposit growth, despite being underperforming ex ante. Our evidence is consistent with an interpretation that PEs stabilize the financial system in crisis by providing capital to failed bank resolutions and complement bank acquirers by filling the capital gap left by under-capitalized banks.
"Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance," with Chris Martin and Alex Ufier. [SSRN link] forthcoming, Journal of Finance.
Abstract:: Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-off, gross funding inflows are large and of first-order impact — a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.
Working Papers
Working Papers
"Breaking Barriers to Financial Access: Cross-Platform Digital Payments and Credit Markets," with Shashwat Alok, Pulak Ghosh, Nirupama Kulkarni [SSRN link]
Abstract: Can cross-platform digital payments improve credit access at scale? We study this question using India’s launch of the Unified Payments Interface (UPI), a nationwide cross-platform payment system. Using rarely available data on the universe of consumer loans, we show that digital payments increased financial deepening, allowing new borrowers to access formal credit. Banks mainly expanded lending to prime borrowers, while fintechs served all borrower segments—but only fintechs extended credit to new-to-credit customers. Credit growth was strongest in regions with affordable internet and recent bank account penetration. We find no evidence that this expansion increased default rates.
"Inside the Boardroom: Evidence from the Board Structure and Meeting Minutes of Community Banks," with Rosalind Bennett and Paul Soto. [SSRN link]
Abstract: Community banks are critical for local economies, yet research on their corporate governance has been scarce due to limited data availability. We explore a unique, proprietary dataset of board membership and meeting minutes of failed community banks to present several stylized facts regarding their board structure and meetings. Community bank boards have fewer members and a higher percentage of insiders than larger publicly traded banks, and experience little turnover during normal times. Their meetings are held monthly and span about two hours. During times of distress, community bank boards convene less often in regularly scheduled meetings in lieu of impromptu meetings, experience higher turnover, particularly among their independent directors, and their meeting tone switches from neutral to significantly negative. Board attention during distressed times shifts towards discussion of capital and examination oversight, and away from lending activities and meeting formalities.
Abstract: We analyze the effect of a major CBDC – the digital euro – on the payment industry. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. We estimate a loss in market capitalization of USD 127 billion for U.S. payment firms, compared to a gain of USD 23 billion for European payment firms. Our results emphasize the medium-of-exchange function of CBDCs and point to a novel geopolitical dimension of CBDCs: enhanced autonomy in payments.
From Competitors to Partners: Banks' Venture Investments in Fintech ," with Yiming Qian and Xiang Zheng . [SSRN link]
Abstract: We hypothesize and find evidence that banks use venture investments in fintech startups as a strategic approach to navigate fintech competition. We first document that banks’ venture investments have increasingly focused on fintech firms. We find that banks facing greater fintech competition are more likely to make venture investments in fintech startups. Banks target fintech firms that exhibit higher levels of asset complementarities with their own business. Finally, instrumental variable analyses show that venture investments increase the likelihood of operational collaborations and knowledge transfer between the investing bank and the fintech investee.
"Bank Entrepreneurs," with Kristoph Kleiner and Chiwon Yom.
Abstract: This paper provides the first analysis of entrepreneurs chartering deposit-insured banks in the U.S. By merging hand-collected biographical data on directors of De Novo banks with detailed call reports, we directly connect entrepreneurial characteristics to corporate policy and firm outcomes. First, we find strong evidence that bank directors are driven by local opportunities, bring significant banking and managerial experience, have the networks necessary to raise local funding, and extend past lending practices. Second, to better identify the value of the individual entrepreneur, we confirm that a new bank’s lending policies are highly predicted by the lending policies of the CEO’s prior bank. Exploiting these correlated lending strategies, we illustrate the CEO has a causal effect on the performance of the bank, as well as the likelihood of survival and outcomes.
"Small Bank Financing and Funding Hesitancy in a Crisis: Evidence from the Paycheck Protection Program,” with Tetyana Balyuk and Nagpurnanand Prabhala [SSRN link]
Abstract: We study the delivery of subsidized financing to small firms through the Paycheck Protection Program (PPP). Smaller firms are less likely to gain early PPP access, an effect attenuated in small banks and firms with prior lending relationships. Their more even treatment offers a new rationale, beyond traditional soft information arguments, for why small businesses pair with small banks. We also detect a “funding hesitancy” in PPP uptake by small businesses, partly reflecting their wariness of the extensive, subjective government powers to investigate PPP recipients. We discuss the implications of the results for research and policies on small business financing.
