Job Market Paper
I study when a firm should go public and if it does, whether it should choose IPO or SPAC merger. One of the main benefits of going public is that the firm can make investment decisions based on the information produced by the financial markets. The cost is that the firm has to pay for the information production. By developing a tractable dynamic model, I find that an early-stage firm with more uncertainty about its quality chooses a SPAC because its investment decisions can benefit from the more precise information produced in a SPAC merger. In contrast, a late-stage high-quality firm chooses to go public via IPO because it does not need to pay for the extra information produced in a SPAC merger. Using Simulated Method of Moments, I find that information production costs $52 ($121) million in an IPO (SPAC merger). A successful IPO (SPAC merger) increases the firm's value by 4.1% (34.3%), which rises (drops) to 6.7% (17.3%) in a counterfactual setting where SPAC merger (IPO) is chosen instead.
Working Papers
with Gaurab Aryal, Zhaohui Chen, and Chris Yung
A SPAC divides the process of a private firm going public into two stages: SPAC IPO and its merger with the firm. This division enables us to disentangle the effect of information- and agency-related frictions on security issuance. To this end, we distinguish “premium” from “non-premium” institutional investors and show evidence consistent with premium investors producing value-relevant information. They are associated with less redemption and higher announcement returns. In contrast, non-premium investors engage in quid pro quo arrangements, such that high returns today imply their participation in weaker future deals. Thus, quid pro quo enables weaker firms to go public.
with Michael Gofman
We construct a director network for 972 SPACs that raised $271 billion from investors. First, we show that SPAC's investors receive lower returns and redeem more shares when directors sit on the board of another SPAC that IPOed later but found a target earlier. Second, we show that conflicted directors inefficiently allocate some targets to younger SPACs. Third, we study theoretically and empirically how new SPACs use compensation to compete for existing SPACs’ directors. Overall, decisions of SPACs' investors, directors, and sponsors raise serious corporate governance concerns and suggest that there is a need for stronger legal protection of investors.
with Zhaohui Chen, Alan D. Morrison, William J. Wilhelm
The relational contract at the heart of an investment banking relationship is valuable because it engenders and requires mutual trust in a setting where conflicts of interest are significant and are not easily resolved through formal contract. But a bank’s ability to commit to a relational contract depends on internal governance mechanisms that align the interests of individual bankers with those of the bank. We argue that increasing complexity in investment banks weakens internal governance and estimate a causal model that indicates that the likelihood of a relationship being broken is increasing in bank complexity.
An average lead arranger spends over 2.7 billion dollars on technology each year between 1998 and 2016, yet little is know whether such investment reduces borrowing companies' financing costs. This article exploits the plausibly exogenous variation in the lead arranger's CEO's earlier-career technology exposure to estimate causal effects of the lead arranger's technology investment on interest spreads in the US syndicated loan market. Results suggest that a 10% increase in the level of technology investment implies a 25.68 basis points lower in interest spreads. In an attempt to understand the possible mechanisms, I find that technology is more helpful in reducing costs for loans that are more complex, facing a larger information production cost, and suffering from a higher degree of information asymmetry.
Work in Progress
Lead Arranger's Informational Advantage in Syndicated Loan Market
In this paper, we estimate the effect of a lead arranger's informational advantage over borrowers on the syndicated loan's interest spreads, and the extent to which lead arrangers can price discriminate. Using global syndicated loan data, I find that on average, borrowers pay 30.79 basis points lower in interest spreads when they borrow from larger lead arrangers than from smaller lead arrangers. Also, larger lead arrangers price discriminate against borrowers' private information, while smaller lead arrangers do not. A firm with an average level of willingness to work with a larger lead arranger pays 69.0 basis points higher in interest spreads than another firm that is indifferent between borrowing from larger lead arrangers and smaller lead arrangers.
Competitive Price Discrimination in Syndicate Loans
with Gaurab Aryal
In this paper, we develop a Bertrand-Nash equilibrium model that features both competition and cooperation among lenders in the syndicated loan market. Lenders compete for loans and price discriminate against borrowers in a setting where both adverse selection and moral hazard exist. Meanwhile, lenders have cooperative incentives that arise from multi-loan contacts, which may decrease competition. At equilibrium, the interest rate set by each lender can be decomposed into three components: the marginal cost, the markup under oligopoly, and the cooperative effect.