"Nominal frictions, leverage, and investment"
I find that nominal debt contracts and nominal price stickiness create a channel for inflation to affect real investment and leverage decisions. When debt in is nominal terms, Inflation lowers the real value of current debt, increases the marginal cost of issuing debt, and reduces the optimal amount of leverage. This reduces the degree of debt overhang, increasing investment. Firms with flexible prices invest more. I confirm these predictions empirically using a measure of price stickiness. Firms increase investment and reduce debt when inflation is high. Firms with sticky prices have lower investment and higher debt following inflation shocks.
|9/14/2016||Chao Ying/Fangyuan Yu|
Chao YingAuthors: Hengjie Ai, Anmol Bhandari, Jincheng Tong and Chao Ying
TITLE: "Aggregation in Economies with Homogeneous Decision Rules"
"Adverse selection and asset sales"
I consider a dynamic adverse selection problem in OTC markets. One seller with private information about asset quality searches buyers sequentially in the market. Two types of buyers exist in the market (informed and uninformed). Buyers make private offers to sellers if they meet, and sellers decide whether to accept the offer. I find that there exists a unique stationary market belief, and belief will converge to this stationary belief if trading hasn't occurred. When the market belief is unfavorable, the high type seller trades more slowly, and the average trading time for high type seller is longer than low type; when the market belief is favorable, high type seller trades more quickly, and the average trading time for high type seller is shorter than low type seller.
Title: "Skilled Labor Risk and Corporate Policies"
Abstract: In 2013, 86% of the U.S. publicly traded companies mentioned potential failure in attracting and retaining skilled labor as a risk factor in their 10-K filings, up from 37% in 1996. The intensity of the discussion on skilled labor risk in 10-Ks also increased sharply over the years. In this study, we measure skilled labor risk by the intensity of such discussions in 10-Ks, and examine its determinants as well as its impact on firms’ compensation design and financial management. We find that both the local mobility of skilled labor and the lack of access to ample supply of educated labor contribute to firms’ skilled labor risk. Consistent with theories on optimal compensation design in the presence of mobile talents, we find that firms facing higher skilled labor risk use more incentive pay with longer duration. Furthermore, those firms pursue more prudent financial management policies, holding more cash and borrowing less, supporting theories arguing that the skilled labor risk adds to a firm’s overall risk.
Title: Debt Structure as a Strategic Bargaining Tool
Abstract: This paper studies the strategic role of debt structure in improving the bargaining position of a firm's management relative to its non-financial stakeholders. Debt structure is essential for strategic bargaining since it affects the ease of debt contract renegotiation and thus the credibility of bankruptcy threats. Using airline industry as the empirical setting, we first show that the degree of wage concessions is strongly related to a firm's debt structure. Debt structure is further shown to be adjusted as a response to an increase in non-financial stakeholders' negotiation power. Using NLRB labor union election as a laboratory setting and employing a regression discontinuity design, we find that passing a labor union election leads to an increase in the ratio of public debt to total assets and a decrease in the ratio of bank debt to total assets in the following three years after elections, while there is no significant change in the level of total debt. Syndication size of newly issued bank loans increases while creditor ownership concentration decreases once the vote share for unions passes the winning threshold. Various tests confirm that the debt structure adjustments after union certification are more likely driven by strategic concerns of management rather than more constrained access to bank loans.
Location: CSOM 1-142
Title: Mobility of Skilled Labor and Capital Structure
Abstract: Firms that rely on relatively more high skill and high mobility employees at the same time, operate with lower financial leverages, to reduce the risk of losing their talents in financial distress. To quantify the importance of this channel, I estimate a dynamic model in which a firm hires skilled labor and finances investment by issuing equity and defaultable debt. Wages are not paid in default states and are only partially paid when the firm is distressed. If future wages are expected to be less than a reservation value, not only new workers cannot be hired, but the current workers also leave the firm at a rate that depends on their mobility. The estimated model generates same cross-sectional patterns in leverage as in actual data. Also, model identification is confirmed in a natural experiment using unexpected changes in labor mobility. The model predicts that if firms were not constrained by labor concerns, net debt to asset ratio would increase by 38%, from 0.124 to 0.171. This can be partially achieved if firms pay wages by their bonds, instead of cash or equity
Location: CSOM 1-142
Title: Dynamic-Agency Based Asset Pricing in a Production Economy
Author: Jincheng Tong & Chao Ying
Abstract: We present an asset pricing model in a production economy where neither firms nor workers can fully commit to labor compensation contracts. We embed optimal dynamic contracting in our general equilibrium setup to provide a unified explanation of macroeconomic quantity dynamics and asset market returns. With a risk aversion of four, our model generates an un-levered equity premium of 4% per year, a volatility of the stock market return of 14% per year, and a low and smooth risk-free rate. On the quantities side, it successfully replicates the empirical evidence of the low volatility of aggregateconsumption growth and large variations in aggregate investment over the business cycle.
|10/19/2016||Yao Deng||Location: CSOM 1-142|
Title: Industry Competition, Profitability and Stock Returns
Location: CSOM L-114
Title: A Race of Unicorns
Abstract: In an emerging industry, successful start-ups, also known as “Unicorns”, compete both in the product market as well as capital markets. The product market condition does not only influence the oligopoly profits, but also influences the investor’s belief on company future growth opportunity in the capital market. In this paper, we model a dynamic competition game between a good unicorn and a bad one. Both companies can choose to raise capitals by IPO and expand the current profit, or to be acquired by the other one. The unicorns time their financing decisions by balancing the adverse selection cost with the loss in expansion. In the model, market condition uniquely divides the financing decisions into three regions: IPO wave, burning money or M&A wave. Good unicorns optimally choose to suffer underpricing if they pool with bad ones in IPO, to give up expansion temporally, or to acquire the bad ones, signal their type and become the monopoly. The model can explain several empirical phenomena like volume fluctuations and market-timing in IPO. Also, the model has some empirical predictions in both pre-IPO competitions and post-IPO wave performance.
Location: CSOM L-114Title: The Market for Conflicted Advice
Author: Martin Szydlowski, Briana Chang
Presenter: Martin Szydlowski
We study decentralized markets in which advisers have conflicts of interest and compete for customers via information provision. We show that competition partially disciplines conflicted advisers. The equilibrium features information dispersion and sorting of heterogeneous customers and advisers: advisers with expertise in more information sensitive assets attract less informed customers, provide worse information, and earn higher profits. We further apply our framework to the market for financial advice and establish new insights: it is the underlying distribution of financial literacy that determines the consumers’ welfare. When advisers are scarce, the fee structure of advisers is irrelevant for the welfare of consumers.
Location: CSOM L-114
Title: The Effect of Taxation on Corporate Financing and Investment
Author: Hong Chen and Murray Frank
Presenter: Murray Frank
This paper studies the impact of taxation on corporate investment, debt, equity, and dividends. There is a classical tax code in which the firm pays tax on profits and the investor pays taxes on dividends, interest, and capital gains. We find that small increases in the dividend tax (or the capital gains tax) has no effect on consumption, production or government revenue. Instead, the firm alters the dividends and share issuance policies. A small increase in the corporate profits tax (or a cut in the tax on interest) reduces consumption, increases government revenue, and for realistic tax parameters increases production. There is one approximate symmetry between the impact of corporate profits tax and interest tax, and another between dividend tax and capital gains tax.
|11/16/2016||Keeseon Nam|| |
|11/30/2016||Wei Zhang|| |
|12/7/2016||Richard Thakor|| |
|12/14/2016||Hengjie Ai|| |