Vijay Yerramilli
Assistant 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


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

"Debt Maturity Structure and Credit Quality"
(with Radhakrishnan Gopalan and Fenghua Song)
Forthcoming, Journal of Financial and Quantitative Analysis

"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 use a large sample of bond issuances by U.S. financial institutions during the 1990 to 2010 period to examine whether bond market investors price the tail risk exposure of financial institutions. Although primary bond yield spreads increase with institutions' own tail risk (expected shortfall, ES), they do not respond to their systematic tail risk (marginal expected shortfall, MES), even in the case of subordinated bonds. Strikingly, primary bond yield spreads of depository institutions do not respond to tail risk for either senior bonds or subordinated bonds. In general, the relationship between bond yield spreads and tail risk is significantly weaker for large financial institutions, government-sponsored entities, and politically connected institutions. Moreover, bond investor concerns for tail risk seems to have weakened in the immediate aftermath of financial crises that involved large-scale government 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 firms in the upstream oil \& gas sector. However, this effect is significantly weaker for large firms, investment-grade firms, and dividend-paying firms, and is much stronger during recessions and when default spreads are high. Our results highlight that the negative relationship between capital investment and price uncertainty is driven as much by financial frictions as by the real option value of delaying investment.

"Real Options, Financial Frictions, and the Choice Between Markets and Contracts" (with Praveen Kumar)
Abstract: We study the choice between markets and operating fixed-price contracts when firms are subject to transactions costs and financial frictions, but also possess valuable real options. The key insight of our paper is that although contracts are effective in mitigating transactions costs and financial distress costs, they also reduce substantially the value of firms' real options. In equilibrium, firms choose to forego use of contracts and utilize the market mechanism when the real options are sufficiently valuable, that is, when the demand uncertainty is high or the option exercise cost is low. Surprisingly, the market mechanism dominates for high levels of uncertainty even as distress costs increase, because firms can lower the risk of financial distress under the market mechanism by optimally lowering their initial capacity. Thus, our model also shows that financial frictions amply the dampening effect of uncertainty on investment.

"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: How does insider ownership affect shareholder value? We answer this question by examining how the marginal valuation of new investment projects announced by Indian firms varies with the level of insider holding in the firm, and other firm and project characteristics. We find that among projects announced by firms affiliated with business groups, announcement returns are significantly lower, and usually negative, for projects announced by firms with low insider holding. This effect is mainly driven by projects that result in either the firm or the business group diversifying into a new industry. On average, diversification projects announced by firms with low insider holding have negative announcement returns. The negative effect of low insider holding is larger in firms with high level of free cash flows. Overall, our results are consistent with 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