Research by Topics
Links to published papers are from the Journals’ designated sites. Note you should obtain permission to access these sites.
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Recent Papers
“Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks,” with RajKamal Iyer, 2011, American Economic Review, forthcoming.
Abstract:
We use a unique, new, database to examine micro depositor level data for a bank that faced a run. We use minute-by-minute depositor withdrawal data to understand the effectiveness of deposit insurance, the role of social networks, and the importance of bank-depositor relationships in influencing depositor propensity to run. We employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running, and the significant underlying factors. We find that deposit insurance is only partially effective in preventing bank runs. Further, our results suggest that social network effects are important but are mitigated by other factors, in particular the length and depth of the bank-depositor relationship. Depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis, suggesting that cross-selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank. Finally, we find there are 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, 2011, Journal of Finance, forthcoming.
Abstract:
We use a new data set that tracks U.S. firms from their birth over two decades to understand the life cycle dynamics and outcomes (both successes and failures) of VC- and non-VC financed firms. We first ask to what market-wide and firm-level characteristics venture capitalists respond in choosing to make their investments and how this differs for firms financed solely by non-VC sources of entrepreneurial capital. We then ask what are the eventual differences in outcomes for firms that receive VC financing relative to non-VC-financed firms. Our findings suggest that VCs follow public market signals similar to other investors and typically invest in young firms with large scale. The main way that VC financed firms differ from matched non-VC financed firms, is they demonstrate remarkably larger scale both for successful and failed firms. VC-financed firms grow more rapidly, but we see little difference in profitability measures at times of exit. We examine in depth VC-financed firms’ failure. We find that VC-financed firms’ cumulative failure rates are lower than those of non-VC-financed firms but the story is nuanced. VC-financed firms are less likely to fail in the first four years after first receiving VC, but conditional on surviving past this point become more likely to fail relative to non-VC-financed firms. We do not find that VC has more stringent survival thresholds nor that VC-financed firm failures are disguised as acquisitions nor that particular kinds of VC firms are driving our results. We find that the performance differential 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, Thomas Hellmann. Forthcoming in George Constantinides, Milton Harris, and René Stulz (eds) Handbook of the Economics of Finance, vol 2, Amsterdam, North Holland.
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.
- “Skin in the Game: Incentives in Crowdfunding” with Thomas Hildebrand and Jorg Rocholl.
Abstract:
This paper analyzes the certification mechanisms and incentives that enable lending markets to match demand and supply despite the absence of financial intermediaries with skin in the game. Our analysis of the online social lending market, in which there is no financial intermediary but in which members can create self-organized groups, shows that allowing group leader rewards, similar to origination fees in securitization, is detrimental. We are able to take advantage of a change imposed on group leaders in which group rewards are eliminated to examine in a difference-in-difference approach how the same groups behave once these origination fees are removed. In general, group leaders signal borrower quality to other lenders by endorsing and submitting bids for listings in their groups. When group leaders receive an origination fee for successful loan listings, it creates adverse incentives so despite bids and endorsements, loans originated by such group leaders have higher default rates. Group leaders become more careful in screening after the elimination of these rewards, and if their loan participation is high, i.e. when they have skin in the game and are thus severely hurt by a borrower default. The results from this experiment provide important implications for the question of how retail consumers can be protected against unscrupulous lending and thus the ongoing debate about the proper regulatory framework for consumer lending.
- “Managerial attitudes and corporate actions,” with John Graham and Cam Harvey.
Abstract:
Traditional economic theory suggests no role for managerial attitudes in forming corporate policies. In contrast, our paper provides striking evidence based on psychometric tests administered to CEOs that personal (or behavioral) traits such as managerial risk aversion, time preference, and optimism are related to corporate financial policies. We also provide evidence consistent with a matching between the behavioral traits of executives and the kinds of companies they join; that is, certain types of firms attract executives with particular psychological profiles. Further, we provide new evidence that behavioral traits help explain compensation structure. Finally, we offer evidence that U.S. CEOs differ from non-U.S. CEOs in terms of their underlying attitudes. CEOs are also significantly more optimistic and risk-tolerant than the lay population.
- Capital Allocation and Delegation of Decision-Making Authority within Firms,” with John Graham and Cam Harvey.
Abstract:
We survey more than 1,000 CEOs and CFOs to understand how capital is allocated, and decision-making authority is delegated, within firms. We find that CEOs are least likely to share or delegate decision-making authority in mergers and acquisitions, relative to delegation of capital structure, payout, investment, and capital allocation decisions. We study capital allocation in detail and learn that most companies allocate funds across divisions using the net present value ranking rule. Allocation is also affected by other factors including the reputation of the divisional manager, the timing of a project’s cash flows, and senior management’s gut feel. Corporate politics and corporate socialism are more important in foreign countries than in the U.S. Finally, we find that CEOs are more likely to delegate decision authority when the firm is large or complex. Delegation is less likely when the CEO is particularly knowledgeable about a project, when the CEO has an MBA degree or long tenure, and when the CEO’s pay is tilted towards incentive compensation.
- “The economic psychology of entrepreneurship and family business,” with David Robinson.
