Working papers

1. Political polarization in financial news, with Ryan Israelsen and Eitan Goldman, revise and resubmit, Journal of Financial Economics. (Slides)

Political news is known to be polarized, but standard explanations for polarization do not apply to financial news. Nevertheless, we find strong evidence of political polarization in the tone and coverage of corporate financial news. In particular, we find that the tone of corporate financial news coverage is more positive, and the likelihood that good (bad) news is reported is higher (lower), if the firm is politically aligned with the news source. Such polarization implies that different market participants may be exposed to differing news about the same firm on the same day. Consistent with this argument, we find that disagreement between news sources increases trading volume, and these effects are larger for firms at the political extremes. Our paper highlights a novel source of bias in financial news that can be important for investors.

Does high pay cause a “brain-drain” to finance shrinking the pool of potential entrepreneurs? Or do talented bankers ease financial access for skilled entrepreneurs? Comparing engineers from the same school-engineering-major graduating one-year apart, those exogenously exposed to high finance wages at graduation are more likely to take finance jobs and less likely to subsequently become entrepreneurs. But high finance wages also increase entrepreneurship in that graduating class. Consistent with peer effects, engineers are more likely to become successful entrepreneurs if more of their classmates are venture capitalists. Contrary to conventional wisdom, we find that the finance wage-premium increases transformational entrepreneurship.

4. "Does money follow the flag?" with Xiaoyun Yu.


1. “Financial development and micro-entrepreneurship,” with Rajeev Dehejia, forthcoming, Journal of Financial and Quantitative Analysis. (Slides)

Does financial development facilitate micro-entrepreneurship? Using randomized surveys of over 1 million Indian households and district-level bank branch location pre-determined by government policy, we find that access to finance shifts workers from informal micro-entrepreneurship into formal employment. Financial access reduces the likelihood of being self-employed without any employees, but benefits productive micro-enterprises that employ workers, and formal firms. Investigating the mechanism using data on 400,000 firms, we find that in districts with more banks, established firms borrow more, are more productive, employ more workers, and pay higher wages than firms in less banked districts. This evidence suggests a labor market mechanism by which financial development facilitates growth: by shifting workers from unproductive micro-entrepreneurship into productive employment.

2. “Quiet Life No More? Corporate Bankruptcy and Bank Competition,Journal of Financial and Quantitative Analysis, with Todd Gormley and Anand Jha. (Slides)

Pursuing delinquent borrowers requires considerable effort, and creditors may lack the incentive to exert this costly effort in uncompetitive banking sectors. To examine this, we use a uniquely large dataset of public and private corporate bankruptcy filings spanning a banking-sector reform that deregulated bank entry across different regions of India. We find that increased banking competition is associated with more firms seeking a stay on assets, a decline in bankruptcy duration, and a shift towards workouts rather than liquidations. The results are consistent with creditors exerting greater effort to pursue delinquent firms and resolve bankruptcies more quickly when competition increases.

3. “The Corporate Value of (Corrupt) Lobbying,Review of Financial Studies, 2016, 9(4), pages 1039-1071, with Alexander Borisov and Eitan Goldman.

Using an event study, we examine whether the stock market considers corporate lobbying to be a value-enhancing activity. On January 3, 2006, lobbyist Jack Abramoff pleaded guilty to bribing politicians, which generated intense scrutiny of lobbyists, limiting their political influence. Using this event as a negative exogenous shock to the ability of firms to lobby, we show that a firm that spends $100,000 more on lobbying in the three years prior to 2006, experiences a loss of about $1.2 million in value around the guilty plea. We also find results consistent with the view that part of the value from lobbying may arise from potentially unethical practices.

4. “Selling the Family Silver to Pay the Grocer’s Bill? The Case of Privatization in India,” in Jagdish Bhagwati and Arvind Panagariya (eds.), Reforms and Economic Transformation in India (2013), Oxford University Press: New York, NY.

5. “The Decision to Privatize: Finance, Politics, and Patronage,” Journal of Finance, 2011, 66(1), pages 241-269, with I. Serdar Dinc.