Publications
Publications
"The long-term default performance of bank underwritten security issues", Journal of Banking and Finance, 1994, 18(2), 397-418. [Article]
Abstract: The Glass-Steagall Act of 1933 barred commercial banks and their affiliates from underwriting and dealing in securities activities, amidst concerns that banks abused the trust of their depositors and clientele by systematically underwriting poor quality security issues. This paper examines if these concerns were justified by studying the long-term default performance of bank underwritten issues as compared to non-bank underwritten issues. The evidence shows that, contrary to conventional wisdom, bank underwritten issues defaulted less than non-bank underwritten issues, over a seven year period from the issue date and had a significantly lower mortality rate.
"Commercial banks in investment banking: Conflict of interest or certification role?", Journal of Financial Economics, 1996, 40(3), 373-401. [Article]
Abstract: When commercial banks make loans to firms and also underwrite securities, does this hamper or enhance their role as certifiers of firm value? This paper examines empirically the pricing of bank-underwritten securities as compared to investment-house-underwritten securities over a unique period in the U.S. (pre-Glass-Steagall) when both banks and investment houses were allowed to underwrite securities. The evidence shows that investors were willing to pay higher prices for securities underwritten by banks rather than investment houses. The results support a certification role for banks, which is more valuable for junior and information sensitive securities.
"Bank underwriting of debt securities: Modern evidence", with Amar Gande, Anthony Saunders, and Ingo Walter, Review of Financial Studies, 1997, 10(4), 1175-1202. [Article] [SSRN link for an earlier version]
Abstract: This article examines debt securities underwritten by Section 20 subsidiaries of bank holding companies relative to those underwritten by investment houses. Consistent with a net certification effect for banks, bank underwriting of lower credit rated firms to whom the bank lends results in relatively higher prices (lower yields). We find no evidence of conflicts of interest even when an issue is used to repay bank debt. Further, banks bring a relatively larger proportion of small issues to the market. Contrary to the contention that universal banking stunts availability of finance to small firms, bank underwritings appear to benefit small firms.
"Bank entry, competition and the market for corporate securities underwriting", with Amar Gande and Anthony Saunders, Journal of Financial Economics, 1999, 54(2), 165-195. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines the competitive effects of commercial bank entry into the corporate debt underwriting market, particularly with respect to underwriter spreads, ex-ante yields, and market concentration. We find that underwriter spreads and ex-ante yields have declined significantly with bank entry, consistent with the market becoming more competitive. This effect is strongest among the lower-rated and smaller debt issues of which banks have underwritten a relatively greater share. The early evidence also indicates that bank entry has tended to decrease market concentration. Overall, our results suggest that bank entry has had a pro-competitive effect.
"Commercial banks as underwriters: Implications for the going public process", Journal of Financial Economics, 1999, 54(2), 133-163. [Article]
Abstract: Commercial bank entry into securities underwriting can affect underwriter behavior because, unlike investment houses, banks also lend to firms. This raises several issues. Are banks better certifiers of firms’ securities than investment houses? If banks hold equity in firms rather than debt, does this make certification more credible? Would one type of underwriter drive out the other? This paper provides a model for analyzing such issues, and derives several interesting results. First, banks, as lenders to firms, can actually be better certifiers than investment houses. Second, equity holding can hinder banks’ certification ability. Finally, banks and investment houses can co-exist.
"The interaction between product market and financing strategy: The role of venture capital", with Thomas Hellmann, Review of Financial Studies, 2000, 13(4), 959-984. [Article] [SSRN Link for an earlier version].
