Abstract: This paper documents a novel "fire-sale insurance" channel through which lending relationships help bank-dependent borrowers when their loans are securitized into Collateralized Loan Obligations (CLOs). I document quid-pro-quo ties between CLO managers and their underwriter banks. To maintain these ties, CLO managers avoid selling the loans of firms related to their underwriter bank when liquidity shocks force them to shrink their portfolio. As a result, these firms gain immunity against fire sales and are able to issue more loans when the CLO market is under stress. Banks benefit by charging fees and selling expensive lines of credit to these firms. They compensate the CLO managers by arranging cheaper debt financing on their new CLOs. These results highlight that securitization has not eliminated the importance of bank relationships but has transformed the institutional mechanism through which they enhance firms' borrowing capacity.
Presentations: Midwest Finance Association 2022, 2021 NFA Conference, 17th FRA conference (poster), 2021 SFA Meeting, UT Austin Ph.D. Symposium, 61st Southwestern Finance Association Meeting, NYU Stern Department Seminar.
Abstract: This paper investigates how precautionary trading behavior of fund managers induced by a higher junior fee component in their compensation structure affects prices of downgraded loans in the leveraged loans market. Using detailed portfolio data from Collateralized Loan Obligation (CLO) funds, we find that fund managers with a higher ratio of subordinate fee to total fees are more likely to sell downgraded loans. Fund managers exhibit such precautionary trading behavior even when currently unconstrained, in anticipation of future binding collateral constraints. Loans subject to a high probability of precautionary selling exhibit large price declines and subsequent reversals. Our results provide new insights into the role of incentives on managerial risk taking and consequent amplification of fire sale externalities in the corporate debt market.
Presentations: SFS Cavalcade 2022, 2022 EFA Annual Meeting, Midwest Finance Association 2022, 6th Vietnam Symposium in Banking and Finance, 61st Southwestern Finance Association Meeting, Northeastern University Brown Bag Seminar.
Abstract: We show that automation represents a source of background risk for routine workers, and it crowds out the risk of their financial portfolio. We exploit the variation in state adoption of Section 179 deduction limits to extract exogenous variation in workplace automation. Following a $100,000 increase in deduction limit, routine workers experience a 0.8% increase in layoff probability and reduce their stock share of liquid wealth by 4% over a four-year period. This effect is not driven by differences in household characteristics, endogenous occupational choice, or aggregate economic factors. The background risk effect is weaker when workers have greater access to government-sponsored or self-sponsored insurance. Finally, we show that the reduction in stock share adversely affects the average return on liquid wealth and the long-term wealth accumulation by routine workers.
Presentations: 2022 EFA Annual Meeting, 61st Southwestern Finance Association Meeting, Northeastern University
Abstract: This paper studies how the opening of a Million Dollar Plant (MDP) affects income inequality, by focusing on a new mechanism: retail inflation. Using detailed barcode-level prices, the paper shows that local barcode-level prices increased in winning counties compared to runner up counties after a MDP enters. The paper further shows that households in winning counties spend less time shopping for deals and discounts and more time on work. Wages also go up in winning counties, but only for high-skilled workers. The paper builds a model of monopolistic firms with variable mark-ups and non-homothetic consumer preferences. Consumers become less price sensitive as they substitute shopping time for more working time in response to rising labor demand generated by the entry of a MDP, and firms respond to less elastic consumer demand by raising their mark-ups. Analysis using the model and detailed reduced form evidence shows that establishing a MDP only increases wages of certain high-skilled workers, but it increases overall county-level prices, thus creating larger increases in income inequality in winning counties compared to runner-up counties.
Abstract: Though the monetary policy transmission and financial intermediation literature have highlighted the role of the “bank credit channel” and relationship banking respectively, the effect of relationship banking on the transmission of monetary policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monetary policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using unique and comprehensive data on bank-borrower relationships in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that bank with multiple banks.