Research Interests:
Corporate Finance, Structural Estimation, Corporate Investment, Mergers and Acquisitions, Corporate Governance, Financial Intermediation, Macro-finance, Innovation and Growth.
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Working Papers:
Investor Demand, Firm Investment, and Capital Misallocation
with Jaewon Choi, Yufeng Wu, and Mahyar Kargar.
Revise and resubmit, Journal of Financial Economics.
Conferences and Seminars: WFA Meeting 2022, AFA 2023 Annual Meeting, MFA Meeting 2023, ITAM Finance Conference 2023, EFA 2023, Federal Reserve Board, Texas A&M University, University of Florida.
Abstract: Fluctuations in investor demand significantly affect firms' valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are an important driver of firm-level investment and economy-wide capital misallocation, accounting for 23.8% of dispersion in MPK and 22.3% of productivity losses.
Keywords: investor demand, firm investment, capital misallocation, structural estimation, market timing.
Are Markups Too High? Competition, Strategic Innovation, and Industry Dynamics
with Laurent Cavenaile and Murat Alp Celik.
Revise and resubmit, Review of Economic Studies.
Conferences and Seminars: MWM 2019, CEPR 2019, SED 2021, NBER Summer Institute, NFA 2021, RCEA Growth, Innovation and Entrepreneurship Conference, Virtual Growth and Innovation Seminar Series.
Abstract: To study competition, innovation, and industry dynamics that arise as a result of their interaction, we develop a new oligopolistic general-equilibrium Schumpeterian growth model. This model ties together the endogenous growth, oligopolistic competition, and dynamic industrial organization literatures in a single unified framework, which is used to assess the growth and welfare implications of counterfactuals. Within each industry, there are an endogenously determined number of large firms (“superstars”) that compete à la Cournot and a continuum of small firms which collectively constitute a competitive fringe. Firms dynamically choose their innovation strategies, cognizant of other firms’ choices, and their entry and exit are endogenous. The model is consistent with the macroeconomic trends observed in the United States since the 1970s, such as the domination of industries by a small number of superstar firms, the rise of markups, market concentration, profits, and R&D spending, and the decline in business dynamism, productivity growth, and the labor share. It replicates the empirical relationship between innovation and competition within and across industries. As an application, we estimate the model to disentangle the effects of separate mechanisms on the structural transition observed in the United States, which yields striking results: (1) While the increase in the average markup causes a significant static welfare loss, this loss is overshadowed by the dynamic welfare gains from increased innovation in response to higher profit opportunities. (2) The increasing costs of innovation are found to be the primary determinant of lackluster productivity growth, i.e., ideas are getting harder to find.
Keywords: innovation, markups, growth, strategic investment, industry dynamics, business dynamism.
Style Over Substance? Advertising, Innovation, and Endogenous Market Structure
with Laurent Cavenaile, Murat Alp Celik, and Pau Roldan-Blanco.
Revise and resubmit, Journal of Monetary Economics.
Conferences and Seminars: AFA 2023 Annual Meeting, SED Annual Meeting, NFA 2021, FMA 2021 (Semi-finalist, Best Paper Award in Corporate Finance), Banco de España 4th Annual Research Conference, CMSG 2021, Econometric Society Winter Meeting 2021, CEA 2022, BSE Summer Forum, EARIE 2022, MMF 2022.
Abstract: While firms use both innovation and advertising to boost profits, markups, and market shares, their broader social implications vary substantially. We study their interaction and analyze their implications for competition, industry dynamics, growth, and welfare. We develop an oligopolistic general-equilibrium growth model with firm heterogeneity. Market structure is endogenous, and firms' production, innovation, and advertising decisions interact strategically. We find advertising reduces static misallocation, but also depresses growth through a substitution effect with R&D. Although advertising is found to be socially useful, taxing it could simultaneously increase dynamic efficiency, contain excessive advertising spending, and raise revenue, while still reducing misallocation.
Keywords: innovation, advertising, markups, growth, industry dynamics, misallocation, business dynamism.
Do Financial Frictions Explain Chinese Firms' Saving and Misallocation? NBER WP NO. 24436, with Yan Bai and Dan Lu.
Revise and resubmit, American Economic Journal: Macroeconomics.