Abstract: Venture capital financing is widely believed to be influential for new innovative companies. We provide empirical evidence that venture capital financing is related to product market strategies and outcomes of start-ups. Using a unique hand-collected database of Silicon Valley high-tech start-ups. Using a unique hand-collected database of Silicon Valley high-tech start-ups we find that innovator firms are more likely to obtain venture capital than imitator firms. Venture capital is also associated with a significant reduction in the time to bring a product to market, especially for innovators. Our results suggest significant interrelations between investor types and product market dimensions, and a role of venture capital for innovative companies.
"Venture capital and the professionalization of start-up firms: Empirical Evidence", with Thomas Hellmann, Journal of Finance, 2002, 57 (1), 169-197. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines the impact venture capital can have on the development of new firms. Using a hand‐collected data set on Silicon Valley start‐ups, we find that venture capital is related to a variety of professionalization measures, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. Venture‐capital‐backed companies are also more likely and faster to replace the founder with an outside CEO, both in situations that appear adversarial and those mutually agreed to. The evidence suggests that venture capitalists play roles over and beyond those of traditional financial intermediaries.
"Institutional allocation in initial public offerings: Empirical evidence", with R. Aggarwal and N.R. Prabhala, Journal of Finance, 2002, 57(3), 1421-1442. [Article] [SSRN Link for an earlier version]
Abstract: We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book‐building theories. However, institutional allocation also contains private information about first‐day IPO returns not reflected in premarket demand and other public information. Our evidence supports book‐building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book‐building alone.
"Credit ratings, collateral and loan characteristics: Implications for yield", with Kose John and Anthony Lynch, Journal of Business, 2003, 76(3), 371-409. [Article] [SSRN Link for an earlier version]
Abstract: This article studies how collateral affects bond yields. Using a large data set of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claim holders explains this puzzling result by recognizing imperfections in the rating process. We test the model’s implications. Consistent with our model and in results new to the literature, we find the yield differential between secured and unsecured debt, after controlling for credit rating, is larger for low credit rating, nonmortgage assets, longer maturity, and with proxies for lower levels of monitoring.
"Debtor-in-possession financing and bankruptcy resolution: Empirical evidence", with Dahiya, John and Ramirez, Journal of Financial Economics, 2003, 69(1), 259-280. [Article] [SSRN Link for an earlier version]
Abstract: Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorganization and reduce time in bankruptcy. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from Chapter 11 than non-DIP financed firms. DIP financed firms have a shorter reorganization period; they are quicker to emerge and also quicker to liquidate. The reorganization period is even shorter when prior lenders provide the DIP financing.
"Bank borrowers and loan sales: New evidence on the uniqueness of bank loans", with Sandeep Dahiya and Anthony Saunders, Journal of Business, 2003, 76(4), 563-582. [Article] [SSRN Link for an earlier version]
Abstract: This article examines the information content of the sale announcement of a borrower’s loans by its lending bank. We find significant negative stock returns for the borrower on the loan sale announcement, particularly for subpar loan sales, where the bank’s information advantage is greatest. Further, a large proportion of these borrowers file for bankruptcy after the loan sale. The evidence supports the hypothesis that the news of a bank loan sale conveys negative certification, which is validated by the subsequent performance of the firms whose loans are sold. We also find that the selling banks are not significantly affected.
"On the benefits of concurrent lending and underwriting", with Steve Drucker, Journal of Finance, 2005, 60(6), 2763-2800. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines whether there are efficiencies that benefit issuers and underwriters when a financial intermediary concurrently lends to an issuer while also underwriting its public securities offering. We find issuers, particularly noninvestment‐grade issuers for whom informational economies of scope are likely to be large, benefit through lower underwriter fees and discounted loan yield spreads. Underwriters, both commercial banks as well as investment banks, engage in concurrent lending and provide price discounts, albeit in different ways. We find concurrent lending helps underwriters build relationships, increasing the probability of receiving current and future business.
