These papers are working drafts of research which often appear in final form in academic journals. The published versions may differ from the working versions provided here.
SSRN Research Paper Series
The Social Science Research Network’s Research Paper Series includes working papers produced by Stanford GSB the Rock Center.
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Measuring Liquidity Mismatch in the Banking Sector
This paper expands on Brunnermeier, Gorton and Krishnamurthy (2011) and implements a liquidity measure, “Liquidity Mismatch Index (LMI),” to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We…
Did the Community Reinvestment Act (CRA) Lead to Risky Lending?
Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares…
Resolution of Failing Central Counterparties
A central counterparty (CCP) is a financial market utility that lowers counterparty default risk on specified financial contracts by acting as a buyer to every seller, and as a seller to every buyer. When at risk of failure, a CCP could be…
Strategic Risk Shifting and the Idiosyncratic Volatility Puzzle
We find strong empirical support for the risk-shifting mechanism to account for the puzzling negative relation between idiosyncratic volatility and future stock returns documented by Ang, Hodrick, Xing, and Zhang (2006). First, equity holders…
The Compelling Case for Stronger and More Effective Leverage Regulation in Banking
Excessive leverage (indebtedness) in banking endangers the public and distorts the economy. Yet current and proposed regulations only tweak previous regulations that failed to provide financial stability. This paper discusses the forces that have…
Matching Capital and Labor
We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. At least 30% of the value mutual fund managers add can be attributed to the firm’s role in efficiently allocating capital amongst…
Reforming LIBOR and Other Financial-Market Benchmarks
We outline key steps necessary to reform the London Interbank Offered Rate (LIBOR) so as to improve its robustness to manipulation. We first discuss the role of financial benchmarks such as LIBOR in promoting over-the-counter market…
Mortgage Rates, Household Balance Sheets, and the Real Economy
This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers’ Social…
Measuring Skill in the Mutual Fund Industry
Using the value that a mutual fund extracts from capital markets as the measure of skill, we find that the average mutual fund has used this skill to generate about $3.2 million per year. We document large cross-sectional differences in skill…
The Cost of Constraints: Risk Management, Agency Theory and Asset Prices
Traditional academic literature has relied on so-called “limits to arbitrage” theories to explain why investment managers are unable to eliminate the effects of investor “irrational” preferences (either the asset-pricing anomalies or the…
Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches
Applying a “co-search” algorithm to Internet traffic at the SEC’s EDGAR website, we develop a novel method for identifying economically-related peer firms. Our results show that firms appearing in chronologically adjacent searches by the same…
Aggregate Investment and Investor Sentiment
Using bottom-up information gleaned from corporate financial statements, we examine the relation between aggregate investment, future equity returns, and investor sentiment. Consistent with the business cycle literature, corporate investments…
Capital Structure and Systematic Risk
Systematic risk is an important determinant of corporate capital structure. A one standard deviation increase in asset beta corresponds to a decrease in leverage of 13%, controlling for total asset volatility. This evidence is consistent with…
Financing as a Supply Chain: The Capital Structure of Banks and Borrowers
We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset…
Performance Measurement: An Investor's Perspective
This article discusses the role of GAAP accounting from an investor’s perspective. For all its flaws, a historical-based system of accounting is vital to the investment community, and I believe moves toward fair value accounting should…
Shell Games: Are Chinese Reverse Merger Firms Inherently Toxic?
We examine the financial health and performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85% of all foreign RMs). As a group, RMs are small, early-stage…
Central Clearing and Collateral Demand
We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into…
Dynamic Information Asymmetry, Financing, and Investment Decisions
We reexamine the classic yet static information asymmetry model of Myers and Majluf (1984) in a fully dynamic market. A firm has access to an investment project and can finance it by debt or equity. The market learns the quality of the firm over…
Operationalizing Financial Covenants
We study the interplay between financial covenants and the operational decisions of a retailer that obtains financing through a secured, inventory-based lending contract. We characterize how leverage affects dynamic inventory decisions, and…
Risking Other People's Money: Gambling, Limited Liability, and Optimal Incentives
We consider optimal incentive contracts when managers can, in addition to shirking or diverting funds, increase short term profits by putting the firm at risk of a low probability “disaster.” To
avoid such risk-taking, investors…