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, January 2021.

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 - Job Market Paper.

Abstract: Internal capital markets (ICMs) allow multinational enterprises (MNEs) to transfer liquidity globally, which connects external capital markets when the related entities also raise external funds. This paper studies such connection with a model of ICMs that permits two layers of agency problems: those between (the shareholders of) a MNE and its external lenders and those between a parent company and its subsidiaries. When a parent company faces a limited internal monitoring capacity due to complex multinational operations, subsidiary-level external debt can be used to induce monitoring from local lenders that have informational and supervisory advantages. This encourages a MNE to deploy an optimal blend of parent- and subsidiary-level external debt to maintain the lender's incentive to monitor. The model predicts that, in response to an uncertainty shock in a foreign country, MNEs can counter the negative effect with an inflow of international capital by substituting subsidiary-level external debt with cheaper parent-level external debt as foreign lenders have a stronger incentive to monitor. My paper then tests this prediction with detailed data on US MNEs at both parent and subsidiary levels, utilizing the surge in uncertainty caused by the UK's unexpected decision to leave the European Union (``Brexit") as a natural experiment. Consistent with the model prediction, I document that the uncertainty shock increased the ratio of parent-level external debt to total assets significantly in the consolidated balance sheet of US MNEs with UK subsidiaries, without changing the ratio of total debt to total assets. Meanwhile, the UK subsidiaries of US MNEs substituted external debt with internal debt significantly on their unconsolidated balance sheet, without changing the ratio of total debt to total assets. Given the global influence of non-financial MNEs, this study provides the first evidence that their ICMs constitute an important channel of cross-border spillovers among external capital markets in response to shocks.

Uncertainty, Stock Prices and Debt Structure: Evidence from the U.S.-China Trade War (with Ali Ozdagli) - Dallas Fed blog post on this paper. 

Abstract: Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.

The Fiscal Multiplier and World War II: A Revisit from the Stock Market Perspective (with Abhi Gupta) - Single-authored draft. Update in progress with Abhi Gupta.

Abstract: Stock returns of the defense industry have been as used as a novel approach in identifying government spending shocks and tend to yield an above-unity fiscal multiplier during the post-Korean War period. In this study, I identify the public aircraft and shipbuilding companies as the defense sector of the U.S. stock market and apply the stock market approach to estimate the fiscal multiplier associated with WWII, the largest fiscal stimulus episode of the modern U.S. history. Based on a monthly sample from 1936 to 1947, I find that the output elasticity with regards to total government spending is around 0.276 during the WWII era, which is very close of the 0.3 output elasticity reported from the post-Korean War sample. I also observe persistent responses in government spending and real output to innovations in the excess returns of defense sector, a feature consistent with the findings of the stock market approach and suggesting the existence of expectation effects at a longer horizon that has yet to be accounted for by the main approaches of the literature. Due to the special economic environments of WWII characterized by a high government spending share, the 0.276 output elasticity implies a fiscal multiplier of 0.72, which is in turn consistent with the multiplier estimated via defense news. Upon comparing the performance of the excess returns and defense news on an overlapping sample, I present evidence emphasize the importance of the expectation effects at a longer horizon. In specific, I discover that the shape of responses to the excess returns and defense news can replicate each other by forwarding the defense news and lagging the excess return series.

Multinationals and Exchange Rates: Evidence from Switzerland (with Andreas Freitag) - Single-authored draft. Update in progress with Andreas Freitag. 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.