A Test of IPO Theories Using Reverse Mergers
Reverse mergers are an alternative method to IPOs for going public and announcement
day price reaction to reverse mergers for the bidding firm is comparable to the initial day price
reaction to IPOs. Most of the academic theories developed thus far to explain the market’s
reaction to IPOs, however, are not applicable to reverse mergers. Using reverse mergers as an
out-of-sample test on these IPO theories suggests most of them are invalid.
The Market for Borrowing Corporate Bonds
This paper describes the market for borrowing corporate bonds using a comprehensive
dataset from a major lender. The cost of borrowing corporate bonds is comparable to the cost of
borrowing stock, between 10 and 20 basis points per year. Factors that increase borrowing costs
are loan size, percentage of inventory lent, rating, and borrower identity. Trading strategies
based on cost or amount of borrowing do not yield excess returns.
Dynamic Asset Allocation with Ambiguous Return Predictability
We study an investor’s optimal consumption and portfolio choice problem when he is confronted with two possibly misspeciﬁed submodels of stock returns: one with IID returns and the
other with predictability. We adopt a generalized recursive ambiguity model to accommodate
the investor’s aversion to model uncertainty.
Macroeconomic Risk and Debt Overhang
Since debt is typically riskier in recessions, transfers from equity holders to debt holders
associated with each investment also tend to concentrate in recessions. Such systematic risk exposure
of debt overhang has important implications for the investment and financing decisions
of firms and on the ex ante costs of debt overhang. Using a calibrated dynamic capital structure/
real option model, we show that the costs of debt overhang become significantly higher in
the presence of macroeconomic risk. We also provide several new predictions that relate the
cyclicality of a firm's assets in place and growth options to its investment and capital structure
Proximity and Investment: Evidence from Plant-Level Data
Proximity to plants makes it easier for headquarters to monitor and acquire information
about plants. In this paper, I estimate the eﬀects of headquarters’ proximity to plants on
plant investment and productivity.
The hypothesis that ﬁnancial markets punish traders who make relatively
inaccurate forecasts and eventually eliminate the eﬀect of their beliefs on prices
is of fundamental importance to the standard modeling paradigm in asset pricing
Growth Opportunities, Technology Shocks, and Asset Prices
We explore the impact of the changes in the Investment Tax Credit on the cross-
section of firms' investment behavior. We find that the elimination of investment tax-
credit in 1986-87 resulted in a reduction in investment in firms with high investment
Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs
In tests of the equity market timing theory of external finance, the prior literature has used overvaluation identifiers such as high market-to-book and high prior returns that are likely correlated with other determinants of SEOs. We use price pressure resulting from purchases by mutual funds with large capital inflows to identify overvalued equity. This is a relatively exogenous overvaluation indicator as it is associated with who is buying - buyers with excess liquidity - rather than what is being purchased.
Can Hedge Funds Time Market Liquidity?
We explore a new dimension of hedge fund managers’ timing ability—their ability to time
market liquidity—and examine whether fund managers can time liquidity by adjusting their
portfolios’ market exposure as aggregate market liquidity conditions change.
Historical accounts of ﬁnancial crises suggest that fear and greed are the common denominators of these disruptive events: periods of unchecked greed eventually lead to excessive
leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled
fear, which must subside before any recovery is possible.
Privacy-Preserving Methods for Sharing Financial Risk Exposures
Unlike other industries in which intellectual property is patentable, the ﬁnancial industry relies on trade secrecy to protect its business processes and methods, which can obscure critical ﬁnancial risk exposures from regulators and
The recent ﬁnancial crisis has generated many distinct perspectives from various quarters.
In this article, I review a diverse set of 21 books on the crisis, 11 written by academics, and
10 written by journalists and one former Treasury Secretary.
Optimal Design of Internal Capital Markets
This paper studies optimal design of a capital allocation process in a dynamic setting
in a firm in which the division manager with empire-building preferences privately
observes the arrival and properties of investment projects, and headquarters are able
to audit each project at a cost. Under certain conditions, the optimal system takes
the form of a budgeting mechanism with threshold division of authority.
Strategic and Financial Bidders in Takeover Auctions
We propose a structural model of takeover auctions that allows
for asymmetries between strategic and ¯nancial bidders. Using
hand-collected data on the number of bidders, their types and
bids, we estimate the model to recover valuations of participating
A Lintner Model of Dividends and Managerial Rents
We develop a model where dividend payout, investment and financing decisions are
made by managers who attempt to maximize the rents they take from the firm.
