Unearthing Zombies (with Nirupama Kulkarni, SK Ritadhi, and Katherine Waldock ) [Paper]

Accepted, Management Science

Bankruptcy reforms that improve lenders' ability to recover claims from financially distressed borrowers can mitigate zombie lending. However, we show that after a 2016 bankruptcy reform in India, lenders are reluctant to recognize zombie credit as non-performing, impeding reform efficacy. A subsequent complementary regulation targeting lender discretion in recognizing non-performing assets improves zombie recognition five-fold. The lender disincentive to recognize zombies arises from undercapitalized banks' reluctance to realize loan losses and political economy frictions at state-owned banks. Resolving zombie credit allows lenders to redirect credit to healthy borrowers but effects are muted at banks more exposed to zombie borrowers.

Regulating Carry Trades: Evidence from Foreign Currency Borrowing of Corporations in India (with Viral V. Acharya) [Paper]

(previously titled "Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India")

Accepted, Review of Economic Studies

We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms tend to issue more foreign currency debt when the interest rate differential between India and the United States is higher. This “carry trade” relationship, however, breaks down once regulators institute more stringent interest rate caps on borrowing; in response, riskier borrowers cut issuance most. Prior to adoption of this macroprudential measure, stock price exposure of issuers to currency risk rises after issuance, as witnessed during the “taper tantrum” episode of 2013; this source of vulnerability is nullified by the measure, as confirmed during the October 2018 oil price shock and the COVID-19 outbreak. We find no evidence of the policy’s efficacy being undermined by leakage or regulatory arbitrage.

Risk Management with Variable Capital Utilization and Time-varying Collateral Capacity (with Guojun Chen and Zhongjin Lu ) [Paper]

Accepted, Management Science

We build a risk management model that incorporates variable capital utilization and time-varying collateral capacity. The former lets firms optimally choose capital utilization, and hence production, which affects capital depreciation and risk exposure. The latter means firms' ability to borrow and hedge increases with expected earnings and thus utilization. Calibrated solutions show both ingredients matter for firm value. We test the novel model predictions using a new dataset of oil and gas producers. Consistent with model predictions, we find utilization is negatively correlated with firm liquidity, while hedging is positively correlated with liquidity and expected profitability.

Working Papers

Closing the Revolving Door (with Joseph Kalmenovitz and Kairong Xiao) [Paper]

Revise and Resubmit, Journal of Finance

Regulators can leave their government position for a job in a regulated firm. Using granular payroll data on 22 million federal employees, we uncover the first systematic evidence of revolving door incentives. We exploit the fact that post-employment restrictions on federal employees, which reduce the value of their outside option, trigger when the employee's base salary exceeds a threshold. We document significant bunching of salaries just below the threshold, consistent with a deliberate effort to preserve private sector job opportunities. The effect is concentrated among agencies with broad regulatory powers, minimal supervision by elected officials, and frequent interactions with high-paying industries. In those agencies, 49% of the regulators respond to revolving door incentives and sacrifice 7.4% of their wage potential to stay below the threshold. Consistent with theories of regulatory capture, we find that revolving regulators initiate fewer enforcement actions and issue rules with lower costs of compliance. Using our findings to calibrate a structural model, we show that eliminating the restriction will increase the incentive distortion in the federal government by 1.7%. Combined, our results shed new light on the economic implications of the revolving door in the government.

Regulatory Risk Perception and Small Business Lending (with Joseph Kalmenovitz) [Paper]

Revise and Resubmit, Management Science

We uncover a significant friction in small business lending: perception of risk by Small Business Administration employees. Using novel data on SBA employees transferring across offices, we find that defaults on SBA loans in their previous location reduce SBA loans and job creation in their current location. The effect is independent of local economic conditions and the informational content of the non-local defaults, suggesting that SBA employees update their risk assessment irrationally. Our results are the first to document that regulators' potential misperception of economic conditions affects the ability of small businesses to obtain access to finance.

Acquiring Failed Banks [Paper]

Revise and Resubmit, Journal of Financial and Quantitative Analysis

I study the relative importance of lending and deposit-taking for bank value. Comparing outcomes for winning banks to runner-up bidders in failed bank auctions, I find winners experience a 1.5% abnormal return and this increase is mainly due to deposits, not loans. After acquisition, the winning bank cuts lending to the failed bank’s borrowers and closes branches but it retains almost all acquired deposits. These deposits are not channeled into lending elsewhere. Rather, the acquirer is able to lower deposit rates, reflecting increased market power. Multiple results are independent of the failed bank, suggesting the findings have broader relevance.

Size-Based Regulation and Bank Fragility: Evidence from the Wells Fargo Asset Cap (with Tianyue Ruan) [Paper]

We argue that heightened regulation on large banks contributed to the rise in banking fragility leading up to the regional bank crisis of 2023. In 2018, U.S. regulators restricted Wells Fargo from growing beyond $1.95 trillion in assets. Wells Fargo gave up large uninsured deposits to stay under the asset cap. We find that smaller and less regulated banks stepped in to fill the gap. Banks more geographically proximate to Wells Fargo experienced an influx of flighty uninsured deposits, particularly during the COVID-19 period. In turn, these banks experienced higher deposit outflows once monetary tightening commenced, and had lower equity returns following the collapse of Silicon Valley Bank. Additional analyses show that the deposit reallocation is not driven by local demand or general proximity to large banks.


UGA Terry

Corporate Finance Theory (UG) – Fall 2018-2023 [Syllabus]

NYU Stern

Corporate Finance (UG) – Summer 2015 [Syllabus]
  • Awarded Commendation for Teaching Excellence