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


"Uncertainty, Capital Investment, and Risk Management" (with Hitesh Doshi and Praveen Kumar)
Forthcoming, Management Science
(Here's the Internet Appendix)

"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:

"Optimal Capital Structure and Investment with Real Options and Endogenous Debt Costs" (with Praveen Kumar)
Abstract: We examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs. Higher capacity ceteris paribus increases operating leverage and default probability, but lowers ex-post adjustment costs and generates larger tax shields. A key insight is that financial leverage and capacity are substitutes in the debt market equilibrium. We develop novel predictions on the effects of capital adjustment costs, operating costs and uncertainty on optimal financial leverage and capacity, which may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment.

"How do Investors Accumulate Network Capital? Evidence from Angel Networks" (with Buvaneshwaran Venugopal)
Abstract: Using unique hand-collected data on start-ups financed by individual angel investors, we show that angels that successfully lead a start-up to the next financing stage, especially from seed to series-A stage, experience an increase in the quantity and quality of co-investment connections relative to their unsuccessful peers, and are rewarded with more new investment opportunities, both as lead investors and participants. Success begets more success, making it more likely that other seed-stage start-ups of the successful angel also progress to the next financing stage. Our results highlight that reputation for good performance enhances the network capital of angel investors.

"Relative Values, Announcement Timing, and Shareholder Returns in Mergers and Acquisitions" (with Sangwon Lee)
Abstract: We examine the endogenous timing of M&A announcements in terms of the bidder's relative value (ratio of bidder's equity value to target's equity value) at which the deal is announced, and how it compares with the range of relative value during a 52-week reference window preceding the announcement. Accordingly, we create a normalized relative value (NRV) measure, which takes a higher (lower) value if the bidder's relative value at announcement is closer to its 52-week high (low). High-NRV deals are more likely to feature stock payment, have higher offer premium, are more likely to fail, and are associated with lower (higher) announcement returns for the bidding (target) firm. However, bidding (target) firms in high-NRV deals earn large positive (negative) abnormal returns in the period from one year before announcement to a day after announcement. Overall, our results are consistent with the misvaluation hypothesis of takeovers, and suggest that bidders strategically choose the timing of M&A announcements to exploit misvaluations.

"Lender Moral Hazard and Reputation in Originate-to-Distribute Markets" (with Andrew Winton)
Abstract: In a dynamic model of originate-to-distribute lending, we examine whether reputation concerns can incentivize a bank to monitor loans it has sold. Investors believe that banks with fewer recent loan defaults are more likely to monitor ("have higher reputation"). In equilibrium, banks monitor more and retain a smaller loan fraction when their reputations are high. Monitoring is harder to sustain in periods with uncommonly large spikes in loan demand ("booms"), especially for low-reputation banks, which are more likely to accommodate boom demand and forgo monitoring. Increased likelihood of facing a rival with reputation concerns also weakens monitoring incentives.

"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.

"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