"Enhancing security value by ownership restrictions: Evidence from a natural experiment", with Amar Gande, Financial Management, 2005, 34(4), 35-64. [Article]
Abstract: We present new evidence from a natural experiment to show circumstances in which ownership restrictions can enhance value. Our evidence is based on multiple restricted bond issues by an emerging market issuer at 150 basis points lower than comparable bonds, resulting in a billion dollars saving. This is intriguing: how can an emerging market issuer with junk bond ratings obtain such low yields? We argue ownership restrictions enhance value since they enable an issuer to precommit to renegotiate efficiently with a favored clientele in the potential default states, thereby circumventing deadweight costs of prolonged negotiations, particularly when the restricted clientele also values the underlying collateral higher than other investors. Ownership restrictions can also result in a transfer of value from holders of unrestricted bonds to holders of restricted bonds because of implicit seniority of the latter. We empirically test and find support for both value enhancement and value transfer and show robustness to several alternative explanations. Our evidence suggests that firms can benefit from designing securities with ownership restrictions, by offering new securities exclusively to investors who value them the most.
"Optimism and economic choice", with David Robinson, Journal of Financial Economics, 2007, 86, 71-99. [Article] [SSRN Link for an earlier version]
Abstract: We create a novel measure of optimism using the Survey of Consumer Finance by comparing self-reported life expectancy to that implied by statistical tables. This measure of optimism correlates with positive beliefs about future economic conditions and with psychometric tests of optimism. Optimism is related to numerous work/life choices: more optimistic people work harder, expect to retire later, are more likely to remarry, invest more in individual stocks, and save more. Interestingly, however, moderate optimists display reasonable financial behavior, whereas extreme optimists display financial habits and behavior that are generally not considered prudent.
"Banks in Capital Markets", with Steve Drucker, chapter in Handbook of Empirical Corporate Finance, ed. by E. Eckbo, Handbooks in Finance, North-Holland Publishers, 2007, 189-232. [Article] [SSRN Link for an earlier version]
Abstract: Banks are an important source of funding in economies all around the world, making it vital to understand how banks directly and indirectly affect funding through capital markets. Few issues have perhaps been as controversial as the appropriate scope of bank activities and whether banks should participate directly in capital market activities, providing both lending and other services, such as underwriting. We review the arguments and theoretical models that consider the consequences of commercial banks engaging in investment banking activities, and we examine the empirical evidence on the potential for conflicts of interest, which focuses on the pricing and long run performance of debt and equity underwritten securities, both in the United States and internationally. A related topic is whether investment banks and commercial banks can co-exist as underwriters. We summarize the theoretical and empirical literature, focusing on the effect that bank lending has had on underwriter fees and the ability of banks to win underwriting mandates, as well as how investment banks have adapted to commercial bank entry into investment banking. We also consider the indirect role of commercial banks in capital markets, providing a summary of banks’ ability to signal the quality of borrowers through their decisions to originate and sell loans. Finally we examine related topics, such as the effects of banks holding equity and engaging in venture capital activities, and we suggest research directions.
"Building relationships early: Banks in venture capital", with Thomas Hellmann and Laura Lindsey, Review of Financial Studies, 2008, 21(2), 513-541. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines bank behavior in venture capital. It considers the relation between a bank’s venture capital investments and its subsequent lending, which can be thought of as intertemporal cross-selling. Theory suggests that unlike independent venture capital firms, banks may be strategic investors who seek complementarities between venture capital and lending activities. We find evidence that banks use venture capital investments to build lending relationships. Having a prior relationship with a company in the venture capital market increases a bank’s chance of subsequently granting a loan to that company. Companies can benefit from these relationships through more favorable loan pricing.
"On the importance of retail banking relationships", with Jorg Rocholl, Journal of Financial Economics, 2008, 89(2), 253-267. [Article] [SSRN Link for an earlier version]
Abstract: We use proprietary data to analyze the importance of retail banking relationships to commercial banks and their depositors when banks underwrite securities. We find lead underwriters’ retail customers benefit as they demand and end up with significantly more of the highly underpriced issues. We find it is actual underpricing beyond that predicted by grey markets that drive the differential demand from the lead bank retail clientele, suggesting that banks pass on information about underpriced initial public offerings to their retail depositors. We analyze banks’ incentives for such behavior and find evidence of banks benefiting through retail cross-selling—both brokerage accounts and consumer loans increase significantly.
