Vijay Yerramilli
Associate Professor, Finance
C. T. Bauer College of Business
University of Houston

Contact information:
240D, Melcher Hall
University of Houston
Houston, TX 77584
Phone: (713) 743-2516
Fax: (713) 743-4789

SSRN page:

Vita: Click here


"Debt Maturity Structure and Credit Quality" (with Radhakrishnan Gopalan and Fenghua Song)
Journal of Financial and Quantitative Analysis, Vol. 49 (4), pp. 817--842

"Market Efficiency, Managerial Compensation, and Real Efficiency" (with Rajdeep Singh)
Journal of Corporate Finance, 2014, Vol. 29, pp. 561--578

"Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies" (with Andrew Ellul)
Journal of Finance, 2013, Vol. 68 (5), pp. 1757--1803
(Here's the Internet Appendix)

"Moral Hazard, Hold-up, and the Optimal Allocation of Control Rights"
RAND Journal of Economics, 2011, Vol. 42 (4), pp. 705--728

"Does poor performance damage the reputation of financial intermediaries? Evidence from the loan syndication market"
(with Radhakrishnan Gopalan and Vikram Nanda)
Journal of Finance, 2011, Vol. 66 (6), pp. 2083--2120

"Why do Firms Form New Banking Relationships?" (with Radhakrishnan Gopalan and Gregory F. Udell)
Journal of Financial and Quantitative Analysis, 2011, Vol. 46 (5), pp. 1335--1365

"Entrepreneurial Finance: Banks versus Venture Capital" (with Andrew Winton)
Journal of Financial Economics, 2008, Vol. 88 (1), pp. 51--79

"The effect of decimalization on the components of the bid-ask spread" (with Scott Gibson and Rajdeep Singh)
Journal of Financial Intermediation, 2003, Vol. 12, pp. 121--148

Completed Working Papers:

"Do Bond Investors Price Tail Risk Exposures of Financial Institutions?" (with Sudheer Chava and Rohan Ganduri)
Abstract: We analyze whether bond investors price tail risk exposures of financial institutions using a comprehensive sample of bond issuances by U.S. financial institutions. Although primary bond yield spreads increase with an institutions' own tail risk (expected shortfall), systematic tail risk (marginal expected shortfall) of the institution doesn't affect its yields. The relationship between yield spreads and tail risk is significantly weaker for depository institutions, large institutions, government-sponsored entities, politically-connected institutions, and in periods following large-scale bailouts of financial institutions. Overall, our results suggest that implicit bailout guarantees of financial institutions can exacerbate moral hazard in bond markets and weaken market discipline.

"Uncertainty and Capital Investment: Real Options or Financial Frictions?" (with Hitesh Doshi and Praveen Kumar)
Abstract: Using forward-looking and long-term measures of oil price uncertainty derived from options on crude oil futures, we find that oil price volatility has a significant negative effect on capital expenditures and drilling activities of upstream oil & gas firms. However, this effect is weaker for large and investment-grade firms, and is stronger during recessions and when default spreads are high. This negative relationship holds even after controlling for hedging activity, which itself increases with oil volatility. Our results highlight that the negative investment-uncertainty relation is driven by both financial frictions and the real option value of delaying investment.

"Optimal Operating Capacity and Risk with Real Options and Financial Frictions" (with Praveen Kumar)
Abstract: We analyze the dynamic capacity investment decisions of a firm that is subject to financial distress costs but can hedge its risks using fixed-price operating contracts. In equilibrium, the firm may optimally choose to remain unhedged when its real option is highly valuable, that is, when demand uncertainty is high and capacity adjustment costs are low. The firm may prefer to remain unhedged at high levels of uncertainty even as distress costs increase, because it can endogenously lower its expected distress costs by reducing its operating capacity and financial leverage. We highlight the substitutability between financial and operating risk.

"Lender Moral Hazard and Reputation in Originate-to-Distribute Markets" (with Andrew Winton)
Abstract: We analyze a dynamic model of originate-to-distribute lending in which a bank with significant liquidity needs makes loans and then sells them in the secondary loan market. There is no uncertainty about the bank's monitoring ability or honesty, but the bank may not have incentives to monitor the loan after it has been sold. We examine whether the bank's concern for its reputation, which is based on the number of recent defaults on loans it has originated, can maintain its incentives to monitor. In equilibrium, a bank that has had more recent defaults obtains a lower secondary market price on its current loan and monitors less intensively. Monitoring is more likely to be sustainable if the bank has greater liquidity needs or monitoring has a higher benefit-to-cost ratio; reputation is more valuable for greater liquidity needs, higher monitoring benefit-to-cost ratio, and higher base loan quality. If the bank can commit to retaining part of loans it makes, then a bank with worse reputation retains more of its loan. Competition from a rival lender makes it less likely that monitoring can be sustained and may cause a high-reputation bank to cede the loan to the rival. A temporary increase in loan demand (a "lending boom") makes it less likely that any monitoring can be sustained, especially for low-reputation banks.

"Insider Ownership and Shareholder Value: Evidence from New Project Announcements" (with Meghana Ayyagari and Radhakrishnan Gopalan)
Abstract: Most firms outside the U.S. have one or more controlling shareholders that manage multiple firms within a business group structure with very little direct cash flow rights. We employ a novel dataset of new capital investment projects announced by publicly-listed Indian firms to estimate the value implications of such complex ownership structures. Focusing on the market's assessment of the \emph{marginal value} of new projects enables us to overcome problems associated with employing average Tobin's q as a value measure. We find that the project announcement returns are significantly larger for projects of group firms with high insider holding as compared to projects of group firms with low insider holding. This effect is larger for projects that result in either the firm or the business group diversifying into a new industry, and for firms with high level of free cash flows. Our results obtain when we employ a matching estimator and when we instrument for the level of insider holding. Overall, our results are consistent with business group insiders expropriating outside shareholders by selectively housing more (less) valuable projects in firms with high (low) insider holding.

Other Links:

C. T. Bauer College of Business

The Finance Department

Finance Department Seminar Series