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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

  • "Capital Allocation and Delegation of Decision-Making Authority within Firms," with John Graham and Cam Harvey.
    "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: The Role of Bank Fundamentals in Shaping Depositor Behavior?" with Rajkamal Iyer and Nick Ryan.
    "A Tale of Two Runs: The Role of Bank Fundamentals in Shaping Depositor Behavior?" with Rajkamal Iyer and Nick Ryan.

    Abstract:
    We use unique micro-level depositor data for a bank that faced a run due to a shock to its solvency to study whether depositors monitor banks. Specifically, we examine depositor withdrawal patterns in response to a timeline of private and public signals of the bank's financial health. In response to a public announcement of the bank's financial troubles, we find depositors with uninsured balances, depositors with loan linkages and staff of the bank are far more likely to run. Even before the run, a regulatory audit, which was in principle private information, found the bank insolvent. We find that depositors act on this private information and withdraw in a pecking order beginning at the time of the regulatory audit, with staff moving first, followed by uninsured depositors and finally other depositors. By comparing the response to this fundamental shock with an earlier panic at the same bank, we argue that withdrawals in the fundamental run are due in part to monitoring by depositors though the monitoring appears to be more of regulatory signals rather than of fundamentals. Our results give sharp empirical evidence on the importance of fragility in a bank's capital structure and may inform banking regulation.


  • "Loan Officer Incentives and the Limits of Hard Information," with Tobias Berg and Jorg Rocholl.
    "Loan Office Incentives and the Limits of Hard Information," with Tobias Berg and Jorg Rocholl.

    Abstract:
    Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using unique data where loans are based on hard information, and loan officers are volume-incentivized, we find loan officers increasingly use multiple trials to move loans over the cut-off, both in a regression-discontinuity design and when the cut-off changes. Additional trials positively predict default suggesting strategic manipulation of information even when loans are based on hard information Increased.


  • "Increased Access to Finance and Firm Productivity," with Karthik Krishnan and Debarshi Nandy.
    "Increased Access to Finance and Firm Productivity," with Karthik Krishnan and Debarshi Nandy.

    Abstract:
    We analyze how increased access to financing affects firm productivity using a large sample of manufacturing firms from the U.S. Census Bureau's Longitudinal Research Database (LRD). We exploit a natural experiment following the interstate bank branching deregulations that increased access to bank financing and relate these deregulations to firm level total factor productivity (TFP). Our results indicate that firms' productivity increased subsequent to their states implementing the bank branching deregulations. The increased productivity following the deregulation is long lived. Further, TFP increases after the bank branching deregulations are greater for financially constrained firms. In particular, firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained). Our results support the idea that greater access to financing can increase financially constrained firms' access to productive projects (i.e., positive NPV projects) that they may otherwise not be able to take up. Our results emphasize that availability of financing is important not only for startup activity (as prior research suggests), but also for increased productivity and the continued success of existing entrepreneurial and small firms.


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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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