Research
Published and Accepted Papers
Accepted, Review of Financial Studies
with Phil Strahan and Jun Yang
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.
Review of Finance, Volume 27, Issue 2, March 2023, Pages 423–467
with Phil Strahan and Jun Yang
We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.
Journal of Empirical Finance, Volume 62, June 2021, Pages 121-140
Using novel data on explicit compensation benchmarking peer groups, I document that small public firms engage in upward compensation benchmarking to a much greater extent than larger firms. Small firms choose aspirational peers that reflect their executives’ shifting opportunity sets. For these firms, compensation benchmarking is indicative of future growth and performance, and the rate at which pay adjusts toward peer levels is sensitive to executives’ outside employment opportunities. Growing and outperforming small firms strategically use upward benchmarking to adjust pay in an effort to retain valuable managerial talent.
Working Papers
Revise and Resubmit, Journal of Financial Economics
with Phil Strahan and Jun Yang
This paper studies banks’ investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled stress test labor in anticipation of a test and following poor performance on a test. Following this higher demand, banks exhibit lower systematic risk and lower profitability. While stress testing has modernized banks’ internal risk management by spurring the acquisition of highly skilled risk management talent, recent changes to the tests could erode its efficacy.
Revise and Resubmit, Journal of Corporate Finance
Recent research suggests that institutional shareholders that hold large stakes in rival firms may influence managers to reduce product market competition. Using detailed data on executive compensation contracts, I find that common owners do not alter executive incentives to foster anti-competitive outcomes. Common ownership is positively related to the use of explicit relative performance evaluation (RPE), which rewards executives for outperforming their competition. Commonly held firms are more likely to benchmark RPE awards against commonly held peers, implying these investors favor tournament incentives. Overall, managers of commonly held firms lack the financial incentives to collude with product market rivals.
To appear in the Oxford Handbook of Banking, 4th Edition.
with Phil Strahan and Jun Yang
This article describes the evolution of the U.S. banking system, with an emphasis on the rise of shadow banking in the modern era. Shadow banking describes the movement of liquidity transformation from banks to a set of institutions and financial arrangements in the securities markets and outside the traditional regulatory framework. This movement occurred in part from value-enhancing innovation, and in part from less valuable efforts to avoid bank regulations. Both the Global Financial Crisis and the financial disruptions around the 2020 COVID-19 Crisis centered on shadow banks. As we show, “regulatory arbitrage” and shadow bank growth continue apace, suggesting future financial instability.