Research Interests

• Corporate finance, financial contracting, information economics.

Working Papers

• Signaling, Financial Constraints, and Performance-Sensitive Debt.
  

  Abstract: This paper examines how good borrowers use the design of performance sensitive debt contracts to alleviate financial constraints. I show that borrowers use a convex pricing grid (i.e., a contract where the increase in the loan spread following a decline in performance exceeds the decrease in the spread following a performance improvement) to signal their unobservable creditworthiness and receive better bank loan terms. I find that constrained firms that use convex pricing grids receive loans that are 21-28% larger with a spread that is 31-37 basis points lower than observationally similar borrowers that use fixed spread loans. Consistent with the notion that a costly signal should positively correlate with future financial health, I find that constrained borrowers that use a loan with a convex pricing grid are one third less likely to experience financial distress during the term of their loans.

• Design of Financial Securities: Empirical Evidence from Private-label RMBS Deals.
  with Amiyatosh Purnanandam
  

  Abstract: Using a representative sample of Residential Mortgage-Backed Securities (RMBS) deals from the pre-crisis period, we show that deals with a higher level of equity tranche have significantly lower foreclosure rates that cannot be explained away by observable credit risk factors of the underlying loan pool. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. These results show that the equity tranche served as a signal of the unobserved pool quality of these deals. In addition, consistent with theoretical models of pooling and tranching, the level of the AAA-rated tranche is significantly higher for pools that bundle loans with commonality in their private information but with uncorrelated risks. Our results highlight the effectiveness of security design solutions in mitigating informational frictions even during the build-up of the subprime mortgage crisis.

Last updated: April 2013