Working Papers
“Expectations and Credit Slumps” (with Antonio Falato), August 2024
Revise & Resubmit at the Review of Financial Studies
Bank expectations are an important explanation for the slow recovery of U.S. lending after the 2008-09 financial crisis. Using new micro data, we document two facts about bank expectations: banks extrapolate from past events and bank pessimism after the crisis was a drag on lending as well as several financial and real outcomes of borrowers during the recovery. In a dynamic model, a realistic degree of bank extrapolation estimated from the data generates the pace of aggregate credit recovery after the crisis. Relative to a rational expectations benchmark, distorted bank beliefs induce sizable aggregate credit losses of 1.5%.
“Information Spreads” (with Antonio Falato and Joseph Kaboski), October 2024
We propose a mechanism in which firm credit spreads arise from default concerns under incomplete information. Investors learn from public information and adjust expectations about firm creditworthiness downward in response to a deterioration in the profit outlook or increase in uncertainty. Empirically, we show that spreads and real outcomes — both at the aggregate and firm-level — respond predictably to the new information summarized in professional forecast revisions. Quantitatively, the model explains the high level and variation of credit spreads and the patterns in responding to public information, and credit spreads remain an important amplifier for investment dynamics and aggregate volatility.
Published & Accepted Papers
“Borrowing to Save and Investment Dynamics”, Review of Economic Studies, Accepted, 2024
During the U.S. Great Recession, investment declined more among firms whose indebtedness increased. Instead of investing, they increased their leverage and expanded their stock of safe assets; that is, they borrowed to save. I model borrowing to save as an optimal portfolio choice when firms face gradually resolving uncertainty, balancing the desire to invest with the need to prevent default. Embedding this into a quantitative general equilibrium model with heterogeneous firms, I show that this mechanism can simultaneously generate a sharp downturn and a slow recovery in response to a combination of first- and second-moment shocks.
“The Internationalization of China’s Equity Markets” (with Juan Cortina, Maria Soledad Martinez Peria, Sergio Schmukler), IMF Economic Review, 2024, 1-57
The internationalization of China’s equity markets started in the early 2000s but accelerated after 2012, when Chinese firms’ shares listed in Shanghai and Shenzhen gradually became available to international investors. This paper documents the effects of the post-2012 internationalization events by comparing the evolution of equity financing and investment activities for (i) domestic listed firms relative to firms that already had access to international investors and (ii) domestic listed firms that were directly connected to international markets relative to those that were not. The paper shows significant increases in financial and investment activities for domestic listed firms and connected firms, with sizable aggregate effects. The evidence also suggests that the rise in firms’ equity issuances was primarily and initially financed by domestic investors. Foreign ownership of Chinese firms increased once the locally issued shares became part of the Morgan Stanley Capital International (MSCI) Emerging Markets Index in 2018.