Published and Accepted Papers

Cross-subsidization of Bad Credits in a Lending Crisis

with Nikolaos Artavanis, Brian Lee and Stavros Panageas

Accepted at the Review of Financial Studies

[+] Abstract

We study the corporate-loan pricing decisions of a major Greek bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the "breakeven rate" of each loan, as computed by the bank's own loan-pricing department (in effect, the loan's marginal cost). We document that low-breakeven-rate (safer) borrowers are charged significant markups, whereas high-breakeven-rate (riskier) borrowers are charged small and sometimes even negative markups. We rationalize this de-facto cross-subsidization of riskier borrowers by safer borrowers through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.

The Labor Effects of Pro-Labor Bias in Bankruptcy

with Aloisio Araujo, Rafael Ferreira, Spyridon Lagaras, Flavio Morales, and Jacopo Ponticelli

Journal of Financial Economics, Volume 50, Issue 2, November 2023

[+] Abstract

Judicial decisions in bankruptcy are often influenced by the goal of preserving employment. Using the text of judicial decisions and the random assignment of cases across courts in the state of Sao Paulo in Brazil, we construct a novel court-level measure of pro-labor bias and study its effect on labor market outcomes. Employees of distressed firms assigned to high pro-labor courts are more likely to stay with their employer; however, they experience a 4.5% decline in earnings. This effect is driven by wage adjustments, it is stronger for workers with better outside options, and concentrated in periods of economic expansion.

Political Ideology and International Capital Allocation

with Elisabeth Kempf, Mancy Luo, and Larissa Schäfer

Journal of Financial Economics, Volume 148, Issue 2, May 2023

Jensen Prize (second place) for the best papers published in the Journal of Financial Economics in 2023 in the areas of corporate finance and organizations

[+] Abstract

Does partisan perception shape the flow of international capital? We provide evidence from two settings, syndicated corporate loans and equity mutual funds, to show that ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Moreover, we find that ideological alignment with foreign countries also affects investments of non-U.S. investors and can explain patterns in bilateral FDI flows. Our empirical strategy ensures that direct economic effects of foreign elections or bilateral ties between countries are not driving the result. Combined, our findings imply that partisan perception is a global phenomenon and its economic effects transcend national borders.

Partisan Professionals: Evidence from Credit Rating Analysts

with Elisabeth Kempf

Journal of Finance, Volume 76, Issue 6 December 2021

2018 Financial Research Association (FRA) Best Paper Award

[+] Abstract

Partisan perception affects the actions of professionals in the financial sector. Using a novel dataset linking credit rating analysts to party affiliations from voter records, we show that analysts who are not affiliated with the U.S. president's party downward-adjust corporate credit ratings more frequently. By comparing analysts with different party affiliations covering the same firm in the same quarter, we ensure that differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results suggest partisan perception has implications for firms' cost of capital.

Coverage: Bloomberg, Bloomberg Opinion, CNBC, VOX, Crain's Chicago Business, CBR Comic

Revealing Corruption: Firm and Worker Level Evidence from Brazil

with Emanuele Colonnelli, Spyridon Lagaras, Jacopo Ponticelli and Mounu Prem

Journal of Financial Economics, Volume 143, Issue 3, 2022

[+] Abstract

We study how the disclosure of corrupt practices affects firms and their employees. We construct novel firm-level measures of involvement in corrupt practices using randomized audits and public procurement suspensions in Brazil. On average, exposed firms grow larger after the audits. However, this result masks large heterogeneity depending on the degree of firm involvement in the corruption scheme. Using contract-, loan-, and worker- level data, we show that highly corrupt firms suffer after anti-corruption initiatives, while other exposed firms grow by changing their investment strategy when shifting away from doing business with the government.

