Research
Research Interests: quantitative corporate finance, financial intermediation, financial contracting with frictions, executive compensation, innovation
Work In Progress
The Financialization of U.S. Corporations (with Antonio Falato and Roberto Steri)
Abstract: In this paper, we uncover a novel empirical phenomenon: a secular increase in financialization of US corporations over the past forty years. To elucidate this trend, we introduce a quantitative explanation through a multitasking model where firms allocate effort between two primary tasks - growth and profit margins. In our model, firms' compensation structures are influenced by market prices. In equilibrium, firms cater to market preferences, prioritizing efforts toward profit margins when these provide less noisy information compared to growth. We calibrate a dynamic rational expectations equilibrium model to U.S. data to quantify the extent to which this market-catering mechanism can account for the observed secular trend in financialization. Our findings indicate that firms are increasingly catering to market preferences by focusing more on enhancing profit margins, thereby becoming more financialized over time. This work is in progress.
Welfare Implications of Capital Regulation in Competitive Capital Markets
Abstract: In this paper, we justify capital requirements in an environment where firms and banks compete for scarce capital. In our model, the safest project has the highest expected payoff. In decentralized equilibrium with deposit insurance and capital market competition, firms select a socially undesirable risky project. We find that higher capital requirement for banks decreases supply of capital for the firms and leads to higher risk-shifting through the 'skin-in-the-game' channel. At the same time, higher capital requirement incentivizes banks to engage more in screening activity. As a result, by setting a capital requirement a social planner optimally trades off losses and gains from risk-shifting and screening activity. This works is in progress.