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"Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies" (Here's the Internet Appendix)
(with Andrew Ellul)
Forthcoming, Journal of Finance
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"Debt Maturity Structure and Credit Quality"
(with Radhakrishnan Gopalan and Fenghua Song)
Forthcoming, Journal of Financial and Quantitative Analysis
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"Moral Hazard, Hold-up, and the Optimal Allocation of Control Rights"
RAND Journal of Economics, 2011, Vol. 42 (4), pp. 705--728
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"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
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"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
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"Entrepreneurial Finance: Banks versus Venture Capital" (with Andrew Winton)
Journal of Financial Economics, 2008, Vol. 88 (1), pp. 51--79
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"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
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"Risk Management and Real Options with Operating Hedging Contracts" (with Praveen Kumar)
Abstract: The real options literature largely abstracts away from active risk management by firms. In this paper, we jointly examine the capacity investment choice and risk management strategy of upstream firms in vertically separated industries that possess costly expansion options but face demand uncertainty from the downstream sector. A novel, but realistic, feature of our analysis is that upstream firms also have the option to hedge the demand uncertainty by fixing the terms of future trade through bilateral operating contracts with downstream firms. The operating hedging contract eliminates the upstream firm's expansion option, but may enhance overall industry profits by improving coordination between the upstream and downstream firms. We show that, in equilibrium, it is optimal for upstream firms to relinquish the expansion option when demand uncertainty is low and the expansion cost is high. A key insight of our paper is that hedging through operating contracts may be optimal even when firms are risk neutral, and are not subject to any financial distress costs or external financing constraints.
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"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.
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"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.
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"Analyst Monitoring and Managerial Incentives" (with Rajdeep Singh)
Abstract: In this paper, we investigate whether an increase in analyst monitoring, which improves the informational efficiency of stock prices, necessarily translates into firms' managers taking more value-enhancing decisions ("real efficiency"). We show that when the manager's compensation is tied to stock prices, then an increase in analyst monitoring weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. If the manager's compensation contract is observed by stock market participants, then an increase in analyst monitoring is always detrimental to real efficiency. However, if market participants do not observe the manager's compensation contract, then an increase in analyst monitoring improves real efficiency for growth firms and reduces real efficiency for value firms.
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"Joint control and redemption rights in venture capital contracts"
Abstract:In most venture capital financed firms, neither the VC nor the manager has exclusive authority over some of the key corporate decisions. For example: the decision whether the firm should undertake an IPO or be sold to a larger rival usually requires the approval of both the manager and the VC. This contradicts a strong prediction in the theoretical literature that joint control is suboptimal. In this paper, I show that assigning control jointly to both the agents, and specifying a harsh penalty (such as liquidation) if they fail to reach an agreement, is sometimes better than assigning control exclusively to one of the agents. A key factor is the firm's "financial slack" -- the difference between its expected cash flows and its required investments and monitoring costs. Joint control is the optimal control allocation when the firm has low financial slack and a reasonable collateral value, and when the VC's liquidity constraints and cost of monitoring the firm are high. Most VC-financed firms fit this description.
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Vijay Yerramilli