Research

[1] Learning from Unexpected Primary Bond Market Demand: Effects on Loan Contracting

Dissertation

• Presented at Northwestern University, Seven Minutes of Scholarship Symposium, 2024 KAAPA PhD Conference, The EAA Talent Workshop

Abstract: This paper studies a previously unexamined information source for private lenders: unexpected primary corporate bond demand. In the primary corporate bond markets, bond spreads for new issues are updated based on unexpected demand from institutional investors. I exploit this spread adjustment on the bond announcement day to study how unexpected demand from the primary bond markets influences lead arrangers' lending decisions in the syndicated loan markets. Using a stacked difference-in-difference research design, I show that lead arrangers decrease borrowers' loan spreads when they observe strong unexpected demand, and the effect is more pronounced for institutional tranches. This effect is driven by lead banks' learning from the primary bond markets. To support this learning channel, I provide evidence that the learning effect is more pronounced when loans are originated by new lead arrangers and when borrowers' alternative information sources are weak. Additional empirical tests suggest asymmetrical learning effects by lead arrangers. They increase loan spreads for bank tranches when bond demand is weak but decrease the spreads for institutional tranches when demand is strong. In summary, this paper shows evidence that lead arrangers learn about institutional investors' willingness to participate in loan syndication from the unexpected primary bond demand, and react by adjusting loan terms accordingly.

[2] Spillover Effects of Fee Transparency: Evidence from the Corporate Bond Market (with Thomas C. Hagenberg and Sugata Roychowdhury)

• Preparing for 2nd round submission at the Journal of Accounting Research

• Developed from second-year summer paper

• Presented at Northwestern University, The Kellogg Accounting Conference, 2024 FARS Midyear Meeting, Cornell University, University of Minnesota Accounting Conference, MIT, Duke Unversity, 2024 PolyU Accounting Research Conference

Abstract: This study examines whether a regulation requiring increased fee transparency in one product market induces a spillover effect on a related, yet distinct, product market, through competitive forces. An amendment to FINRA 2232 requires brokers to explicitly disclose markups charged to retail investors for individual corporate bonds. We predict that corporate bond mutual funds, anticipating a direct price effect of the regulation on individual corporate bond markups, reduce fees charged to retail investors. In a difference-in-differences design, we find that corporate bond mutual funds reduce fees for retail investors relative to institutional investors around the approval of the amendment. Results are more pronounced in corporate bond mutual funds that cater more to retail investors and compete more directly with those individual corporate bonds expected to exhibit the largest reduction in markups. Collectively, evidence suggests transparency regulation can induce spillover effects across related, yet distinct product markets, through competitive forces.

[3] Soft Information and Loan Contract Design: The Role of Managerial Ability (with Peter R. Demerjian and Jaehoon Lee)

• Presented at City University of Hong Kong, The Chinese University of Hong Kong, Egyptian Online Seminars in Business, Accounting, and Economics

Abstract: We examine the relation between managerial ability, an important form of soft information for lenders, and loan contract design, focusing on financial covenants. Measuring managerial ability with the MA Score developed by Demerjian et al. (2012), we find managerial ability at the borrowing firm is negatively associated with the number of financial covenants imposed at loan origination. Among financial covenants, this result is observed strongly for performance covenants. Additionally, we use TRACE implementation to identify a causal relation between managerial ability and covenant design. Finally, we show that managerial ability not only affects the covenant decision at origination but also influences the efficiency of the debt contract which is measured by the change in covenants throughout the life of new loans. These results collectively show that managerial ability, a form of soft information, is useful for lenders in screening borrowers.