Research Papers

Do Universal Banks Finance Riskier But More Productive Firms?
(with Daniel Neuhann) 

Journal of Financial Economics (forthcoming)

Using variation in bank scope generated by the stepwise repeal of the Glass-Steagall Act in the U.S., we show that the deregulation of universal banks allowed them to finance firms with 14% higher volatility. This increase in risk is compensated by lasting improvements in firms' total factor productivity of 3%. Using bank-scope-expanding mergers to identify shocks to universal banks' private information about borrower firms, we provide evidence that informational economies of scope across loans and non-loan products account for the firm-level real effects of universal banking.

Target Revaluation after Failed Takeover Attempts: Cash versus Stock
(with Ulrike Malmendier and Marcus Opp) 

Journal of Financial Economics (January 2016), Jensen Prize for the best paper published in the Journal of Financial Economics in the areas of corporate finance and organizations (first place)

Cash- and stock-financed takeover bids induce strikingly different target revaluations. We exploit detailed data on unsuccessful takeover bids between 1980 and 2008, and we show that targets of cash offers are revalued on average by +15% after deal failure, whereas stock targets return to their pre-announcement levels. The differences in revaluation do not revert over longer horizons. We find no evidence that future takeover activities or operational changes explain these differences. While the targets of failed cash and stock offers are both more likely to be acquired over the following eight years than matched control firms, no differences exist between cash and stock targets, either in the timing or in the value of future offers. Similarly, we cannot detect differential operational policies following the failed bid. Our results are most consistent with cash bids revealing prior undervaluation of the target. We reconcile our findings with the opposite conclusion in earlier literature (Bradley, Desai, and Kim, 1983) by identifying a look-ahead bias built into their sample construction.

Common Lenders and Product Market Competition (with Daniel Streitz) 

This paper explores how bank concentration affects product market competition of non-financial firms. We argue that sharing common lenders lowers the cost of debt financing in an industry. Exploiting plausibly exogenous variation in banks' industry market shares stemming from bank mergers, we find that high-market-share lenders charge lower loan rates. This is because common lenders internalize potential adverse effects of higher loan rates on the product market behavior among their competing borrowers. In the aggregate, we show that a higher proportion of firms sharing the same lender and higher credit concentration in an industry lead to lower output. Effects are stronger for industries with competition in strategic substitutes. Our findings support the idea that bank concentration helps firms to achieve less competitive outcomes in the product market.

Life Below Zero: Bank Lending Under Negative Policy Rates
(with Florian Heider and Glenn Schepens) 

We show that negative policy rates transmit to the real sector via bank lending in a novel way. The European Central Bank's lowering of the policy rate into negative territory in June 2014 induces banks with more deposits to lend less and to riskier borrowers. Banks do not adjust loan terms, and the risk taking is concentrated in poorly capitalized banks. New risky borrowers appear financially constrained, and invest more after receiving a loan. Besides highlighting the role of bank net worth for the supply of credit, our results point to distributional consequences of negative rates in the banking sector.

Shock Propagation and Banking Structure
(with Mariassunta Giannetti) 

We conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize negative spillovers. We show that lenders with a large share of loans outstanding in an industry provide liquidity to industries in distress when spillovers are expected to be strong, because fire sales are likely to ensue. Lenders with a large share of outstanding loans also provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be costly. Our results suggest a novel channel explaining why credit concentration may favor financial stability.

How Does Firms' Innovation Disclosure Affect Their Banking Relationships? (with Alminas Zaldokas) 

Firms face a trade-off between patenting, thereby disclosing innovation, and secrecy. We show that this trade-off interacts with firms' financing choices, as public-information provision through patents and private information in financial relationships are substitutes. As a shock to innovation disclosure, we study the American Inventor's Protection Act that made firms' patent applications public 18 months after filing, rather than when granted. Such increased innovation disclosure helped firms switch lenders, resulting in lower cost of debt. Our evidence lends support to the idea that lenders derive rents from informational monopolies when firms seek to finance innovation.

Bank Deregulation and the Rise of Institutional Lending
(with Daniel Neuhann) 

We study the determinants of increased participation of non-bank financial intermediaries in the market for syndicated loans prior to the 2008 financial crisis. Institutional investors who do not have monitoring expertise disproportionately purchase loan tranches originated by banks able to offer both loans and underwriting services to firms. Our argument is that non-loan exposures to firm performance ensure monitoring incentives even when banks retain small loan shares. Since such universal banking was permitted only after the repeal of the Glass-Steagall Act, our findings suggest a direct link from bank deregulation to the rise of non-bank intermediaries.

Informal Finance, Risk Sharing, and Networks: Evidence from Hunter-Gatherers 

This paper analyzes the relationship between informal finance and the risk-sharing properties of networks. I show that in addition to sharing idiosyncratic risk, network members can also support one another in dealing with aggregate shocks. To identify this, I use data from an Amazonian foraging-farming society, and exploit a flood shock in 2006. Villagers outside the network demanded significantly more credit following the flood than did network members, suggesting that networks allow their members to cope with aggregate shocks through non-financial resources rather than through costly loans. The increased credit demand by villagers outside the network was in turn served through a temporary extension of network benefits across the two groups.

Inequality, Relative Income, and Human Capital Investment
(with Jere Behrman, Ricardo Godoy, and Eduardo Undurraga) 

Do investment responses to income transfers depend on the implied level of redistribution because of social comparisons? In a field experiment in 53 villages of an Amazonian foraging-farming society, we allocated substantial in-kind transfers, varied their associated degree of village income inequality, and measured the short-run effects on individual-level determinants of development. We find that the poorest households invested significantly less in human capital and engaged less with the labor market under an inequality-reducing treatment than under income-distribution neutrality. Our evidence suggests that inequality shapes the development process through social comparisons, and has implications for the effectiveness of transfer programs.

Informational Inequity Aversion and Performance (with Iris Bohnet) 

In labor markets, some individuals have, or believe to have, less data on the determinants of success than others, e.g., due to differential access to technology or role models. We provide experimental evidence on when and how informational differences translate into performance differences. In a laboratory tournament setting, we varied the degree to which individuals were informed about the effort-reward relationship, and whether their competitor received the same or a different amount of information. We find performance is adversely affected only by worse relative, but not absolute, informedness. This suggests that inequity aversion applies not only to outcomes but also to information that helps achieve them, and stresses the importance of inequality in initial information conditions for performance-dependent outcomes.

Understanding the Gender Pay Gap: What's Competition Got to Do with It? (with Alan Manning) 

Industrial and Labor Relations Review (July 2010)

A number of researchers have argued that men and women have different attitudes toward and behavioral responses to competition; that is, women are more likely to opt out of jobs in which performance pay is the norm. Laboratory experiments suggest that these gender differences are rather large. To check these hypotheses and findings against differences in the field, the authors use performance pay as an indicator of competition in the workplace and compare the gender gap not only in incidence of performance pay but also in earnings and work effort under these contracts. They find that although women are less likely than men to work under performance pay contracts, the gender gap is small. Furthermore, the effect of performance pay on earnings is modest and does not differ markedly by gender. Consequently, the authors argue, the ability of these competition hypotheses to explain the gender pay gap seems very limited.