Publications and Accepted Manuscripts
Financial Statement Complexity and Bank Lending with Indraneel Chakraborty, Andy Leone, and Miguel Minutti-Meza (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.
Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market with Hami Amiraslani, John Donovan and Regina Wittenberg-Moerman (Conditionally accepted at 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 too costly and reduces the fixed cost of syndicate participation. Our analyses of loan contract design and ex-post contracting outcomes also suggest that while public-side lending increases within-syndicate information asymmetry, it does not impair the syndicated lending dynamics. Collectively, we demonstrate how debt contracting practices evolved to address frictions associated with the protection of borrowers’ private information and the related changes in loan contracting equilibria.
Does Recognition versus Disclosure Affect Debt Contracting? Evidence from SFAS 158 with John Donovan and Andrew McMartin (minor revision requested (fourth round) at 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.
Originate-to-Distribute Lending Relationships and Market Making in the Secondary Loan Market (dissertation titled "Origination Lenders as Market Makers in the Secondary Loan Market" ) - Greater participation of origination lenders as market makers, relative to other market makers, is associated with lower trading costs for their borrowers' loans traded in the secondary market. This finding is most pronounced during conditions of low liquidity, such as when there are few market makers, when loans are further past their origination date and during market-wide liquidity shocks. Lenders benefit from active participation as market makers by experiencing strong subsequent lending relationships with borrowers. Collectively, this evidence is consistent with origination lenders providing an important source of liquidity for their borrowers’ loans traded in the secondary market and inconsistent with moral hazard in originate-to-distribute lending markets.
The Role of Disclosure in Closing Going Private Deals with Pietro Bianchi, Miguel Minutti-Meza and Maria Vulcheva (under review) - A perceived conflict of interest in going private transactions can occur when a company transfers ownership and control to affiliated parties and terminates its public status. For example, conflict can occur if acquiring owners and selling owners have dissimilar information and competing incentives. These deals are subject to mandatory disclosure requirements to inform shareholders before the transaction is put to a general vote. However, the expected incremental role of these disclosures is uncertain. We demonstrate that disclosure volume is positively associated with the likelihood of closing a deal. However, we also find that disclosure volume is positively associated with two proxies for the intensity of shareholders’ negotiations: upward price revisions and litigation. Our findings offer insights into the incremental benefits and costs of disclosure in this setting. Specifically, increased disclosure can facilitate the completion of going private deals and exiting shareholders can use it to negotiate better terms.
The Consequences of Fund-level Liquidity Requirements with Indraneel Chakraborty, Elia Ferracuti and John Heater - We investigate the effects that mutual fund liquidity requirements have on fragility. In 2018, SEC Rule 22e-4 restricted ownership of illiquid securities in funds. As expected, post-rule, funds hold more liquid securities. Firms issuing illiquid securities face higher costs due to a smaller investor pool. However, higher liquidity does not ameliorate adverse shocks. Facing outflows, funds maintain cash levels and sell illiquid securities. This is because liquidity requirements are not sufficiently countercyclical: funds must maintain cash even when they should use it to mitigate flow pressures. Hence, outflows force funds to sell more illiquid securities post-rule change, unintentionally increasing fragility.
Do Private Lenders Learn from Public Equity Markets? (previously circulated as "Lender Learning") with Emmanuel De George, John Donovan and Regina Wittenberg-Moerman - We examine whether private lenders learn from the borrower’s equity market investors and impound this information into loan pricing. Using the setting of corporate merger and acquisitions (M&A), we document a “V-shaped” pattern between M&A announcement returns and the loan spread charged on subsequent private debt contracts. We argue that this evidence is consistent with lenders learning about agency-related risk associated with future managerial actions (i.e., conflicts between debt and equity investors) from equity market returns. The association between absolute M&A announcement returns and loan spread is larger when managerial compensation is more sensitive to equity prices and when loans lack covenants that facilitate lender monitoring. Importantly, we do not find a significant association between loan spreads and M&A announcement returns when the loan is issued immediately before the M&A announcement, which mitigates concerns of correlated omitted variables related to unobservable firm risk characteristics. Overall, we provide novel evidence that equity markets can inform private lenders of agency risk.