Abstract:
The paper studies how the attitudes of entrepreneurs, in general, and family business owners, in particular, differ from others in the economy. Family business owners are entrepreneurs who operate a business with their spouse or adult children. We use data from the Survey of Consumer Finance to measure and isolate the enjoyment of private benefits, attitudes towards risk, and optimism for these groups. Entrepreneurs are more optimistic, and enjoy the nonpecuniary benefits of work more than wage earners. They are somewhat more risk loving, but perhaps less so than commonly believed. Family business owners share optimism and non-pecuniary benefits with other entrepreneurs; their tolerance for risk is not different than wage earners. These attitudes translate into actions: optimism and non-pecuniary benefits increase hours spent at work, and in some cases increase measured labor productivity. Family business owners are primarily responsible for the observed labor productivity associated with entrepreneurship.
- “A Corporate Beauty Contest,” with John Graham and Cam Harvey.
Abstract:
We conduct beauty contest experiments, using close to 2,000 subjects to study the facial traits of CEOs. In one experiment we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” and less “likable” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent and likable. In a third experiment, subjects numerically rate the facial traits of CEOs. We find that executive compensation is linked to these perceived “competence” ratings. Our analysis explores these findings in more detail and shows that the facial-trait rating can be explained by a quantitative scoring of the “maturity” or “baby-facedness” of the CEO. That is, more mature looking CEOs are assigned higher “competence” scores. This finding is potentially worrisome because psychology research shows that baby-faced-looking people often possess qualities opposite to those projected by their facial traits. Accordingly, we find no evidence that the firms of competent looking CEOs perform better. Essentially, the "look" of competence says very little about effective competence.
- “On the Importance of Prior Relationships in Bank Lending to Retail Customers,” with Jorg Rocholl and Sascha Steffen.
Abstract:
This paper analyzes the importance of retail consumers’ banking relationships for loan defaults using a unique, comprehensive dataset of over one million loans by savings banks in Germany. We find that loans of retail customers, who have a relationship with their savings bank prior to applying for a loan, default significantly less than customers with no prior relationship. We find relationships matter in different forms (transaction accounts, savings accounts, prior loans), in scope (credit and debit cards, credit lines), and depth (relationship length, utilization of credit line, money invested in savings account). Importantly, though, even the simplest forms of relationships such as transaction accounts (e.g., savings or checking accounts) are economically meaningful in reducing defaults, even after controlling for other borrower characteristics as well as internal and external credit scores. We are able to access data on loan applications to assess how banks screen. We find that relationships are important in screening but even after taking screening into account relationships have a first order impact in reducing borrower default. Our results suggest that relationships of all kinds have inherent private information and are valuable in screening, in monitoring, and in reducing consumers’ incentives to default.
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Banking
On the scope of bank activities: Expansion of bank powers into underwriting
- "The long-term default performance of bank underwritten security issues," Journal of Banking and Finance, 1994, 18(2), 397-418.
- “Commercial banks in investment banking: Conflict of interest or certification role?" Journal of Financial Economics, 1996, 40(3), 373-401.
- "Bank underwriting of debt securities: Modern evidence,” with Amar Gande, Anthony Saunders, and Ingo Walter, Review of Financial Studies, 1997, 10(4), 1175-1202.
- “Bank entry, competition and the market for corporate securities underwriting,” with A. Gande and Anthony Saunders, Journal of Financial Economics, 1999, 54(2), 165-195.
- "Commerical banks as underwriters: Implications for the going public process,” Journal of Financial Economics, 1999, 54(2), 133-163.
- On the benefits of concurrent lending and underwriting,” with Steve Drucker, Journal of Finance, 2005, 60(6), 2763-2800.
- “Banks in Capital Markets,” with Steve Drucker, chapter in Empirical Corporate Finance, ed. by E. Eckbo, Handbooks in Finance, North-Holland Publishers, 2007, 189-232.
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Bank-firm and Bank-Depositor Relationships
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On the loan sale market and loan contracting
- “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.
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On Financial Crisis and Bank Runs
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Venture Capital, Entrepreneurship, Household Finance
- “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.
- “Venture capital and the professionalization of start-up firms: Empirical Evidence,” with Thomas Hellmann, Journal of Finance, 2002, 57 (1), 169-197.
- “On the fundamental role of venture capital,” with Thomas Hellmann, Economic Review of the Atlanta Federal Reserve Bank, 2002, Vol. 87, No. 4.
- “A survey of venture capital research," with Marco Da Rin, Thomas Hellmann. Forthcoming in George Constantinides, Milton Harris, and René Stulz (eds) Handbook of the Economics of Finance, vol 2, Amsterdam, North Holland.
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Behavioral Finance
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IPOs, Credit Ratings, Misc finance
- “Institutional allocation in initial public offerings: Empirical evidence,” with R. Aggarwal and N.R. Prabhala, Journal of Finance, 2002, 57(3), 1421-1442.
- “Credit ratings, collateral and loan characteristics: Implications for yield,” with Kose John and Anthony Lynch, Journal of Business, 2003, 76(3), 371-409.
- “Debtor-in-possession financing and bankruptcy resolution: Empirical evidence,” with Dahiya, John and Ramirez, Journal of Financial Economics, 2003, 69(1), 259-280.
- “Enhancing security value by ownership restrictions: Evidence from a natural experiment,” with Amar Gande, Financial Management, 2005, 34(4), 35-64.
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