financial intermediation and regulation, mortgage markets, corporate finance, financial contracting, information economics.
Disaster Lending: "Fair" Prices, but "Unfair" Access. [Management Science, Accepted]
(with Umit Gurun, Amiyatosh Purnanandam, and Daniel Weagley)
We find the Small Business Administration's disaster-relief home loan program denies significantly more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality. We find that risk-insensitive loan pricing -- a feature present in many regulated and government-run lending programs -- is a primary driver of these disparities in access to credit. We show the differences in denial rates are disproportionately high compared to counterfactual both private-market and government-insured risk-sensitive loan pricing programs. Thus, despite ensuring "fair" prices, the use of risk-insensitive pricing may lead to "unfair" access to credit.
We study the significant migration of labor into the real estate agent occupation (REA) during the early 2000s and examine the long-run career path outcomes for those that enter. We show large flows of workers into realty from virtually all parts of the skill, wage, and education spectrums during the run-up. We find those entering REA in MSAs with house price bubbles end up in jobs paying significantly less in the long-run as compared to REA entrants in non-bubble areas from the same occupation and with the same education-level. Even in 2017 when house prices and employment return to their pre-crisis levels, REA entrants in Bubble MSAs are in occupations earning about 11% less.
Firm Finances and the Spread of COVID-19: Evidence from Nursing Homes. [Review of Corporate Finance Studies, 2023, Editor's Choice]
(with Daniel Weagley) [ssrn version]
We find that firms' financial resources play an important role in mitigating the spread of COVID-19. We study nursing homes -- whose residents account for over one-third of all U.S. COVID-19 deaths -- at a time when investment in risk mitigation was costly and critical. Facilities with less liquidity and those experiencing more severe cash flow shocks had more cases of COVID-19. The importance of cash flow is further supported by tests exploiting state-level variation in Medicaid reimbursement expansion. Evidence on personal protective equipment supplies suggests a lack of financial resources leads to lower investment in risk mitigation.
Small bank lending in the era of fintech and shadow banking: a sideshow? [Review of Financial Studies, 2022]
(with Kandarp Srinivasan) [ssrn version]
Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence on the heterogeneous impact of two shocks to the supply of mortgage credit: post-crisis regulatory burden and GSE financing cost changes. Small banks exploit disproportionate regulation on the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.
Color and Credit: Race, Regulation, and the Quality of Financial Services. [Journal of Financial Economics, 2021]
(with Amiyatosh Purnanandam) [ssrn version]
The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.
We show that banks significantly under-report the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank's equity capital results in substantially more violations of its self-reported risk levels in the following quarter. The under-reporting is especially high during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of under-reporting present in Basel regulations to provide further support for a causal link between capital-saving incentives and under-reporting. Overall, we show that banks' self-reported risk measures become least informative precisely when they matter the most.
Design of Financial Securities: Empirical Evidence From Private-label RMBS Deals. [Review of Financial Studies, 2017]
(with Amiyatosh Purnanandam) [ssrn version]
We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate that cannot be explained away by the underlying loan pool's observable credit risk factors. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.