"On loan sales, loan contracting and lending relationships", with Steve Drucker, Review of Financial Studies, 2009, 22(7), 2835-2872. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines the secondary market for loan sales and, in particular, loan contract design as a mechanism to resolve informational issues in loan sales and associated costs and benefits. Using loan-level data, we find that sold loans contain additional covenants and more restrictive net worth covenants, particularly when agency and informational problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales? Our evidence suggests that these borrowers benefit through increased private debt availability. Further, loan sales go hand in hand with more durable lending relationships, suggesting that risk management aids continued relationship lending.
"Global retail lending in the aftermath of the U.S. financial crisis: Distinguishing between supply and demand effects", with Jorg Rocholl and Sascha Steffen, Journal of Financial Economics, 2011, 100(3), 556-578. [Article] [SSRN Link for an earlier version]
Abstract: This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.
"Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks", with Rajkamal Iyer, American Economic Review, 2012, 102(4), 1414-45. [Article] [SSRN Link for an earlier version]
Map of depositors who ran can be seen on Google Earth using this link. The round dots represent depositors who run; the big star is the bank.
Abstract: We use unique depositor-level data for a bank that faced a run to understand the factors that affect depositor behavior. We find uninsured depositors are most likely to run. Deposit insurance helps, but is only partially effective. Bank-depositor relationships mitigate runs, suggesting that relationship with depositors help banks reduce fragility. In addition, we also find that social networks matter. Finally, we find long-term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications.
"On the lifecycle dynamics of venture-capital and non-venture-capital-financed firms", with Rebecca Zarutskie, Journal of Finance, 2012, 67(6), 2247-93. [Article] [SSRN Link for an earlier version]
Abstract: We use data over 25 years to understand the life cycle dynamics of VC‐ and non‐VC‐financed firms. We find successful and failed VC‐financed firms achieve larger scale but are not more profitable at exit than matched non‐VC‐financed firms. Cumulative failure rates of VC‐financed firms are lower, with the difference driven largely by lower failure rates in the initial years after receiving VC. Our results are not driven by VCs disguising failures as acquisitions or by certain types of VCs. The performance difference between VC‐ and non‐VC‐financed firms narrows in the post‐internet bubble years, but does not disappear.
"A survey of venture capital research", with Marco Da Rin and Thomas Hellmann, chapter in Handbook of the Economics of Finance, ed. by George M. Constantinides, Milton Harris and Rene M. Stulz, Elsevier, 2013, Volume 2, Part A, 573-648. [Article] [SSRN Link for an earlier version]
Abstract: This survey reviews the growing body of academic work on venture capital. It lays out the major data sources used. It examines the work on venture capital investments in companies, looking at issues of selection, contracting, post-investment services, and exits. The survey considers recent work on organizational structures of venture capital firms, and the relationship between general and limited partners. It discusses the work on the returns to venture capital investments. It also examines public policies, and the role of venture capital in the economy at large.
"The economic psychology of entrepreneurship and family business", with David Robinson, Journal of Economics and Management Strategy, 2013, 22(2), 423-44. [Article] [SSRN Link for an earlier version]
Abstract: This paper studies the attitudes of entrepreneurs, both how they differ as a group from others in the economy, as well as how they differ from one another according to the mode of entry into entrepreneurship and whether or not the firm is a family business. We use data from the Survey of Consumer Finance to measure and isolate the enjoyment of private benefits, attitudes toward risk, and optimism for these groups. Entrepreneurs are more optimistic and enjoy the nonpecuniary benefits of work more than wage earners. They embrace risk, but perhaps less so than commonly believed, as their risk‐bearing is tempered by longer planning horizons. Family business owners share optimism and nonpecuniary benefits with other entrepreneurs; their tolerance for risk is not different than wage earners. In contrast, those who inherit businesses are significantly less risk tolerant than nonentrepreneurs, are no more optimistic than nonentrepreneurs, but seem to derive more nonpecuniary benefits from work than others. Simply possessing these entrepreneurial traits translate into actions, increasing the amount of time spent at work, even among those who are not entrepreneurs.