But the threat of intervention by outside shareholders constrains rents and forces
rents and dividends to move in lockstep. Managers are risk-averse, and their utility
function allows for habit formation. We show that dividends follow Lintner's (1956)
target-adjustment model. We provide closed-form, structural expressions for the
payout target and the partial adjustment coefficient.
Debt and Managerial Rents in a Real-Option Model of the Firm
We present a theory of capital investment and debt and equity financing in a real-options
model of a public corporation. The model assumes that managers maximize the present
value of their future compensation (managerial rents), subject to constraints imposed by
outside shareholders' property rights to the firm's assets. Absent bankruptcy costs, managers
follow an optimal debt policy that generates efficient investment and disinvestment.
Trading Puts and CDS on Stocks with Short Sale Ban
We focus on the short sale ban of 2008 to examine the interaction between the price
discovery in banned stocks and the trading of options and CDS. Within the sample
of banned stocks with exchange traded options, stocks whose put-call ratios are in
the top quintile underperform the middle group by 2.13% and 4.01% over the next
three- and ﬁve-day returns, respectively.
Noise as Information for Illiquidity
We propose a measure of liquidity for the overall ﬁnancial market by exploiting its connection with the amount of arbitrage capital in the market and observed price deviations
in US Treasuries. When arbitrage capital is abundant, we expect the arbitrage forces
to smooth out the Treasury yield curve and keep the deviations small
Excess Volatility of Corporate Bonds
This paper examines the connection among corporate bonds, stocks, and Treasury
bonds under the Merton model with stochastic interest rates. The main focus is on the
volatility of corporate bonds and its connection to the equity volatility of the same firm
and Treasury bond volatility. For a broad cross-section of corporate bonds from 2002
through 2006, empirical measures of bond volatility are constructed using bond returns
over daily, weekly, and monthly horizons. Comparing the empirical volatility with its
model-implied counterpart, we find an overwhelming degree of excess volatility that is
difficult to explain with a default-based model.
Liquidity of Corporate Bonds
This paper examines the liquidity of corporate bonds and its asset-pricing implications
using a novel measure of illiquidity based on the magnitude of transitory price movements.
Using transaction-level data for a broad cross-section of corporate bonds from
2003 through 2007, we find the illiquidity in corporate bonds to be significant, substantially
greater than what can be explained by bid-ask bounce, and closely linked to
liquidity-related bond characteristics.
The Recovery Theorem
We can only estimate the distribution of stock returns but we observe the
distribution of risk neutral state prices. Risk neutral state prices are the product of risk
aversion – the pricing kernel – and the natural probability distribution.
Incomplete Contracts and Renegotiation: Evidence from a Field Audit
This paper explores how the relationship specificity of an investment affects the contract structure and pricing of a transaction ex-ante and the renegotiation ex-post. In a field experiment in the wholesale market for pens in India, trained auditors who act as entrepreneurs procure large orders of pens from wholesalers. We vary the specificity of the order by either buying generic or custom-printed (relationship specific) lots of pens.
The Importance of Holdup in Contracting: Evidence from a Field Experiment
This paper explores how the relationship specificity of the investment affects the ex-ante
structure of contracts and the ex-post resolution of an ensuing holdup problem. We set up
a field experiment in the wholesale market for pens in India where we sent entrepreneurs
as auditors to procure large orders of pens from wholesale dealers. We vary the
specificity of the order by buying either generic or custom-printed lots of pens. We find
that ex ante contracts alleviate the risk of holdup by demanding 25 percent higher upfront
payments on average in the case of custom-printed pens.
Credit Supply and House Prices: Evidence from Mortgage Market Segmentation
We show that easier access to credit significantly increases house prices by using exogenous changes
in the conforming loan limit as an instrument for lower cost of financing and higher supply. Houses
that become eligible for financing with a conforming loan show an increase in house values of 1.1
dollars per square foot (for an average price per square foot of 224 dollars) and higher overall house
prices controlling for a rich set of house characteristics. These coefficients are consistent with a local
elasticity of house prices to interest rates below 10.
Keeping it Simple: Financial Literacy and Rules of Thumb
Individuals and business owners engage in an increasingly complex array of financial
decisions that are critical for their success and well-being. Yet a growing literature documents
that in both developed and developing countries, a large fraction of the population is unprepared
to make these decisions. Evidence on potential remedies is limited and mixed.