Conferences and Seminars: China Meeting of Econometric Society, World Congress of Comparative Economics, SED Annual Meeting, CEA Annual Meeting, Econometric Society Annual Meeting.
Abstract: We use firm-level data to identify financial frictions in China and explore the extent to which they can explain firms' saving and capital misallocation. We first document the features of the data in terms of firm dynamics and debt financing. State-owned firms have higher leverage and pay much lower interest rates than non-SOEs. Among privately owned firms, smaller firms have lower leverage, face higher interest rates, and operate with a higher marginal product of capital. We then develop a heterogeneous firm model with endogenous borrowing constraints rising from default risk and fixed costs of issuing loans. Using evidence on the firm size distribution and financing patterns, we estimate the model and find it can explain aggregate firms' saving and investment and around 50 percent of the dispersion in the marginal product of capital within private firms, which translates into a TFP loss as high as 12%.
Keywords: financial frictions, firms debt financing, capital misallocation, saving and investment.
with Paul Borochin, Murat Alp Celik, and Toni M. Whited.
Conferences and Seminars: WFA Meeting 2023, SFS Cavalcade 2022 North America, AEA 2022, FMA 2021 (Semi-finalist, Best Paper Award in Investment).
Abstract: We develop a method for estimating individual firm heterogeneity in the stock market impact of aggregate events, using data on both stock and options prices. Our method impounds the effects of event anticipation. We apply the method to the passage of the Tax Cuts and Jobs Act (TCJA), which exhibits both anticipation and heterogeneity. We estimate that the market anticipated the probability of passage to be 95% 30 days before the event. The full value impact of the TCJA is 12.36%, compared to 0.68% when market anticipation is ignored. Large, innovative firms with high growth prospects are the largest winners.
Keywords: event study, market anticipation, options, tax policy, innovation.
The Efficiency of Patent Litigation, with Samuel Antill, Murat Alp Celik, and Toni M. Whited.
Conferences and Seminars: WFA Meeting 2024 (scheduled), SFS Cavalcade 2024 North America (scheduled), Northeastern University Finance Conference (scheduled).
Abstract: How efficient is the U.S. patent litigation system? We quantify the extent to which the litigation system shapes innovation using a novel dynamic model, in which heterogeneous firms innovate and face potential patent lawsuits. We show that the impact of a litigation reform depends on how heterogeneous firms endogenously select into lawsuits. Calibrating the model, we find that weakening plaintiff rights through fewer defendant injunctions increases firm innovation and output growth, improving social welfare. Raising plaintiff pleading requirements, which heightens barriers to filing lawsuits, likewise promotes innovation, boosts output growth, and enhances social welfare.
Keywords: patent litigation, innovation, firm value, growth, social welfare.
with Kose John, Y. Christine Liu, and Haofei Zhang.
Conferences and Seminars: FARS Midyear Meeting, NFA, CAAA Annual Conference, Hawaii Accounting Research Conference.
Abstract: Using a hand-collected sample of 1,419 CEO turnover announcements gathered from Factiva News, we study the market reaction to these announcements in the context of information frictions. We find that the market reaction to forced CEO turnovers tends to be negative, particularly when the level of asymmetric information between corporate insiders and their investors is high. In contrast, for voluntary CEO turnovers, the market reaction is negligible and does not correlate with the level of asymmetric information. Furthermore, we observe that in scenarios of high information asymmetry, companies often report forced turnovers as voluntary, eliciting a less negative market response. Overall, our results suggest that firms strategically disclose information about CEO turnover to avoid negative market reactions. The existing degree of asymmetric information combined with strategic disclosure by firms produce the equilibrium announcement effect of CEO turnovers.
Keywords: CEO turnover, information asymmetry, information disclosure, market reaction.
Publications:
Agency Frictions, Managerial Compensation, and Disruptive Innovations, with Murat Alp Celik.
Review of Economic Dynamics, 2023, 51: 16-38.
