Research
Research
Research Interests: quantitative corporate finance, financial intermediation, financial contracting with frictions, executive compensation, innovation
Working Papers
Wasted Ideas: Limited Diversificaiton and the Rise of Intangibles (job market paper)
Abstract: I study entrepreneurial investment when intangible capital is riskier than tangible capital. This risk arises, for example, from failed research and development or the departure of employees with specialized training. I develop a dynamic model in which entrepreneurs cannot fully diversify the risks associated with intangible capital, whereas tangible capital retains its value in all contingencies. Entrepreneurs therefore favor tangible capital partly as insurance against intangible capital risk. Less wealthy, undiversified entrepreneurs tilt their capital mix toward tangible assets, while wealthier entrepreneurs increasingly self-insure through cash holdings because of diminishing marginal returns to capital. I calibrate the model using a sample of U.S. firms. Relative to a benchmark with fully diversified entrepreneurs, limited diversification reduces the aggregate intangible-to-tangible capital ratio by 10%, intangible capital by 12%, and output by 6%. These shortfalls widen as production becomes more intensive in intangible inputs.
The Financialization of U.S. Corporations (with Antonio Falato and Roberto Steri)
Abstract: We document a secular increase in U.S. corporate financialization: firms allocate a declining share of their resources to real flows, investment in their core business, and a growin gshare to financial flows to the liability side, payouts to shareholders and interest to creditors. Financialization rises with equity pay. In our structurally estimated dynamic multitasking model, managers split effort between growth and margins. As margins predict future cash flows better than growth, secondary-market prices put more weight on them. Managers paid in equity cater to these prices by shifting effort toward margins: firms invest less and earn more on existing assets, so payouts rise. Between 1992–2006 and 2007–2020, higher equity pay accounts for 28% of the forces raising financialization and lowers firm value by 1.5%, or $335 billion. Each additional dollar of yearly equity grants costs $3.2 of firm value annually. A difference-in-differences design around SFAS 131, which made some multinationals’ margins less informative, validates the mechanism in the data and the estimated model: affected firms invest more and become less financialized.
Welfare Implications of Capital Regulation in Competitive Capital Markets (with Ramis Khabibullin)
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 work is in progress.