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Recent Working papers

Banking

Venture Capital, Entrepreneurship, Household Finance

Behavioral Finance

IPOs, Credit Ratings, Misc finance

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Recent Papers

  • "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment," with Karthik Krishnan and Debarshi Nandy, forthcoming at the Review of Financial Studies.
    "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment," with Karthik Krishnan and Debarshi Nandy.

    Abstract:
    We analyze how increased access to financing affects firm total factor productivity (TFP) by exploiting a natural experiment following interstate banking deregulations which increased access to bank financing. We find that firms' TFP increases after their states implement these deregulations. Using a regression discontinuity approach based on Small Business Administration's funding eligibility criteria, we show that TFP increases following the deregulations are significantly greater for financially constrained firms. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up.


  • "Capital Allocation and Delegation of Decision-Making Authority within Firms," with John Graham and Cam Harvey, forthcoming at the Journal of Financial Economics.
    "Capital Allocation and Delegation of Decision-Making Authority within Firms," with John Graham and Cam Harvey.

    Abstract:
    How are decision-making authority and investment dollars delegated within firms? We study these issues using a quantitative measure of delegation derived by directly asking top executives how high-level decisions are made within their firms. Our survey of more than 1,000 Chief Executive Officers and Chief Financial Officers allows us to investigate how personal characteristics of the CEO, as well as unique firm characteristics, affect delegation. We find that CEOs are less likely to delegate decisions that are external to the firm (such as mergers) and about which the CEO is knowledgeable. We find that CEOs are more likely to delegate decision authority when the firm is complex. In terms of the internal allocation of capital, we find that companies allocate funds across divisions based on the reputation of the divisional manager, the timing of a project's cash flows, senior management's "gut feel", and the net present value rule. Corporate politics and corporate socialism affect allocation outside of the U.S.


  • "Adverse Incentives in Crowdfunding," with Thomas Hildebrand and Jorg Rocholl.
    "Adverse Incentives in Crowdfunding," with Thomas Hildebrand and Jorg Rocholl.

    Abstract:
    This paper analyses the substantially growing markets for crowdfunding, in which lenders give money to borrowers without financial intermediation. Critics suggest these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depends on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular we look at group leader bids in the presence of origination fees and find that these bids are wrongly perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results provide important implications for crowdfunding, its structure and regulation.


  • "A Corporate Beauty Contest," with John Graham and Cam Harvey.
    "A Corporate Beauty Contest," with John Graham and Cam Harvey.

    Abstract:
    We conduct beauty contest experiments, studying the facial traits of CEOs using nearly 2,000 subjects and link these traits to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically rate the facial traits of CEOs. We find competent looks are priced into CEO compensation. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separate inside and outside CEO hires. Second, we separate inside and outside CEO hires and find that the competence premium is driven by outside hires – the situation where first impressions are likely to be more important.


  • "What Kinds of Bank-Client Relationships Matter in Reducing Loan Defaults and Why?," with Jorg Rocholl and Sascha Steffen.
    "What Kinds of Bank-Client Relationships Matter in Reducing Loan Defaults and Why?," with Jorg Rocholl and Sascha Steffen.

    Abstract:
    The value of bank relationships is typically thought to arise from repeat lending. However, relationships can be of many kinds, e.g., they could be non-credit based marked by a simple savings or checking account. Further relationships can differ in intensity and depth. What kinds of relationship matters for default behavior? And why? These are important but underexplored questions. We address these questions using a unique, comprehensive dataset of over one million loans from almost 300 banks. We find that retail customers, who have a relationship with their savings bank prior to applying for a loan, default significantly less than customers without prior relationships. 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). Even the simplest forms of relationships such as savings or checking accounts are economically meaningful in reducing defaults. We next assess the channels which lead to lower default rates by accessing detailed data on loan applications, approval and defaults, which allow us to control for endogeneity and selection concerns. Our results suggest that relationships are important in screening but also that relationship banks monitor differently, they react more quickly on signs of trouble reducing their credit limit which eventually leads to lower default rates. Further, we find effects beyond that derived from private information such as reduced consumers' incentives to default. On the regulatory dimension the demise of many US banks during the Savings and Loans Crisis were attributed to interstate or in-state branching restrictions which resulted in loans being made where banks did not have prior relationships. Our results speak to regulators and loan-makers on the importance of allowing banks to form relationships in the markets in which they lend. Even a simple model where banks ask customers to open savings or checking accounts, observe them and then decide on whether to give loans helps reduce default rates.


  • "A Tale of Two Runs: Depositor Responses to Bank Solvency Risk," with Rajkamal Iyer and Nick Ryan.
    "A Tale of Two Runs: Depositor Responses to Bank Solvency Risk," with Rajkamal Iyer and Nick Ryan.

    Abstract:
    Using depositor-level data, we examine whether depositor actions reflect solvency risk, for a bank that faced runs. We find that depositors with loans and bank staff are less likely than others to run in a low solvency-risk shock, but become more likely in a high solvency-risk shock. Uninsured depositors always run more and this difference grows markedly in a high solvency-risk shock. In contrast, depositors with older accounts run less, and those with more frequent past transactions run more, irrespective of the underlying solvency risk. Our results suggest how depositor composition affects bank fragility and who are stable depositors.


  • "Loan Officer Incentives, Internal Ratings, and Default Rates," with Tobias Berg and Jorg Rocholl.
    "Loan Officer Incentives, Internal Ratings, and Default Rates," with Tobias Berg and Jorg Rocholl.

    Abstract:
    In this paper, we analyze the effect of loan officer incentives on bank-internal ratings. Internal ratings are regularly used by banks and regulators for loan making, risk assessment, and capital adequacy ratios (as per Basel II/III). However, how internal ratings are impacted by loan officer incentives is widely unknown. Using unique lending data, we find that loan officer incentives skew internal ratings even in settings where the internal ratings are computed by a credit scoring model with hard information based inputs. We find loan officers make multiple attempts to get loans over the cutoff by re-inputting information using additional trials. These results hold when cut-offs change and also in a regression-discontinuity design. We further find that additional trials result in higher default rates. Our results suggest strategic manipulation of information and of internal ratings stemming from loan officer incentives and suggest it is important for banks and regulators to take such effects into account when using internal ratings for risk assessment and regulation.


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Banking


On the scope of bank activities: Expansion of bank powers into underwriting

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Bank-firm and Bank-Depositor Relationships

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On the loan sale market and loan contracting

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On Financial Crisis and Bank Runs

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Venture Capital, Entrepreneurship, Household Finance

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Behavioral Finance

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IPOs, Credit Ratings, Misc finance

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