Working papers

  • Title
  • Author(s)

Departments: Finance, GREGHEC (CNRS)

We explore how financial distress and choices are affected by noncognitive abilities. Our measures stem from research in psychology and economics. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.

Keywords: Noncognitive abilities, financial distress, financial choices, saving, unsecured debt, behavioral finance, psychology and economics

Departments: Finance, GREGHEC (CNRS)

We develop a model in which collateral serves to protect creditors from the claims of competing creditors. We find that borrowers rely most on collateral when cash flow pledgeability is high, because this is when it is easy to take on new debt, diluting existing creditors. Creditors thus require collateral for protection against being diluted. This causes a collateral rat race that results in all borrowing being collateralized. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment, i.e. there is a collateral overhang. Our results suggest that the absolute priority rule, by which secured creditors are senior to unsecured creditors, may have an adverse effect — it may trigger the collateral rat race.

  • FIN-2017-1184
  • Drugs, Showrooms and Financial Products: Competition and Regulation When Sellers Provide Expert Advice

Departments: Finance, GREGHEC (CNRS)

Departments: Finance, GREGHEC (CNRS)

This paper explores the impact of regulations imposed by the Chinese government on the development of the Chinese IPO market between 2000 and 2011. Some of these regulations have affected the population of Chinese firms that went public domestically, some firms being excluding from the domestic IPO markets, others being induced to list abroad. We also provide evidence that, because of limits on prices and proceeds, the Chinese IPO market does not attract companies that need cash the most. Some IPO firms that raise large amounts of cash decide to pay large dividends shortly after going public, which investors interpret as evidence that their growth options were overestimated at the time of their IPO.

Keywords: Regulation, Emerging markets, Initial Public Offerings

Departments: Finance, GREGHEC (CNRS)

We analyze the nature and the implications of debt financing of political campaigns. Debt is a significant source of funding of political campaigns. Almost half of all campaigns rely on some form of debt. Indebted politicians raise more funds, especially from special interest groups, in subsequent election cycles. Moreover, indebted legislators who receive funds from labor organization are more likely to take pro-labor policy positions in Congress. This evidence is consistent with the view that indebted politicians trade political favors in return for additional campaign funds from special interest groups. The results suggest that debt distorts political decision making by forcing indebted politicians to cater to contributors’ demands.

Keywords: debt financing, political campaigns, political decision making

Departments: Finance, GREGHEC (CNRS)

We study the supervision of multinational banks (MNBs), allowing for either national or supranational supervision. National supervision leads to insufficient monitoring of MNBs due to a coordination problem between supervisors. Supranational supervision solves this problem and generates more monitoring. However, this increased monitoring can have unintended consequences, as it also affects the choice of foreign representation. Indeed, supranational supervision encourages MNBs to expand abroad using branches rather than subsidiaries, resulting in more pressure on their domestic deposit insurance fund. In some cases, it discourages foreign expansion altogether, so that financial integration paradoxically decreases. Our framework has implications on the design of supervisory arrangements for MNBs, the European Single Supervisory Mechanism being a prominent example.

Keywords: Cross-Border Banks, Multinational banks, Supervision, Monitoring, Regulation, Banking Union

Departments: Finance, GREGHEC (CNRS)

We present a model of trading in the art auction market. Agents make purchase and sale decisions based on the relative magnitude of their private use value. This generates an endogenous negative relation between holding periods and financial returns. In economic expansions consignment volume goes up, while reserve prices become less restrictive. Our model of endogenous trading finds empirical support in historical art transaction data. Finally, we show that transaction-based price indexes provide biased estimates of art’s volatility and covariance with the economy, and can be expected to suffer from index revision problems.

Keywords: art; auctions; endogenous trading; price indexes; private values

Departments: Finance, GREGHEC (CNRS)

We consider private-value auctions in the presence of exogenous participation costs and secret reserve prices endogenously set by sellers whose valuation of the item equals zero. We show that in first-price auctions there is an equilibrium for any arbitrary reserve price level. In second-price auctions, the only equilibrium with truthful bidding is a situation where no buyer enters and the seller chooses a reserve price that deters entry.

Departments: Finance

I study the implications of skewness in labor income risk for portfolio choices over the life-cycle. First, I show that French households that face higher left-skewness have lower equity holdings. Then, I calibrate a life-cycle model that incorporates the cyclical skewness observed in US data. The negative effect of skewness on the equity share counteracts the low beta of labor income shocks, in particular for households with modest financial wealth relative to human capital. In the baseline calibration, and holding variance constant, skewness turns upside down the predicted life-cycle profile of the equity share and produces a hump-shaped relationship with age

Keywords: Household finance, Labor income risk, Portfolio choices, Human capital, Life-cycle model

Departments: Finance, GREGHEC (CNRS)

We examine how the merger between two European megabanks affects credit supply to small and medium-sized businesses. Using loan-level and firm-level data from the credit register, we exploit variation in the merging banks' market overlap to isolate the competition effect of the merger. We find that in local markets in which the merging banks' market shares overlap, the merged bank decreases the supply of credit to both existing firms and to new firms. This effect is not offset by other banks increasing their lending, leading to an overall decline in bank credit. This reduction in credit supply is associated with higher firm exit. However, for the rest of firms that do not exit, the merger has no adverse real effects on investment, employment, or firm entry

Keywords: Bank megamerger; Banking competition; Credit Supply