"Managerial attitudes and corporate actions", with John Graham and Cam Harvey, Journal of Financial Economics, 2013, 109(1), 103-21. [Article] [SSRN Link for an earlier version]
Abstract: We administer psychometric tests to senior executives to obtain evidence on their underlying psychological traits and attitudes. We find US CEOs differ significantly from non-US CEOs in terms of their underlying attitudes. In addition, we find that CEOs are significantly more optimistic and risk-tolerant than the lay population. We provide evidence that CEOs' behavioral traits such as optimism and managerial risk-aversion are related to corporate financial policies. Further, we provide new empirical evidence that CEO traits such as risk-aversion and time preference are related to their compensation.
"Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment", with Karthik Krishnan and Debarshi Nandy, Review of Financial Studies, 2015, 28(6), 1768-1809. [Article] [SSRN Link for an earlier version]
Abstract: We analyze how increased access to financing affects firm total factor productivity (TFP) by exploiting a natural experiment following interstate banking deregulations that increased access to bank financing. We find that firms' TFP increases after their states implement these deregulations. Using a regression discontinuity approach based on the Small Business Administration's funding eligibility criteria, we show that TFP increases following the deregulations are significantly greater for financially constrained firms. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up.
"Capital Allocation and Delegation of Decision-Making Authority within Firms", with John Graham and Cam Harvey, Journal of Financial Economics, 2015, 115(3), 449-470. [Article] [SSRN Link for an earlier version]
Abstract: We use a unique data set that contains information on more than 1,000 Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) around the world to investigate the degree to which executives delegate financial decisions and the circumstances that drive variation in delegation. Delegation does not appear to be monolithic; instead, our results show that it varies across corporate policies and also varies with the personal characteristics of the CEO. We find that CEOs delegate financial decisions for which they need the most input, when they are overloaded, and when they are distracted by recent acquisitions. CEOs delegate less when they are knowledgeable (long-tenured or with a finance background). Capital is allocated based on “gut feel” and the personal reputation of the manager running a given division. Finally, corporate politics and corporate socialism affect capital allocation in European and Asian firms.
"A Tale of Two Runs: Depositor Responses to Bank Solvency Risk", with Rajkamal Iyer and Nick Ryan, Journal of Finance, 2016, 71(6), 2687-2726. [Article] [SSRN Link for an earlier version]
Abstract: We examine heterogeneity in depositor responses to solvency risk using depositor‐level data for a bank that faced two different runs. We find that depositors with loans and bank staff are less likely to run than others during a low‐solvency‐risk shock, but are more likely to run during a high‐solvency‐risk shock. Uninsured depositors are also sensitive to bank solvency. In contrast, depositors with older accounts run less, and those with frequent past transactions run more, irrespective of the underlying risk. Our results show that the fragility of a bank depends on the composition of its deposit base.
"What Do A Million Observations Have to Say About Loan Defaults? Opening the Black Box of Relationships," with Jorg Rocholl and Sascha Steffen, Journal of Financial Intermediation, 2017, 31,1-15. [Article] [SSRN Link for an earlier version]
Abstract: Using a unique dataset of more than 1 million loans made by 296 German banks, we evaluate the impact of many aspects of customer–bank relationships on loan default rates. Our research suggests a practical solution to reducing loan defaults for new customers: Have the customer open a simple transactions account – savings or checking account. Observe for some time and then decide whether to make a loan. Loans made under this model have lower default, as banks can use historical data about their borrowers to establish a baseline against which new client-related information can be evaluated. Banks assemble this historical information through relationships of different forms. We define relationships in many different ways to capture non-credit relationships, transaction accounts, as well as the depth and intensity of relationships, and find each of these can provide information that helps reduce default – even establishing a simple savings or checking account and observing the activity prior to loan granting can help reduce loan defaults. Our results show that banks with relationship-specific information act differently compared with banks that do not have this information both in screening and subsequent monitoring borrowers which helps reduce loan defaults.
"Adverse Incentives in Crowdfunding", with Thomas Hildebrand and Jorg Rocholl, Management Science, 2017, 63(3), 587-608. [Article] [SSRN Link for an earlier version]
Abstract: This paper analyzes the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries. Critics suggest that these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depend on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular, we look at group leader bids in the presence of origination fees and find that these bids are (wrongly) perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results from the analysis in this paper provide more general implications for crowdfunding, its structure, and its regulation.
