Competing with Security Design, job market paper
Abstract: The literature on security design under information asymmetry predicts that a party with superior information holds an information sensitive stake. This makes it hard to reconcile the prevalence of debt with the fact that most securities in private firms are proposed by professional investors with expertise in screening. I show that competition can drive informed investors to propose debt financing, because debt protects them against the winner's curse. More generally, I observe that the relative degree of competition between firms and investors determines security design, while which party has superior information is a subordinate factor.
Presentation: LSE, HEC Liège Corporate Finance Day 2020, Econometric Society European Winter Meeting 2020
Short video (2m41s):
Abstract: Almost all firms repurchase shares gradually through open market repurchase (OMR) programs as opposed to using the quicker alternative of tender offers. In contrast, issue methods are both more diverse, and often quicker: while a significant minority of firms issue shares using at-the-market offerings, analogous to OMR programs, a majority of firms issue shares swiftly via SEOs, analogous to the rarely-used tender offer repurchases. We show that this asymmetry in the diversity of methods, and in transaction speeds, is a natural consequence of the single informational friction of a firm having superior information to investors.
Works In Progress
Imperfect Competition of Equity Issuers
Abstract: I model a market in which the demand curve for equity is downward sloping due to investors’ heterogeneous beliefs and short-sale constraint. Firms with different risk profiles exploit their monopoly power as equity issuers by strategically deciding the amount of their public equity. I derive testable implications: firms that face weaker competition on the equity market (1) have lower expected returns on equity; (2) respond more actively to listings or delistings of competitors; (3) are more eager to merge with competitors.
Abstract: This paper shows that social networks have significant effects on loan repayments. In the loan records of a peer-to-peer lending platform, we proxy social networks based on the contact persons that borrowers provide at loan applications. We estimate the effect of the propensity to pay of a borrower on the propensity to pay of their contact persons using a Spatial Autoregressive Probit model. If the repayment probability of a borrower’s contact persons increases by 10%, the repayment probability of the borrower increases by 0.8%, which increases the lender's profit on average by 360 RMB (i.e. $52). In contrast, a borrower's propensity to pay does not significantly affect the propensity to pay of other borrowers from the same home or work address. We interpret the results as evidence that social networks affect loan repayment decisions beyond common borrower characteristics and financial situations.
Teaching Assistant, LSE
FM212 Principles of Finance (undergraduate) Evaluation
FM409 Risk Management in Financial Markets (master, not evaluated)
FM430 Asset Markets (master) Evaluation
FM441 Derivatives (master) Evaluation
FM473 Financial Markets (master, not evaluated)
Teaching Assistant, LSE Summer School
FM230 Alternative Investments
FM350 Advanced Corporate Finance
FN209 Corporate Finance in a Global World (PKU campus)
FM403 Management and Regulation of Risk