Time Inconsistency and Financial Covenants. (Job Market Paper)
I investigate how financial covenants influence corporate behavior and firm value by allocating control rights. In a dynamic model with long-term debt, shareholders cannot commit to not expropriate creditors in the future with new debt issuances and risky investments. Creditors intervene upon violations of covenant restrictions and restructure the debt without ex ante commitment. I find that financial covenants significantly increase debt capacity, investment and ex ante firm value by disciplining shareholders. However, I show that lenders' inability to commit to a restructuring plan severely impairs contractual efficiency. My analysis suggests that a further tightening of covenants, relative to the calibrated benchmark, improves their role as a commitment device.
Corporate Debt Choice and Bank Capital Regulation. (last revised 03/2018)
I show that a permanent tightening of bank capital requirements leads to a decline in non-bank finance.
Conferences: SED, Econometric Society (Davis), EEA-ESEM, USC Marshall PhD Conference, MFA, Midwest Macro
Make America Great: Long-Run Impacts of Short-Run Public Investment, with Alexandr Kopytov. (last revised 10/2018)
We document and quantitatively rationalize S-shaped dynamics of the US economy in the 1960s associated with the construction of the Interstate Highway System. However, our analyses cast doubt on the efficiency of a large public investment in the post-Great Recession era.
Conferences: CEPR Growth and Inequality Conference, Econometric Society (Barcelona), Midwest Macro, LBS-TADC