Do Firms Respond to Gender Pay Gap Transparency?

with Morten Bennedsen, Elena Simintzi and Daniel Wolfenzon

Journal of Finance, Volume 74, Issue 4 August 2022

[+] Abstract

We examine the effect of pay transparency on gender pay gap and firm outcomes. This paper exploits a 2006 legislation change in Denmark that requires firms to provide gender dis-aggregated wage statistics. Using detailed employee-employer administrative data and a difference-in-differences approach, we find that the law reduces the gender pay gap, primarily by slowing the wage growth for male employees. The gender pay gap declines by approximately two percentage points, or a 7% reduction relative to the pre-legislation mean. In addition, the wage transparency mandate causes a reduction in firm productivity and in the overall wage bill, leaving firm profitability unchanged.

Family Firms and Management Practices

Oxford Review of Economic Policy, Volume 37, Issue 2, Summer 2021, Pages 323–334

[+] Abstract

This article reviews the existing literature about management practices in family firms, the most prevalent form of corporate ownership around the world. I summarize the existing evidence that shows family firms are less likely to adopt structured management practices, especially "dynastic" family firms that combine family ownership and control. I discuss what might be the unique features of family firms that drive the lower adoption of management practices, despite the evidence that improving management boosts their productivity and performance.

Drivers of Effort: Evidence from Employee Absenteeism

with Morten Bennedsen and Daniel Wolfenzon

Journal of Financial Economics, Volume 133, Issue 3, September 2019, Pages 658-684

[+] Abstract

We use detailed information on individual absent spells of all employees in 4,140 firms in Denmark to document large differences in average absenteeism across firms. Using employees who switch firms, we decompose days absent into an individual component (e.g., motivation, work ethic) and a firm component (e.g., incentives, corporate culture). We find the firm component explains 50% to 60% of the difference in absenteeism across firms, with the individual component explaining the rest. We present suggestive evidence of the mechanisms behind the firm effect with family firm status and concentrated ownership strongly correlated with decreases in absenteeism. We also analyze the firm characteristics that correlate with the individual effect and find that firms with stronger career incentives attract lower-absenteeism employees.

Do Director Elections Matter?

with Vyacheslav Fos and Kai Li

The Review of Financial Studies, Volume 31, Issue 4, 1 April 2018, Pages 1499–1531

[+] Abstract

Using a hand-collected sample of more than 30,000 directors nominated for election over the period 2001–2010, we construct a novel measure of director proximity to elections— Closeness-to-election. We find that the closer a director is to her next election, the higher is CEO turnover–performance sensitivity. Each year closer to director elections is associated with a 23% increase in CEO turnover–performance sensitivity. Three tests support a causal interpretation of the results. First, when we require directors to have a minimum tenure of three years, there is no material change in the results, suggesting that the timing of when directors join their boards is unlikely to drive the results. Second, we find similar results when we use director Closeness-to-election on other boards as a measure of proximity to elections. Third, when we restrict the analysis to firms with unitary boards, there is no material change in the results, suggesting that director self-selection into firms with staggered boards does not drive the results. Cross-sectional tests suggest that, when other governance mechanisms are in place, CEO turnover–performance sensitivity is affected to a lesser extent by Closeness-to-election. We conclude that director elections have important implications for corporate governance.

Measuring Income Tax Evasion using Bank Credit: Evidence from Greece

with Nikolaos Artavanis and Adair Morse

Quarterly Journal of Economics , May 2016 131 (2)

Winner of the Wharton School-WRDS Award for the Best Empirical Finance Paper, WFA 2013

[+] Abstract

We show that in semiformal economies, banks lend to tax-evading individuals based on the bank's perception of the individual's true income. This observation leads to a novel approach to estimate tax evasion using the adaptation of the private sector to the norms of semiformality. We use bank microdata on household credit, and replicate the bank model of credit capacity decision to infer the bank’s estimate of individuals’ true income. We estimate a lower bound of 28.2 billion euros of unreported income for Greece. The foregone government revenues amount to 32% of the deficit for 2009. Primary tax-evading industries are medicine, law, engineering, education, and media. We provide evidence that tax evasion persists not because the tax authorities are unaware, but because of a lack of paper trail and political willpower. Finally, we speak to the reproducibility and applicability of our method in other semiformal settings.

