Published Papers
How Important is Social Trust During the COVID-19 Crisis Period? Evidence from the Fed Announcements. (2020), Journal of Behavioral and Experimental Finance
COVID-19: Fear of pandemic and short-term IPO performance. - with Pritam Saha. (2021), Finance Research Letter
The Market Reaction to COVID-19: the Case of Airline and Tourism Stock Returns- with David Carter, Betty Simkins, and Eric Sisneros (2021), Finance Research Letter
Systemic Risk: Bank Characteristics Matter.- with Louis R. Piccotti. (2022), Journal of Financial Services Research
Collateral, Commitment, and Capital Structure: International Evidence
Abstract:Most of the theoretical and empirical studies recognize tangible assets/collateral as one of the critical determinants of capital structure policy. In this study, we investigate another important feature of collateral: its role as a commitment device. More precisely, we examine the optimal dynamic capital structure choice when collateral (tangible assets) acts as a commitment mechanism to the future capital structure. This commitment to lenders implies faster adjustment of leverage ratios when firms deviate from the target. Our empirical findings offer strong support to the commitment nature of tangible assets. We find that firms increase the adjustment of their total leverage ratio by 2.6% if the firms possess higher tangible assets in the asset portfolio. Moreover, firms can exhibit a higher commitment to lenders if firms adjust the leverage ratio even though the cost of adjustment is higher. Reduced financial flexibility makes the leverage adjustment costlier for over-levered firms. We find that over-levered firms with higher tangible assets adjust book (market) leverage by 7% (3.9%) faster, to maintain the commitment, than firms with low tangible assets. The commitment nature of the tangible assets can be further evident if firms adjust leverage if the creditors’ bargaining power is low. Our empirical findings show that firms with higher commitment enhance the adjustment of the total (market) leverage ratio by 5.9% (5.9%) in low creditors’ rights environment. After analyzing the time-series dynamics of investment behavior, we further show that firms having financial flexibility (spare debt capacity) and higher commitment invest more in capital expenditure by issuing more debt and adjust the debt ratio towards the optimal.
Working Papers
Social Trust and Capital Structure: Evidence from International Data with Ramesh Rao. (R&R- Journal of Multinational Financial Management)
Abstract: Using firm-level data from 32 countries (excluding the US), we document that social trust is an important country-level factor of capital structure choice. Specifically, higher social trust is associated positively with the long-term debt ratio. The findings are robust when we control for other important country-level and firm-level factors. In particular, the association becomes stronger when governance quality, creditors’ rights, and financial development of a country are weak. We also analyze the firm-level factors, such as tangible assets, profitability, growth opportunity, and financial distress, with their interaction effect on leverage ratio. Factors that hinder (ease) the use of external financing produce a stronger (weaker) association between social trust and the long-term debt ratio. Investigating the US sample, we find robust evidence that social trust associates positively with the long-term debt ratio. To address potential endogeneity, we use instrumental variables and propensity score matching analyses and find that our findings are robust.
Does Having Multiple Insiders on Boards Enhance the Effectiveness of Independent Directors? -with Ramesh Rao. (R&R- Journal of Business Finance & Accounting, JBFA)
Abstract: Regulations and shareholder pressures have dramatically changed corporate board structures such that today most boards consist of virtually all independent directors with only one insider, usually the CEO. In this study, we argue that having a sole executive on the board impedes the free flow of information to the outside independent directors. We hypothesize that the efficacy of independent directors is enhanced in the presence of more than one insider on the board. Specifically, we show that the positive relation between firm performance (Tobin’s Q) and independent board membership is enhanced when there is more than one insider on the board. Further, we show that the oversight function of independent board members, as proxied by forced CEO turnover and CEO entrenchment measures, is strengthened when multiple insiders are present. Finally, we document that having multiple insiders may enhance the advisory role of independent directors when it comes to investment decisions.
Work in Progress Papers
Banking on culture: The impact of national culture on U.S. bank decisions - with Leo Pugachev and Hao Zhang
Desirable Earnings Attributes: Cosmetics or Discernable Signals? Evidence from Corporate Credit Spreads - with Ali Nejadmalayeri