Assistant Professor of Finance
Finance and Managerial Economics
The School of Management, SM31
The University of Texas at Dallas
800 West Campbell Road
Richardson, Texas 75080
"Financing Constraints and Workplace Safety" (with Jonathan Cohn)
"The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives" (with Ari Kang and Richard Lowery)
We estimate a dynamic model of the decision to close a troubled bank. Regulators trade off an aversion to closing banks against the risk that allowing a bank to continue will raise the eventual costs to the deposit insurance fund. Using a conditional choice probability approach, we estimate the costs associated with closing banks, both in direct costs to the insurance fund and in other costs perceived by regulators, either social or personal. We find that delayed closures were driven by a desire to defer costs, an aversion to closing the largest and smallest troubled banks, and political influence.
"How do Employees Fare in Private Equity Buyouts? Evidence from Workplace Safety Records" (with Jonathan Cohn and Nicole Nestoriak)
This paper studies the impact of leveraged buyouts (LBOs) on workplace injury risk. Injury rates decrease substantially after LBOs of public firms, both in absolute terms and relative to controls. These changes persist for several years post-buyout. Cross-sectional analysis suggests that alleviation of public market pressure to behave myopically contributes to the decrease in injury risk after LBOs of public firms. The reduction in injury risk, for which employees demand a compensating wage differential, may partly explain the recently-documented fall in employee earnings after public firm LBOs. Injury rates increase after LBOs of private firms, though from substantially lower pre-LBO levels.
"The Trust Alternative" (with Indraneel Chakraborty and Alessio Saretto)
We propose an alternative market design to the current credit ratings industrial organization. An issuer delegates a pass-through non-monitoring trust to acquire a rating report from credit ratings agencies (CRAs). The trust pays outcome contingent fees, which guarantee truth-telling and therefore eliminate ratings inflation. Moreover, because the trust acts as an intermediary, it also eliminates the ability of issuers to shop different CRAs for better ratings. Voluntary participation to the trust mechanism from both issuers and CRAs is guaranteed by the surplus generated by improved ratings efficiency. Ultimately, the trust can improve social welfare by inducing more effort, especially when CRAs are competing over the accuracy of ratings. Differently from up front fees, in fact, payments contingent upon outcomes can be properly designed to increase the CRA’s effort to produce more precise signals.
"Complexity, Standardization, and the Design of Loan Agreements" (with Bernhard Ganglmair)
This paper uses a text-based approach to analyze the level of detail and customization found in the defaults and covenants sections of a large sample of private loan contracts. While previous studies have examined a small number of well-defined accounting covenants, we characterize a significant amount of detail not captured by these covenants. We demonstrate that while complexity and detail are an important aspect of complete contracts, tradeoffs exist in which excess detail is incorporated at the expense of less customization. Contracts are more detailed when firms are closer to the default boundary, maturities are longer, loan amounts are larger, lenders are distant from the firm, loans are widely syndicated, and the existing financial structure is more complex. Alternatively, we find that loans are less customized and more "boilerplate" when they are widely syndicated and lenders are more distant. We also find that loans with more detailed clauses are renegotiated more often, while more customized ones are renegotiated less, suggesting that boilerplate language may serve as a reference point for future renegotiation.
"Investment, Cash Flow, and the Structure of Corporate Debt Covenants" (with Richard Lowery)
We analyze the determinants of covenant structure in private debt contracts. While previous studies have demonstrated a relationship between firm characteristics and the overall strictness of loan contracts, few studies have examined why covenants are written on a range of accounting variables and what determines their selective use. Using a simple model of firm investment where firms face uncertain cash flows and investment opportunities, we characterize the conditions under which it is optimal for a debt contract to specify a restriction on investment or to specify a minimum cash flow realization. Consistent with this model, we find that the application of covenants based on these variables is not necessarily monotonic in firm risk. While the financially riskiest firms tend to employ capital expenditure covenants, cash flow and net worth covenants are most common among moderately risky firms with greater profitability and firms with stronger banking relationships. The results also highlight the importance of debt covenants in both mitigating agency frictions and maximizing the value of future private information.
This paper investigates how changes in a bank’s health impact real investment of its existing borrowers. Using a sample of U.S. firm bank relationships, I find that firms reduce investment by around 10% in response to a one standard deviation increase in the loan nonperformance of their primary bank. This effect is only present during active borrowing relationships, and is not driven by reverse causality or changes in region or industry specific investment opportunities. The effect weakens in the decade following the mid-90s but returns post 2006, suggesting that U.S. have not become less bank dependent
5 (M. Wardlaw → R. Lowery → J. Ledyard → R.McKelvey → C. Tovey → P. Erdős)