Research and Book Chapters

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SSRN / The Accounting Review

Recent evidence suggests that investors struggle to process complex financial disclosures. Relative to equity and public debt investors, banks have unique advantages in acquiring information and can impose contractual terms to mitigate information frictions. We investigate whether financial statement complexity is associated with firms' reliance on bank financing and the terms of bank loans. We focus on two aspects of complexity, the length of financial reports and the complexity of financial reporting rules. We document that both aspects of complexity are positively associated with firms' reliance on bank financing (i.e., level of debt and new financing). This result is consistent with banks' superior information processing capabilities. Next, we document that banks ameliorate information frictions using loan contractual terms that depend on the source of complexity. Overall, banks are an attractive source of financing for firms with complex disclosures, but banks also increase screening and monitoring for relatively complex borrowers. 


SSRN / Journal of Accounting and Economics

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to borrowers’ private information. We posit that “public-side” lending emerged to facilitate broad lender participation in the syndicated loan market by mitigating concerns about the leakage of borrowers’ private information into public securities markets. In line with this proposition, we find that public-side lending facilitates the loan market participation of lenders for which maintaining robust information barriers is particularly costly. Furthermore, while public-side lending increases within-syndicate information asymmetry, our findings indicate that it does not materially increase interest spreads and is associated with lower coordination costs among syndicate participants. Collectively, we document how debt contracting practices evolved to address frictions associated with the protection of borrowers’ private information and the related changes in loan contracting equilibria.


SSRN / The Accounting Review

We study how recognition versus disclosure affects pricing and control allocation in debt contracting. We examine whether loan spreads and the use of covenants changed around SFAS 158 adoption, which required recognition of previously disclosed pension liabilities. We find that pension underfunding is positively associated with loan spreads and negatively associated with the use of covenants prior to the adoption of SFAS 158. This is consistent with lenders viewing disclosed pension underfunding as insufficiently reliable for inclusion in covenants and instead pricing the risk associated with underfunding. Post-SFAS 158, pension underfunding is associated with lower spreads and a higher likelihood of using covenants relative to the pre-period. We find no change in the use of covenants unaffected by the accounting standard change or credit risk associated with underfunding post-SFAS 158.  Collectively, the evidence is most consistent with recognition improving the reliability of accounting information for control allocation in debt contracting.


SSRN

This paper investigates why  commercial lenders   make markets for the loans that they sell on the secondary market. Using loan-level data, I find that origination lenders with extensive borrower relationships and more reputational capital at stake are more likely to serve as market makers.  Greater participation of origination lenders as market makers is associated with lower trading costs for their borrowers' loans. This association remains even in conditions where origination lenders could exploit their information advantage for market making profits. Lenders benefit from being market makers by maintaining strong subsequent lending relationships with their borrowers. Collectively, this evidence is consistent with origination lenders' participation in the secondary market being motivated by reducing trading frictions rather than market making profits. 

Working Papers 

SSRN

We investigate the effects of mandatory mutual fund liquidity requirements on fund fragility. After the implementation of SEC Rule 22e-4, as required, bond mutual funds hold more liquid securities. However, we find that additional liquidity does not ameliorate fragility. Post-rule, funds with illiquid securities face greater outflows conditional on past underperformance, and fund exits increase. At the holdings level, funds exhibit a higher likelihood of selling illiquid securities post-rule. In turn, such sales increase fund underperformance, thus completing the vicious cycle of fragility. These results are consistent with the theory that fund-level liquidity does not necessarily reduce fund-run incentives. 


SSRN

We examine whether private lenders learn from the equity market. We conjecture that lenders can learn from stock prices new information about firms’ fundamentals and growth opportunities (prospects channel) as well as information about managers’ incentives to take risky actions that may be detrimental to the value of debt claims (incentives channel). Exploiting the mergers and acquisitions (M&A) setting, we find a V-shaped relation between M&A announcement returns and the interest spread on loans issued following M&As. We further show that the association between announcement returns and the interest spread is more pronounced when managers’ risk-taking incentives are likely to be more acute. These findings suggest that lenders learn from stock prices in assessing borrowers’ creditworthiness and that this learning works, at least partially, through the incentives channel. Our evidence highlights a novel channel through which firm stakeholders with incentives misaligned with those of stockholders can learn from stock returns. 