Coverage: Columbia Law School's Blog on Corporations and the Capital Markets
Abstract: Whether a manager leads the innovation efforts of a firm in line with shareholder preferences has a substantial impact on the firm's market value and growth. This in turn influences aggregate productivity growth and welfare. Using data on US public firms, we find that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options and (ii) such contracts are more likely to lead to disruptive innovations -- patented inventions that are in the upper tail of the distribution in terms of quality and originality. We develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations, as well as the consequent macroeconomic impact. Better corporate governance can reduce the influence of the manager in determination of the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders as well as the broader economy through knowledge spillovers. Reducing agency frictions leads to an increase in long-run output growth, which translates into a significant welfare gain in consumption-equivalent terms. An extended model with short-term earnings pressure on the manager reveals that short-termism only slightly dampens the gains from reducing manager influence; it is quantitatively less detrimental in comparison; and alleviating both frictions at the same time leads to amplified gains in growth and welfare.
Keywords: agency frictions, corporate governance, innovation, managerial compensation, short-termism.
Acquiring Innovation Under Information Frictions, with Murat Alp Celik and Wenyu Wang.
Review of Financial Studies, 2022, 35(10): 4474-4517.
Abstract: Acquiring innovation through M&A is subject to information frictions, as acquirers find it challenging to assess the value of innovative targets. We find an inverted U-shaped relation between firm innovation and takeover exposure; equity usage increases with target innovation; and deal completion rate drops with innovation. We develop and estimate a model of acquiring innovation under information frictions, featuring endogenous merger, innovation, and offer composition decisions. Our estimates suggest that acquirers' due diligence reveals only 30% of private information possessed by targets. Eliminating information frictions increases capitalized merger gains by 59%, stimulates innovation, and boosts productivity, business dynamism, and social welfare.
Keywords: information frictions, adverse selection, innovation, M&A.
Uncertainty and the Shadow Banking Crisis: Estimates from a Dynamic Model
Management Science, 2022, 68(2): 1469-1496.
Abstract: Shadow banks play an important role in the modern financial system and are arguably the source of key vulnerabilities that led to the 2007-2009 financial crisis. I develop a quantitative framework with uncertainty fluctuations and endogenous bank default to study the dynamics of shadow banking. I argue that the increase in asset return uncertainty during the crisis results in a spread spike, making it more costly for shadow banks to roll over their debt in the short-term debt market. As a result, these banks are forced to deleverage, leading to a decrease in credit intermediation. The model is estimated using a bank-level dataset of shadow banks in the United States. The parameter estimates imply that uncertainty shocks can explain 72% of asset contraction and 70% of deleveraging in the shadow banking sector. Maturity mismatch and asset fire-sales amplify the impact of the uncertainty shocks. First-moment shocks to bank asset return, financial shocks, or fire-sale cost shocks alone can not reproduce the large interbank spread spike, dramatic deleveraging or contraction in the U.S. shadow banking sector during the crisis. The model also allows for policy experiments. I analyze how unconventional monetary policies can help to counter the rise in the interbank spread, thus stabilizing the credit supply. Taking bank moral hazard into consideration, I find that government bailout might be counterproductive as it might result in more aggressive risk-taking among shadow banks, especially when bailout decisions are based on bank characteristics.
Keywords: shadow banking, uncertainty, firesale, maturity mismatch, unconventional monetary policy, moral hazard.
The Dynamic Effects of Antitrust Policy on Growth and Welfare, with Laurent Cavenaile and Murat Alp Celik.
Journal of Monetary Economics, 2021, 121: 42-59.
Abstract: Motivated by concerns regarding the lack of dynamic considerations in models of antitrust, we develop and estimate the first general equilibrium model with Schumpeterian innovation, oligopolistic product market competition, and endogenous M&A decisions to shed light on the dynamic effects of antitrust policy on growth and welfare. The estimated model reveals that: (1) Existing policies generate moderate gains in growth and welfare. (2) Strengthening antitrust enforcement could deliver substantially higher gains. (3) The dynamic long-run effects of antitrust policy on social welfare are an order of magnitude larger than the static gains from higher allocative efficiency in production. (4) Current HHI-based antitrust rules leave the majority of anticompetitive acquisitions undetected, highlighting the need for alternative guidelines. Overall, our results suggest that the long-run impact on innovation policy and aggregate productivity growth should receive much higher consideration in the design of antitrust policies.
Keywords: antitrust policy, M&A, innovation, growth, social welfare.