Publications:
Asset Life, Leverage, and Debt Maturity Matching (with T. Geelen, J. Hajda, & E. Morellec) - Journal of Financial Economics - April 2024
Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4025812
https://www.sciencedirect.com/science/article/pii/S0304405X24000199
Non-pecuniary Benefits: Evidence from the Location of Private Company Sales (with M. Jansen) - Forthcoming - Review of Corporate Finance Studies
This paper investigates whether acquisition prices reflect a specific set of non-pecuniary benefits preferred by entrepreneurs: the quality of life (QOL) associated with the business location. Using data on private firm acquisitions, we find that target firms in high-QOL cities sell for a 14 to 20% premium. Traditional financial factors do not explain this premium and it dissipates when the buyer is unlikely to have preferences for high-QOL locations. Using wage-to-housing cost differentials to decompose local amenities and data on migration patterns, we find that QOL amenities have a greater impact on entrepreneurs' location decisions relative to wage workers.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423117
Working Papers:
Economic Magnitudes Within Reason (with Z. Liu) - R&R Journal of Corporate FInance
A common method of calculating economic magnitudes is to multiply the regression coefficient of the variable of interest by its sample standard deviation. This method is often problematic in finance settings when researchers use granular fixed effects. We show that in many recently published finance papers and for many common finance variables, the sample standard deviation is much larger than the within-group variation that identifies the regression coefficient, and that within-group changes of this magnitude are rare. Without additional assumptions, this common approach can significantly inflate the economic magnitude of the identified effect and impact the comparison of effects among different variables of interest. We recommend using within-group measures of variation to improve the interpretation of economic magnitudes in this setting.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4223412
Collateral Damage: Low-Income Borrowers Depend on Income-Based Lending (with M. Garmaise, & M. Jansen)
We study the relative importance of asset-backed lending (ABL) and income-based lending (IBL) in auto finance. Negative durability shocks generated by vehicle discontinuations lead to increased down payments and loan-to-value ratios. Consumer defaults on discontinued cars are markedly more likely to result in personal recoveries from borrowers. These results all indicate that resource-constrained consumers are relatively less reliant on secured ABL financing, which stands in stark contrast to corporate financing patterns. Lower-income borrowers' dependence on IBL suggests that their relative credit access may have declined with the securitization-driven rise of ABL.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4132810
A Signaling Theory of Derivatives-Based Hedging (with F. Anjos)
We model a commodity producing firm that is privately informed about future volume and has an incentive to convey such information to outsiders. In equilibrium, signaling incentives can cause firms to deviate from hedging strategies that minimize financial distress costs: High-volume firms engage in costly signaling by selling too many or too few forward contracts, including sometimes holding long positions, which amplifies risk. We also show that only high-volume firms trade non-linear derivatives. Beyond casting doubt on whether unusual hedging strategies can be deemed speculative or ineffective, our results suggest alternative interpretations for empirically-documented associations between hedging and firm value.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2725270
Adverse Selection, Capital Supply, and Venture Capital Allocation
This paper develops a model to explore how the interaction of adverse selection and search frictions affects the allocation of venture capital. Entrepreneurs have projects with different levels of risk and private information about their projects' quality and compete in a search market to attract investors. The combination of low capital supply and information frictions can cause entrepreneurs with high quality risky projects to avoid entering the venture capital market. An increase in capital supply reduces the distorting effects of search and information frictions causing entrepreneurs with high quality risky projects to enter the market and venture capitalists to increase their allocations to riskier projects. These effects can persist even if riskier projects are more valuable, meaning the average output per dollar of venture capital investment can increase with venture capital supply. Several other model predictions are also consistent with empirical findings.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2980598