Index Creation, Information and External Finance
Revise and Resubmit: Journal of Accounting Research
(with Daniel Urban and Wenting Zhao)
How do firms newly added to an equity index change their financing strategies? We use the formation of new equity indexes and changes to index methodology as a setting to examine how shocks to a firm's information environment affect the debt supply and financing of firms. Firms added to an index are covered by more equity analysts and have greater news coverage, resulting in higher information production. Consequently, bond liquidity improves and firms benefit from lower yield spreads on newly issued debt. Treatment firms increase their leverage by about two percentage points relative to control firms. The response is primarily in the more information-sensitive public debt market, with firms issuing more public debt.
Debt Market Responses to Longevity Shocks
(with Zhanhui Chen, Pingyi Luo, and Wenjun Zhu)
Unexpected increases in life expectancy induce life insurers to extend the duration of their assets, which results in significant purchases of long-term corporate bonds. We show that this variation in life insurer demand for bonds of specific maturities has real-economy consequences for corporate sector financing and investment policies. As longevity increases, long-term bond yields fall and the corporate sector absorbs such shocks by issuing more long-term bonds, while simultaneously increasing investments in long-term assets. The effects are particularly marked where life insurers are the primary holders of a firm’s debt. The response is also more pronounced for firms that rely on long-term financing, and financially unconstrained firms.
(with Joshua Madsen and Wei Wang)
Does having a lawyer familiar with the judge affect the judicial process? We exploit a setting where lead counsel lawyers are selected before judge assignment in corporate bankruptcies and find that cases resolve 25% faster when a lawyer-judge connection exists. The most effective connections arise through previous in-court interactions. Connected cases are more likely to emerge, have lower recidivism, file fewer plans of reorganization, incur lower legal fees, and their creditors recover more. The results suggest that lawyers' private knowledge of judges' discretion helps accelerate court processes.
Access to Credit and Labor Mobility
(with Janghoon Shon)
Exploiting a government credit program in Korea that sharply expanded credit access to some individuals but not others, we analyze the effect of credit market frictions on labor mobility and wages. Individuals eligible for credit were 43% more likely to switch jobs relative to those who were not eligible. The higher switching rates and subsequent wage improvements in response to improved access to credit suggest that credit frictions impede labor mobility. Furthermore, individuals take greater risks when they have more credit; they exhibit a higher propensity to switch to employers in a different industry and move to different occupations at a higher rate. The fact that wages increased on average for these workers implies that removing credit frictions is important for labor mobility and quality of job matches.
Work in Progress
Climate Policies as Implicit Contracts
(with Deniz Okat and Arkodipta Sarkar)