Research

Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies (with Anna Chernobai and Ali Ozdagli) - Journal of Monetary Economics, Volume 117, January 2021, Pages 418-440

Abstract: Recent regulatory proposals tie a financial institution’s systemic importance to its complexity. However, little is known about how complexity affects banks’ risk management. Using the 1996–1999 deregulations of U.S. banks’ nonbanking activities as a natural experiment, we show that banks’ business complexity increases their operational risk. This result is driven by banks that had been constrained by regulations, compared with other banks and also with nonbank financial institutions that were never subject to these regulations. We provide evidence that managerial failure underlying these events offsets benefits of strategic risk taking.

Multinationals and Uncertainty: The Role of Internal Capital Markets

Abstract: Despite their importance, we know little about how the internal capital markets (ICMs) of multinational enterprises (MNEs) connect external lenders. My paper addresses this gap by studying the interaction between parent- and subsidiary-level external lenders. I first derive the optimal debt structure of MNEs, explaining the role of subsidiary-level external debt. When used to incentivize delegated monitoring, I show that MNEs can substitute it with cheaper parent-level external debt to offset deleveraging pressure from local shocks that enhance the monitoring incentives. Using Brexit uncertainty as a natural experiment, I provide evidence of this channel at both parent and subsidiary levels.

Uncertainty, Stock Prices, and Debt Structure (with Ali Ozdagli). Posts from Dallas Fed Economics Blog and Berkeley Economics Newsroom on this paper.

Abstract: Despite the recognized importance of debt structure in transmitting economic shocks, we know little about its role in transmitting uncertainty. We find that bank debt reduces stock price sensitivity to policy uncertainty, unlike non-bank debt. This mitigating effect comes from cash-flow insolvent firms, consistent with the idea that they particularly value renegotiability of bank debt. Using high-frequency methods, we address challenges in identifying policy uncertainty shocks, focusing on the 2018-2019 U.S.-China trade policy uncertainty and on monetary-policy-related uncertainty around FOMC announcements. Our results suggest that bank debt provides insurance and flexibility for shareholders of distressed firms, especially during uncertain times.

Anticipation Effects and Fiscal Multipliers: Evidence from WWII (with Abhi Gupta)

Abstract: Correctly estimating fiscal multipliers depends on correctly recording when news of future spending breaks. The leading approach from Ramey (2011) deals with this issue by constructing fiscal shocks using news articles on defense spending. As an alternative, we construct a new measure of excess returns on military contractors over 1936-1947. Excess returns systematically lead the defense news series and produce more persistent dynamic responses of output and government spending. We estimate a long-run fiscal multiplier of 0.7. We consider two explanations for these discrepancies in the context of WWII: slow-moving changes in public expectations and private, pre-war coordination between defense-related firms and the government. For the first, we show that controlling for pre-war expectations of future spending renders both the news series and excess returns poor predictors of government spending.  For the second, lagging (leading) the excess returns (defense news) series can approximately reproduce the impulse responses generated by the other, suggesting that firms' returns are measuring the same eventual spending as the defense news series but are responding earlier in time.

Multinationals and Exchange Rates: Evidence from Switzerland - Clausen Center 2022 Research Grant Award

Abstract: In this article, I present the first-step evidence that foreign affiliates of multinational enterprises propagate the transmission of international monetary shocks to domestic inflation dynamics. I further highlight the importance that ownership matters in the usage of imported inputs due to potential organizational bonds between foreign affiliates and the intangible assets of their parents. When propagating the transmission of international monetary shocks, imported inputs themselves do not give a complete picture. Rather, the interaction between ownership and imported inputs matters. Utilizing a novel database that splits the Inter-Country Input-Output tables along the dimension of ownership, I find that foreign affiliates have an influential presence in the domestic sales of the tradable sectors of major developed economies. I also confirm that foreign affiliates tend to use more imports compared with the domestic-owned firms in the same industry. However, there is mixed evidence on foreign affiliates systematically selecting into import intensive industries. Using the 2015 Swiss franc appreciation as a natural experiment, I show that foreign affiliates in Switzerland gained market share following the appreciation, compared with not only the domestic-owned firms, but also the domestic-owned multinational enterprises in the same industry. This finding is consistent with the narrative that the foreign affiliates propagated the deflationary shock by adjusting prices downward further due to the cheaper imports following the appreciation. I also provide evidence that tradable sectors in Switzerland with a higher import intensity gained relative market share from the appreciation. But the positive effect of import intensity on domestic sales is significant only for the foreign-owned sectors.

Inventories and Monetary Policy Transmission (with Marco Brianti and Vito Cormun)

Bank Holding Companies and Risk Taking: The Role of Internal Capital Markets (with Kebin Ma and Jing Ye)

The Anti-Competitive Effect of Input Tariff Liberalization (with Petr Martynov and Yipei Zhang)