Working Papers

Risk Management with Variable Capital Utilization and Procyclical Collateral Capacity (with Guojun Chen, and Zhongjin Lu ) [Paper]

Revise and Resubmit, Management Science

We build a risk management model that incorporates variable capital utilization and procyclical collateral capacity. The former means that capital utilization determines production, which affects capital depreciation and risk exposure, linking capital utilization to firms' risk management decisions. The latter means that the ability to borrow and hedge increases with expected profitability. Using a new dataset on hedging and capital utilization of oil and gas producers, we employ novel identification strategies and find that hedging is positively correlated with corporate liquidity and expected profitability, whereas utilization is negatively correlated with liquidity. These results support the key predictions of our theory.

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

Revise and Resubmit, Management Science

Bankruptcy reforms that improve lenders’ ability to recover claims from financially distressed borrowers can mitigate zombie lending. However, we show that a 2016 bankruptcy reform in India had only a limited impact since lenders remained reluctant to recognize zombie credit as non-performing. A subsequent complementary regulation targeting lender discretion in recognizing non-performing loans improves zombie recognition nearly five-fold. The mechanisms impeding bankruptcy reform efficacy include undercapitalized banks’ incentives to avoid provisioning for loan losses and political interference at state-owned banks. We also highlight a key reallocation channel: resolving zombie credit allows lenders to redirect credit to healthy borrowers, increasing investment.

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

Revise and Resubmit, The Review of Financial Studies

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.

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")

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.

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

Regulators can leave their government position for a job in a regulated firm. Using granular payroll data on 23 million federal employees, we uncover the first causal 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 employees just below the threshold, consistent with a deliberate effort to preserve the value of their outside option. 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, 32% of the regulators respond to revolving door incentives and sacrifice 5% of their wage potential to stay below the threshold. Consistent with theories of regulatory capture, we find that revolving regulators issue fewer rules and rules with lower costs of compliance. Using our findings to calibrate a structural model, we show that doubling the duration of the restriction will reduce the incentive distortion in the federal government by 2.7%, at the cost of modest decline in labor supply to the public sector. Combined, our results shed new light on the economic implications of the revolving door in the government.

Acquiring Failed Banks [Paper]

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.


UGA Terry

Corporate Finance Theory (UG) – Fall 2018-2022 [Syllabus]

NYU Stern

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