Featured in The Wall Street Journal, The NY Times, The Washington Post, The Financial Times, The Economist, Free Exchange, and Kathimerini

The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment

Journal of Finance Issue (70:2), 1 April 2015

Winner of the Trefftzs Award, WFA 2010

[+] Abstract

This paper provides causal evidence on the impact of succession taxes on firm investment decisions and transfer of control. I exploit a 2002 policy change in Greece that substantially reduced the tax on intra-family transfers of businesses and show that succession taxes lead to more than a 40% decline in investment around family successions, slow sales growth, and depletion of cash reserves. Furthermore, succession taxes strongly affect the decision to sell or retain the firm within the family. I conclude by discussing implications of my findings for firms in the United States and Europe.

Shareholder Democracy in Play: Career Consequences of Proxy Contests

with Vyacheslav Fos

Journal of Financial Economics 114 (2014), pp. 316-340

[+] Abstract

This paper shows that proxy contests have a significant adverse effect on careers of incumbent directors. Following a proxy contest, directors experience a significant decline in number of directorships not only in the targeted company, but also in other non-targeted companies. The results are established using the universe of all proxy contests during 1996-2010. To establish that this effect of proxy contests is causal, we use within-firm variation in directors' exposure to proxy contests and exploit the predetermined schedule of staggered boards that only allows a fraction of directors to be nominated for election every year. We find that nominated directors relative to non-nominated ones lose 45% more seats on other boards. We discuss that this pattern can be expected if proxy contest mechanism imposes a significant career cost on incumbent directors.

Books and Lightly Refereed Papers

Political Polarization and Finance

with Elisabeth Kempf

In preparation for the Annual Review of Financial Economics

[+] Abstract

We review an empirical literature that studies how political polarization affects financial decisions. We first discuss the degree of partisan segregation in finance and corporate America, the mechanisms through which partisanship may influence financial decisions, and available data sources to infer individuals' partisan leanings. We then describe and discuss the empirical evidence. Our review suggests an economically large and often growing partisan gap in the financial decisions of households, corporate executives, and financial intermediaries. Partisan alignment between individuals explains team and financial relationship formation, with initial evidence suggesting that high levels of partisan homogeneity may be associated with economic costs. We conclude by proposing several promising directions for future research.

Beyond Austerity: Reforming the Greek Economy

Author of Chapter 7, Financial Development and the Credit Cycle in Greece, with Haliassos M, G Hardouvelis, and D Vayanos (2015).

Prepared for an MIT Press volume on reforms in Greece, edited by C Meghir, C Pissarides, D Vayanos and N Vettas.

Working Papers

The Political Polarization of Corporate America

with Vyacheslav Fos and Elisabeth Kempf

Revise & Resubmit Journal of Finance

[+] Abstract

Executive teams in U.S. firms are becoming increasingly politically polarized. We establish this new fact using political affiliations from voter registration records for top executives of S&P 1500 firms between 2008 and 2018. The rise in political homogeneity is explained by both a rising share of Republican executives and increased sorting by partisan executives into firms with like-minded individuals. We further document substantial heterogeneity across party lines in executives’ beliefs, as proxied by their trading of company stock around presidential elections, as well as in firms’ investment decisions.

Women in the Financial Sector

with Spyridon Lagaras, Maria-Teresa Marchica and Elena Simintzi

Revise & Resubmit Journal of Finance

[+] Abstract

We examine the sources and evolution of the gender pay gap in finance, using administrative micro data from the U.K. for 1997-2019. We show a persistently larger gender pay gap in finance, compared to other sectors. Exploiting employees who switch firms, we find the gender pay gap in finance is predominantly explained by more skilled male employees sorting into finance relative to other sectors. The gender pay gap in finance is relatively lower for flexible occupations, in firms that offer childcare benefits and in more female friendly environments. Over time, higher investment in human capital for women and sorting in high-skilled occupations within the sector as well as policy interventions have reduced the gender pay gap in finance.

