Publications

Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency (with Anatoli Segura) 
Journal of Financial Economics, July 2020, Vol. 137(1), pp. 90-107. 
[Online Appendix] [Paper on SSRN]

• ​Financing an investment off-balance sheet gives a bank the option, but not the obligation, to use its funds to voluntarily support debt repayments when the investment fails. Such flexibility, which is absent with on-balance sheet funding, allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, to have the capacity to provide support, the bank must keep unused funds on-balance sheet. Off-balance sheet funding with voluntary support emerges as the optimal funding mode when external financing is not too costly. In those cases, a ban on voluntary support decreases the bank's profits.

​Securitization and Optimal Foreclosure​ (with John Kuong)
Journal of Financial Intermediation, Forthcoming
[Paper on SSRN]

• Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank's ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.

Working papers

Stress Testing and Bank Lending (with Joel Shapiro)
R&R, Review of Financial Studies

• Stress tests can affect banks' lending behavior. Since regulators care about lending, banks' reactions affect the test's design and create a feedback loop. We demonstrate that there may be multiple equilibria due to strategic complementarity, possibly leading to excess default or insufficient lending to the real economy. The stress tests may be too soft or too tough. Banking supervision exams have similar properties. When the recapitalization of banks becomes more difficult, stress tests are less informative. However, when a bank is more systemic, the stress test will be more informative.​

Portfolio Size and the Incentives for Shareholder Activism (with Gunter Strobl)

• We analyze the investment strategy of an activist investor in a multi-firm setting in which both an intervention in a firm's operations and the threat of an intervention can improve firm value. If the value of the activist's intervention is not immediately observable to investors, we find that the activist's incentive to maximize the market value of her portfolio leads her to choose an inefficient intervention policy. In particular, we demonstrate that, compared to the first-best intervention strategy, the activist conducts too many (too few) interventions when her ability to conduct a value-enhancing intervention is low (high). A skilled activist can mitigate this inefficiency by increasing the number of firms in her portfolio. This is because a larger portfolio dilutes the threat of an intervention imposed on each firm, thereby lowering the value of the firm under the incumbent management which strengthens the activist's incentive to conduct an intervention. Our analysis thus predicts that more capable activists invest in more firms, even when their capacity to intervene in the operations of these firms is limited.

Contingent Capital Structure
Belgrade Young Economists Conference UnitCredit & Universities Best Paper Award 2014

• This paper studies the optimal financing contract of a bank with risk-shifting incentives and private information, in an environment with macroeconomic uncertainty. Leverage mitigates adverse selection problems owing to debt information-insensitivity, but leads to excessive risk-taking. I show that the optimal leverage is procyclical in the laissez-faire equilibrium, and contingent convertible (CoCo) bonds emerge as part of the implementation of the optimal contingent capital structure. However, the equilibrium entails excessive leverage and risk-taking, due to a bank's private incentives to minimise market mispricing of its securities. It is socially optimal to impose countercyclical capital requirements, implemented by CoCo bonds in addition to straight debt and equity.

Work in progress

Peer Monitoring and Interbank Markets