We investigate the influence of political and financial factors on the decision to privatize government-owned firms using firm-level data from India. We find that the government significantly delays privatization in regions where the governing party faces more competition from opposition parties. This result is robust to firm-specific factors and regional characteristics. The results also suggest that political patronage is important as no government-owned firm located in the home state of the minister in charge is ever privatized. Using political variables as an instrument for the endogenous privatization decision, we find that privatization has a positive impact on firm performance.

6. “On the Growth Effect of Stock Market Liberalizations,Review of Financial Studies, 2009, 22(11), pages 4715-4752, with Kathy Yuan.

We investigate the effect of a stock market liberalization on industry growth in emerging markets. Consistent with the view that liberalization reduces financing constraints, we find that industries that are more externally dependent and face better growth opportunities grew faster following liberalization. However, this growth increase appears to come from an expansion in the size of existing firms rather than through the entry of financially constrained new firms. We show that following liberalization, new firm growth occurs in countries and industries with lower entry barriers. Hence, liberalization has a more uniform growth impact if accompanied by competition-enhancing reforms.

7. “Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic,” The European Economic Review, 2008, Volume 52, Issue 2, pages 183-208, with John C. Ham and Jan Svejnar.

While privatization of state-owned enterprises has been one of the most important aspects of the economic transition from a centrally planned to a market system, no transition economy has privatized all its firms simultaneously. This raises the question of whether governments privatize firms strategically. In this paper we examine theoretically and empirically the determinants of the sequencing of privatization. To obtain testable predictions about factors that may affect sequencing, we develop new theoretical models and adapt existing ones. In doing so we characterize potentially competing government objectives as i) maximizing efficiency through resource allocation; ii) maximizing public goodwill from the free transfers of shares to the public; iii) minimizing political costs; iv) maximizing efficiency through information gains and v) maximizing privatization revenues. Next, we use firm-level data from the Czech Republic to test the competing theoretical predictions about the sequencing of privatization. We find strong evidence that more profitable firms were privatized first. This suggests that the government sequenced privatization in a way that is consistent with our theories of maximizing revenue and maximizing public goodwill. Our findings are consistent with Glaeser and Scheinkman's (1996) recommendations for increasing efficiency through informational gains. They are inconsistent with the government pursuing the objective of increasing Pareto efficiency through improved resource allocation. They are also inconsistent with the hypothesis that the government minimized political costs. Our results also suggest that many empirical studies of the effects of privatization on firm performance suffer from selection bias since privatized firms are likely to have characteristics that make them more profitable than firms that remain in state ownership.

8. “Incumbents and Protectionism: The Political Economy of Foreign Entry Liberalization", Journal of Financial Economics, 2008, Volume 88, pages 633-656, with Anusha Chari.

This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Based on data from India's economic reforms, the results suggest that firms in concentrated industries are more successful at preventing foreign entry, that state-owned firms are more successful at stopping foreign entry than similarly placed private firms, and that profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. These results continue to hold when we control for industry characteristics such as the presence of natural monopolies and the size of the workforce. When foreign entry is allowed in an industry, incumbent firms experience a significant decline in market share and profits. The pattern of foreign entry liberalization supports the private interest view of policy implementation.

9. “Privatization in South Asia,” in Gerard Roland (ed.), Privatization: Successes and Failures (2008), Columbia University Press: New York, NY, pages 170-198.

10. “Best Foot Forward or Best for Last in a Sequential Auction?Rand Journal of Economics, 2006, Volume 37-1, pages 176-194, with Archishman Chakraborty and Rick Harbaugh.

Should a seller with private information sell the best or worst goods first? Considering the sequential auction of two stochastically equivalent goods, we find that the seller has an incentive to impress buyers by selling the better good first because the seller's sequencing strategy endogenously generates correlation in the values of the goods across periods. When this impression effect is strong enough, selling the better good first is the unique pure-strategy equilibrium. By credibly revealing to all buyers the seller's ranking of the goods, an equilibrium strategy of sequencing the goods reduces buyer information rents and increases expected revenues in accordance with the linkage principle.

11. “Partial Privatization and Firm Performance,” Journal of Finance, 2005, Vol. LX, No. 2, pages 987-1015.

Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment.