Journal Publications

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.

Working Papers

Multinationals and Uncertainty: The Role of Internal Capital Markets <Updated on Mar 1, 2023!> - Job Market Paper

Abstract: Multinational enterprises (MNEs) tap external capital markets globally, especially through their subsidiaries, and use internal capital markets (ICMs) to transfer liquidity. This paper studies how the ICMs of MNEs connect external capital markets when both parent companies and their subsidiaries borrow external debt. I first propose a model of ICMs, allowing for agency problems between MNEs and external lenders, as well as between parent companies and subsidiaries. I then test the model’s predictions through the lens of country-level uncertainty shocks, using a special period of Brexit as a natural experiment. Consistent with my predictions, I find that uncertainty shocks lead to an intense substitution of external debt: A rise in foreign uncertainty makes MNEs substantially substitute the external debt of foreign subsidiaries with internal debt from their ICMs, funded by the external debt of parent companies. Meanwhile, the equity-to-asset ratio of the foreign subsidiaries and MNEs can remain stable.

Uncertainty, Stock Prices and Debt Structure: Evidence from the U.S.-China Trade War (with Ali Ozdagli) <Updated on Sep 3, 2023!> - Dallas Fed blog post on this paper

Abstract: Using the 2018-2019 U.S.-China trade war as a laboratory, we establish the causal relation that policy uncertainty shocks significantly lower stock prices. In addition, we find that the usage of bank debt in firms' debt structure can significantly mitigate the negative impact, while the mitigating effect does not exist for non-bank debt. We further demonstrate the source of the mitigating effect by showing that it is concentrated among zombie firms --- mature firms that persistently lack sufficient earnings to cover their interest expenses. A zombie firm that derives half of its capital from bank debt can entirely offset the negative impact of uncertainty because of the mitigating effect. Our findings provide evidence that bank debt can provide insurance and flexibility for shareholders of distressed firms, especially during turbulent times.

The Fiscal Multiplier and World War II: A Revisit from the Stock Market Perspective <Updated draft coming soon>

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.

Selected Work in Progress

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.

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

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

A Sketch for the Great Library of Alexandria(Image Source: Science History Images/Alamy Stock Photo) "The opportunity before all of us is living up to the dream of the Library of Alexandria and then taking it a step further – universal access to all knowledge. Interestingly, it is now technically doable.” - Brewster Kahle