Entrepreneurship and the Platform Economy: Evidence from U.S. Tax Returns

with Matthew Denes and Spyridon Lagaras

Revise & Resubmit Journal of Financial Economics

[+] Abstract

Platform intermediation of goods and services has considerably transformed the U.S. economy. Using confidential, administrative data on U.S. tax returns for the universe of firms and individuals, we study the effect of the platform economy on entrepreneurship. We find that flexible labor availability increases the entry of individuals into entrepreneurship. Using detailed information on individual-level income, we show that income derived from platforms facilitate new firm creation. We also compare firms started by entrepreneurs with platform-based income with similar firms founded in the same area and at the same time. We find that gig-founded firms are more likely to survive, have more employees, and be profitable. Taken together, these results highlight the interaction between entry into entrepreneurship and flexible labor opportunities using detailed data on firms and individuals in the U.S. economy over the past 15 years, in addition to the role of tax administration and services for newly-created firms.

One Size Doesn't Fit All: Heterogeneous Depositor Compensation During Periods of Uncertainty

with Nikolaos Artavanis, Daniel Paravisini, Claudia Robles-Garcia and Amit Seru

[+] Abstract

We develop a new approach to identify different categories of depositors during periods of uncertainty and quantify their compensation to remain in the bank. We isolate withdrawals due to liquidity needs, deterioration of fundamentals, and expectation about withdrawal behavior of other depositors. We exploit variation in the cost of withdrawal induced by the maturity expiration of time deposits around unexpected uncertainty events and high-frequency microdata from a large Greek bank. Deposit withdrawals quadrupled in response to a policy uncertainty shock that doubled the short-run credit default swap (CDS) price of Greek sovereign bonds. About two-thirds of this increase is driven by direct exposure to deteriorating fundamentals, and the remainder due to strategic complementarities. We find that depositors need to be offered annualized returns exceeding 50% to remain in the bank during episodes of high uncertainty. Our findings provide new insights into the design of interventions that prevent runs by targeting depositors with the largest propensity to withdraw.

First Come, First Served: The Timing of Government Support and its Impact on Firms

with Matthew Denes and Spyridon Lagaras

[+] Abstract

We study the effects of deploying government capital to firms during crises. Using exogenous variation in the timing of disbursements in the Paycheck Protection Program (PPP), we find that firms receiving PPP loans later become more financially distressed and face reductions in credit supply. These effects are amplified for firms with heightened financial constraints. We also show that firms receiving loans later have lower economic activity using in-store activity and shutdowns. The results are consistent with a direct channel on firm operations and a financing channel. Overall, our findings highlight the role of timely and uninterrupted fiscal support during crises.

Pay Transparency and Mental Health

with M. Bennedsen, D. Scur, E. Simintzi and D. Wolfenzon

Family Control and the Cost of Debt: Evidence from the Great Recession.

with Spyridon Lagaras

[+] Abstract

The purpose of the paper is to examine the effect of founding family control on the cost of bank debt. We examine the cost of accessing the syndicated market and we use the financial crisis and the unexpected nature of Lehman Brother's collapse as a laboratory in order to tease out the effect of family ownership. We find that the increase in loan spreads around the Lehman crisis was by at least 24 basis points lower for family firms. Furthermore, the gap in spreads among family and non-family firms becomes wider among firms that had pre-crisis relationships with lenders with higher exposure to the shock. The evidence are consistent with family ownership lowering the cost of accessing debt financing especially when lenders are constrained. We further investigate potential channels that drive the effect of family ownership. We provide novel evidence that for 17% of the family firms creditors impose explicit restrictions in private credit agreements that require the founding family to maintain a minimum percentage of ownership or voting power. Thus creditors value the presence of the family. Furthermore, the impact of family control on lowering the cost of bank debt is higher when family CEOs run the firms and among firms with higher ex ante agency conflicts.