with Liang Dai and Ming Yang
Review of Financial Studies, Forthcoming
We find that disclosing bank-specific information reallocates systemic risk, but whether it mitigates systemic bank runs depends on the nature of information disclosed. Disclosure reveals banks’ resilience to adverse shocks, and shifts systemic risk from weak to strong banks. Yet, only disclosure of banks’ exposure to systemic risk can mitigate systemic bank runs because it shifts systemic risk from more vulnerable banks to those less vulnerable. Disclosure of banks’ idiosyncratic shortfalls of funds does not differentiate such exposure, rendering the resulting reallocation of systemic risk ineffective in mitigating systemic runs.
Conditionally accepted by Journal of Finance
The Finance Theory Group (FTG) 2022 “best paper in finance theory on the job market” prize
The Brattle Group Ph.D. Candidate Awards For Outstanding Research at WFA 2022
An entrepreneur makes offers to multiple investors to fund a project. The project is implemented only if the investment committed exceeds a threshold. Concerned about the project quality and others' decisions, investors share information through strategic communication. When having conflicts of interest, those with contractually stronger incentives to invest persuade others, which induces a cascade causing more investors to invest and persuade. The entrepreneur's choice of contracts affects whether investors have conflicts of interest and thus how they communicate strategically. When the project has high ex ante profitability, the entrepreneur is concerned about investors' information rent and employs a hierarchical structure to differentiate investors, create conflicts of interest, and impede information sharing. When the project has low ex ante profitability, the entrepreneur is concerned about investors' miscommunication and employs a flat structure to homogenize investors, align their interests, and facilitate information sharing. The two structures and their underlying logic are consistent with empirical observations regarding investor syndicates.
with Ming Yang
Charles River Associates Award For the Best Paper on Corporate Finance at WFA 2023
We study multi-agent security design in the presence of coordination frictions. A principal intends to develop a project whose value increases with an unknown state and the level of agents’ participation. To motivate the participation of ex ante homogeneous agents, the principal offers them multiple monotone securities backed by the project value. More participation results in a higher project value and thus higher security payment to participating agents, making participation decisions strategic complements. Miscoordination arises because agents cannot precisely infer others’ decisions from noisy signals about the state. We identify two objects in security design—"payoff sensitivity" and "perception of participation"—that determine the impact of miscoordination. To mitigate the adverse impact of miscoordination, the two objects should be matched assortatively over agents. This mechanism implies a multi-tranche security structure in which senior-tranche holders are more robust to potential miscoordination and participate more aggressively, helping alleviate the junior-tranche holders’ fear of miscoordination. We find that the principal’s ability to differentiate agents in security format is crucial to whether differentiation is desirable.
Transmission Of Quantity-based Monetary Policy Through Heterogeneous Banks In China
with Michael Weber, Zhishu Yang, and Jacky Qi Zhang
Best Research Paper Award in Finance at RSFE 2023
Different from the target rate oriented monetary policy in Western countries, China mainly relies on quantity-based instruments, which can induce funding imbalance within the banking system. Systematic reallocation of funds among banks constitutes a central part of the monetary policy transmission. This paper studies the reallocation of funds within the Chinese banking system and its effects on lending to the real economy. The substitution of funds injected by monetary policy for banks’ positions on negotiable certificate of deposit (NCD) constitutes the main channel of monetary transmission within the banking system. State banks’ apparent conservatism in lending prevents full substitution for interbank lending and impedes the reallocation of funds to non-state banks. Regarding the effects of the reallocation on the economy, we find that following a shift in state banks’ positions on the NCD market from lending to borrowing, 1) state banks’ use of funds increased, 2) non-state banks’ lending growth and holding of excess reserves relative to state banks increased, 3) cities with more exposure to non-state bank lending experienced higher lending growth, and 4) the fraction of firms’ borrowing from non-state banks increased.
with Jian Sun
We study SPACs in a finite-horizon continuous-time delegated investment model. Due to the misalignment in incentives, the sponsor has an increasing incentive to propose unprofitable deals to the investor as the SPAC approaches its deadline. As a response, the investor redeems shares more aggressively over time. The investor's current redemption reduces the sponsor's expected payoff from proposing unprofitable deals, but future redemption reduces his expected payoff from waiting. We discuss the welfare implications of SPAC designs related to investors' redemption: 1) prohibiting the investor from redeeming shares in late periods can be a Pareto improvement; 2) coupling the investor's deal rejection with redemption benefits the sponsor; 3) the participation of investors with behavioral biases can be a Pareto improvement.
Much of corporate managers’ incentive is related to the stock price, so a firm can design the corporate information environment to tackle its manager’s moral hazard problem. We analyze a model in which the manager needs to exert costly effort to start a risky, long-term project and the project gives the manager opportunities to make credible disclosure. The optimal disclosure to motivate effort is the manager’s strategic disclosure because it protects the manager from the downside of the project and induces the rational stock market to punish nondisclosure. A more transparent information regime is not always preferred, because it may reduce the manager’s discretion on disclosure. We also derive the optimal disclosure when both the effort and the project choice are considered.