SSRN

We study the 2015 introduction of a voluntary disclosure program that focused on the execution quality of equity trades under 100 shares, known as odd lots. The disclosure program was enacted during a period of increased regulatory and media scrutiny of how market makers fulfilled odd lot orders. We show the percentage of odd lot orders that receive price improvement from market makers jumped discontinuously at the outset of the program. This jump was driven by trivially small price improvement given to a larger fraction of orders, and an offsetting reduction in larger price improvement for a small handful of orders. These changes resulted in no material difference in overall execution quality but allowed market makers and brokers to tout high execution quality statistics via their disclosures. Together, our evidence suggests that public scrutiny creates incentives for firms to use mutually reinforcing operational and disclosure changes to manipulate public sentiment.


SSRN

We use the adoption of current expected credit loss reporting for banks as a setting to examine how recognition of managers’ forward-looking estimates affects their learning from stock prices. We posit that recognition of banks’ expected credit losses can reduce managerial learning in two ways. First, managers are forced to invest in information systems that allow them to generate decision-useful information and to rely less on alternative sources, such as stock price. Second, the disclosure of expected credit losses reduces incentives for investors to privately collect and trade based on this information, thereby reducing the informativeness of stock prices for banks’ lending decisions. We find robust evidence that bank managers learn from stock prices under the incurred loss model and that this learning is attenuated under the expected credit loss model. The results vary with banks’ information advantage over equity market participants and are robust to alternative treatment and control groups and measurement approaches. We present evidence that investors incorporate less macroeconomic information in banks’ stock prices and that the reduction in learning hurts banks’ lending efficiency.


SSRN

We exploit the semi-annual rebalancing of the Morningstar LSTA US Leveraged Loan 100 Index as an exogenous shock to the trading conditions in the secondary loan market, which are critical to non-bank institutional lenders that rely heavily on the secondary market for liquidity. In line with improved loan liquidity and greater institutional demand arising from the index inclusions, we find that index-included loans achieve lower bid-ask spreads, higher prices, and greater mutual fund holdings. We further find that index-included loans experience significantly higher likelihood of interest rate-reducing renegotiations than index-excluded loans, consistent with non-bank lenders sharing with borrowers non-fundamental surplus driven by the index inclusion. We rule out explanations related to borrower fundamental by showing that non-traded loans included in the same package as index-included loans do not experience interest rate reducing renegotiations and by conducting placebo analyses that employ an artificial index inclusion threshold and the time period preceding the index origination. Overall, our findings provide novel evidence that non-fundamental forces, such as a loan's inclusion in a major index, can trigger loan renegotiation. 


SSRN

This paper examines how tax policy affects borrower-lender negotiations in syndicated loan markets. Using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment, we analyze changes in loan terms for firms facing higher after-tax borrowing costs due to limits on interest deductibility. We find that borrowers most likely to face limited interest deductibility negotiate lower interest rates post-TCJA. Importantly, we observe no changes in non-price terms such as covenants, maturities, or collateral requirements, suggesting that lenders share the incidence of tax policy burdens with borrowers rather than offsetting reduced rates through stricter loan terms. The results are concentrated in borrowers that operate in industries that saw increased lender competition after the TCJA. We also find no evidence of changes in the creditworthiness of firms with limited interested deductibility post-TCJA, suggesting that the change in loan spreads is not attributable to changes in borrower fundamentals. Our findings demonstrate lenders' willingness to share borrowers' tax burdens as a novel channel by which tax policy affects corporate financing decisions and credit markets.  


Book Chapters

SSRN