Research

Research Interests

  • Financial Intermediation
  • Corporate Finance
  • Political Economy

Publications

Prime (Information) Brokerage
with Kevin MullallySugata Ray and Yuehua Tang
Journal of Financial Economics 2020, vol. 137, 371-391

Political Interference and Crowding Out in Bank Lending
Journal of Financial Intermediation 2020, vol. 43

The Secured Credit Premium and the Issuance of Secured Debt
with Efraim Benmelech and Raghuram Rajan
Journal of Financial Economics, accepted

Working Papers

The Decline of Secured Debt
with Efraim Benmelech and Raghuram Rajan
– Revise and Resubmit
– SFS Cavalcade, WFA, NBER Summer Institute
– WFA Charles River Associate Award for Best Paper on Corporate Finance
Abstract: The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently – when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical.

Customers as Friendly Shareholders: Uncovering the Complex Mutual Fund-Broker Relationship
with Yuehua Tang and Kelsey Wei
– WFA 2021
Abstract: This paper examines mutual funds’ dual role as both clients and shareholders of broker banks. Mutual funds are more likely to hold and significantly overweight stocks of their broker banks. In line with the portfolio decisions, fund voting is biased towards broker management in contentious proposals. Such voting bias significantly affects voting outcomes and the presence of contentious proposals at shareholder meetings. Furthermore, client funds’ voting behavior is inconsistent with maximizing banks’ shareholder value. Finally, we show that one benefit client funds receive for their voting support is preferential IPO allocations from connected brokers. Our study not only uncovers a new mechanism—being brokers’ friendly shareholders—through which the two parties maintain their quid pro quo relationships, it also raises a broader concern about governance of important financial institutions.

Inter-Firm Relationships and the Special Role of Common Banks
with Emanuela Giacomini and Andy Naranjo
Abstract: Using a novel dataset that combines information on customer-supplier trade relationships with information on firm-bank lending relationships, we show that common banks that lend to firms at both ends of a trade link grow and strengthen such trade relationships. To establish causality, we use bank mergers, which generate exogenous variations in the presence of common banks, and show that common bank relationships between customers and suppliers increase trade relationships by 41.5%. We find that the role of a common bank is greater when it is more informed and when supply chains suffer from larger information and holdup problems. We also document that suppliers with common banks face lower bankruptcy spillover risks from a distressed customer, adopt a focused customer base, and invest more in relationship specific assets. Lastly, we show that common banks play a central role in facilitating provision of trade credit by suppliers during periods of systemic distress (e.g., the Great Recession). Overall, our findings show the unique role of banks in driving inter-firm growth and investment by mitigating information and holdup problems, which arguably leads to greater economic growth.

ESG Lending
with Sehoon Kim, Jongsub Lee and Junho Oh
– MFA 2022, Univ. of Delaware Weinberg Center/ECGI Corporate Governance Symposium 2022, Fixed Income and Financial Institutions Conference 2021, Paris December Finance Meeting 2021
Abstract: This paper examines the environmental, social, and governance (ESG) loan market, which has grown from $6 billion in 2016 to $322 billion in 2021. This growth is driven primarily by ESG-linked loans where loan spreads are contingent on borrower ESG performance, as well as by use-of-proceeds based green loans issued for specific green projects. ESG-linked loans are mostly issued by large and publicly traded firms with superior ESG profiles. These loans are often structured as revolving credit facilities and syndicated by dominant global banks with good ESG profiles and pre-existing lending relationships with borrowers. Green loans, on the other hand, are mostly issued to privately held borrowers by non-relationship lenders. ESG loan borrowers enjoy a net pricing advantage, suggesting improved ESG profiles reduce credit risk or that lenders value being associated with ESG loans. We find that ESG-linked loans are opaque and vary widely in the extent of their contractual disclosures. Consistent with greenwashing, borrowers with low quality disclosures about ESG contract features experience deterioration in ESG scores after loan issuance. Borrowers with high quality disclosures continue to maintain good ESG profiles and stock markets react positively to such loan announcements. Overall, our results indicate market vigilance against potential greenwashing and suggest that as the market matures, the ESG loan market has potential to make a positive impact on corporate ESG performance.