"A Corporate Beauty Contest", with John Graham and Cam Harvey, Management Science, 2017, 63,3044-3058. [Article] [SSRN Link for an earlier version]
Abstract: We provide new evidence that the subjective “look of competence” rather than beauty is important for CEO selection and compensation. Our experiments, studying the facial traits of CEOs using nearly 2,000 subjects, link facial characteristics to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically score the facial traits of CEOs. We find competent looks are priced into CEO compensation, more so than attractiveness. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separately analyze inside and outside CEO hires and find that the competence compensation premium is driven by outside hires—the situation where first impressions are likely to be more important.
"Loan Officer Incentives, Internal Rating Models, and Default Rates," with Tobias Berg and Jorg Rocholl, Review of Finance, 2020, 24(3), 529–578. [Article] [SSRN Link for an earlier version]
Abstract: Manipulation of hard information has been at the center of a wave of investigations into fraudulent bank behavior, such as mis-selling of mortgages and rigging of London Interbank Offered Rate and Foreign Exchange rates. Despite these prominent cases, little is known as to why employees manipulate hard information. Using almost a quarter million retail loan applications, we show that loan officers who face volume-based incentives significantly manipulate ratings even in settings where ratings are computed using hard information only. Manipulation is widespread across loan officers, with low-performing loan officers manipulating more toward the end of the year. These incentives have a first-order effect on bank profitability, reducing return on equity by 1.5 percentage points. We conclude that reliance on hard information does not overcome loan officer agency problems, and it is important for banks and regulators to take manipulation of hard information into account when using hard information for risk assessment and regulation.
"On the rise of FinTechs: Credit Scoring using Digital Footprints," with Tobias Berg, Valentin Burg, and Ana Gombovic, Review of Financial Studies, 2020, 33(7), 2845–2897. [Article] [SSRN Link for an earlier version] Editor's Choice Article.
Abstract: We analyze the information content of a digital footprint—that is, information that users leave online simply by accessing or registering on a Web site—for predicting consumer default. We show that even simple, easily accessible variables from a digital footprint match the information content of credit bureau scores. A digital footprint complements rather than substitutes for credit bureau information and affects access to credit and reduces default rates. We discuss the implications for financial intermediaries’ business models, access to credit for the unbanked, and the behavior of consumers, firms, and regulators in the digital sphere.
What Explains Differences in Finance Research Productivity During the Pandemic?” with Brad Barber, Wei Jiang, Adair Morse, Heather Tookes and Ingrid Werner. [SSRN link]. Journal of Finance, 2021, 76(4), 1607-2081.
Abstract: How has COVID-19 impacted faculty productivity? Does it differ by characteristics such as gender and family structure? To answer these questions, we conduct a survey of American Finance Association (AFA) members. Overall, faculty respondents report lower research productivity with less time allocated to research and more time allocated to teaching. There is also heterogeneity: 14.5% of respondents report an increase in productivity. We find the negative effects on research productivity are particularly large for women and faculty with young children regardless of gender. Thus, the pandemic has the effect of widening the gender gap for women and creates a “family gap” in productivity for both men and women with young children. Lower research productivity for faculty with young children is explained, to a large extent, by increased time spent on childcare. Our results suggest the need for deliberate policy to factor in these underlying mechanisms. We caution that a one-size-fits-all tenure-clock extension can have unintended negative consequences of increasing disparity.
"FinTech Lending," with Tobias Berg and Andreas Fuster. [SSRN link] Annual Review of Financial Economics, 2022, 14:187-207.
Abstract: In this paper, we review the growing literature on FinTech lending – the provision of credit facilitated by technology that improves the customer-lender interaction or lenders’ screening and monitoring of borrowers. FinTech lending has grown rapidly, though in developed economies like the U.S. it still only accounts for a small share of total credit. An increase in convenience and speed appears to have been more central to FinTech lending’s growth than improved screening or monitoring, though there is certainly potential for the latter, as is the case for increased financial inclusion. The COVID 19 pandemic has shown potential vulnerabilities of FinTech lenders, although in certain segments they have displayed rapid growth.
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