For more information about the Mitsui Finance Brown Bag Series, please contact Gabriella Ring at [email protected].
The audience for these brown bags is generally faculty and doctoral students.
august 28
Title: Novel Implications of Deposit Insurance for Banking
Abstract: The deposit insurance premium paid by banks to the FDIC does not change with interest rates. However, the market value of deposit insurance, a put option held by banks, decreases when interest rates rise. Consequently, banks receive higher subsidies on deposit insurance in low interest rate environments compared to high-interest-rate regimes. This time-varying nature of the deposit insurance subsidy offers a unifying framework and novel explanation for several key empirical patterns in banking literature: (i) Deposit channel of monetary policy: the deposit channel proposed by Drechsler et al. (2017) can operate independently of the competition channel. When interest rates rise, deposits become less attractive to banks due to the reduced subsidy, leading them to optimally reduce deposit supply without requiring market power; (ii) Reaching for yield: banks are incentivized to take on more risk in low-interest-rate environments due to the increased subsidy, even without managerial risk-taking incentives, which has been the primary explanation for this behavior in existing literature; (iii) Quantitative effect of traditional monetary policy channel: the traditional reserve-based mechanism of the bank lending channel has been deemed too weak to explain the observed effects of monetary policy on lending outcomes. Our results show that in high reserve, i.e., low interest rate regimes, the supply curve of insured deposits shifts outward, strengthening the transmission of monetary policy more than existing literature estimates. We provide preliminary empirical evidence to support our main argument.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
september 4
Title: Home Is Where Your FinTech Loan Is
Abstract: This paper examines the impact of unsecured FinTech lending on the long-term financial well-being of borrowers, as measured by their access to mortgage markets. Using personal loans data by LendingClub and HMDA mortgage data, I find that increase in penetration of FinTech lending in personal loans positively impacts overall mortgage activity in an area. To establish a causal link from FinTech personal loans to mortgage loans, I exploit the exogenous variation in LendingClub loan activity due to its partnership with the BancAlliance consortium of community banks in February 2015. Consistent with the mechanism of alleviation of information frictions, I find that this spillover effect is more pronounced for new home purchase mortgage activity vs refinancing, and for borrowers who face larger information frictions in an area.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
september 18
Title: The Role of Underwriters in the Green Bond Market
Abstract: This paper examines the role of underwriters in the green bond market. I find that firms with long-established relationships with major green bond underwriters are more likely to issue green bonds and benefit from the green premium, possibly due to preferential terms that favor established clients and maximize underwriter profits. Despite the financial benefits, these companies fail to fulfill their environmental commitments, resulting in increased emission intensity by 17% in the long term. Overall, the results suggest that, as profit-maximizing entities, underwriters may prioritize established clients, thereby potentially undermining the credibility of their green bond certifications.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
september 25
Don Lee, Mitsui Visiting Scholar
Title: Unbundling Institutions for Corporations
Abstract: The persistent coexistence of two distinct groups of companies in the corporate sector—i.e., companies with positive free cash flows (FCF) and companies with negative FCF—is a robust empirical regularity across countries. Such a sustained cohabitation, together with the conceptual contrast between positive FCF and negative FCF, suggests that a country has different sets of institutions serving each group of companies. That is, a country’s institutions for corporations can be unbundled into those for positive-FCF firms and those for negative-FCF firms. This paper investigates the possibility and usefulness of this unbundling and provides supporting evidence, using firm-level data from 43 countries for the period of 2000-2018.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
October 2
Title: Asset Prices in Equilibrium Economies With Frictions and Subjective Beliefs
Abstract: In frictionless economies where investors share beliefs, the absence of arbitrage opportunities, a necessary condition for economic equilibrium, implies a concrete and empirically testable relationship between the prices of financial assets and the preferences of the marginal investor(s), P=E(MX). I propose a class of models which permits financial constraints and heterogeneous subjective beliefs and investigate its implications for asset prices in economies where the observables are the output of economic agents’ optimization in equilibrium. I show new but similarly concrete relationships between asset prices, preferences, beliefs, and constraints, and propose directions to implement tests of these relationships empirically.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
October 9
Title: Opening the Brown Box: Production Responses to Environmental Regulation
Abstract: We study production responses to an emission capping regulation on manufacturing firms. Firms reduce pollution by electrifying their production, producing less coal-intensive products, and increasing their abatement expenditures. Firms preserve profitability by increasing their production of higher-margin products. However, firms in highly polluting industries produce fewer products. In the aggregate, we document lower product variety, an altered firm-size distribution, and lower business formation. Our findings highlight the mechanisms behind how mandated pollution reduction can be effective and its costs, suggesting a loss in agglomeration externalities.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
October 16
Jack Liebersohn, UC Irvine
Title: Understanding Excess Repayment
Abstract: Twenty-two percent of U.S. households partially prepay their mortgage each month, a practice known as curtailment in the mortgage industry. For mortgages with interest rates below the risk-free rate, curtailment has negative net present value. We show that interest rate increases in 2022 led to $1.2 billion in curtailment losses from January 2022-February 2023, due to the rising share of mortgages with a negative rate spread. Curtailment is more frequent among households with less credit card debt or those who have no credit card at all and is correlated to the availability of disposable income. Interest rate increases reduce curtailment for adjustable-rate but not fixed-rate mortgages. Our findings suggest that curtailment is explained by both an aversion to debt and by household responses to changes in current cash flows.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
October 23
Title: Supervisory Stigma and Banking Stability
Abstract: Supervisory stigma is a critical yet understudied topic in banking regulation. Using newly digitized data of Virginia state banks in the 1920s, we examine how the introduction of stigma around interbank borrowing influenced financial stability. Our findings show that stigmatization reduced overdependence on interbank borrowing along observable dimensions; however, it did not eliminate habitual borrowing, which was loosely defined. Banks that remained habitual borrowers were more likely to fail during the Great Depression. Overall, this study highlights the role of explicit guidance in promoting effective bank examination and supervision.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
October 30
Title: Missing R&D and Creditor Rights
Abstract: I examine the effect of creditor rights on the likelihood of R&D expenses being undisclosed (or “missing”). I find that firms are more likely to have missing R&D expenses after an exogenous increase in creditor rights. This supports the idea that stronger creditor rights, by reducing the cost of debt financing, decrease the need to disclose competitively sensitive R&D expenses information for obtaining cheaper debt. The effect is stronger for bond-dependent firms, those engaged in patenting, and those with extensive narrative R&D disclosures in their 10-K filings. Estimates for firms that transitioned from positive to missing R&D after the positive shock to creditor rights suggest that, on average, each reclassified $17.26 million of R&D expenses into SG&A expenses post-shock. My findings indicate that both the cost of external financing and the competitive drawbacks of R&D expenses disclosure influence whether firms disclose these expenses separately or within SG&A expenses, potentially distorting the measurement of innovation activities and organization capital.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
November 6
Jeffery Zhang / Andrea Stella
Title: Out of Sight, Out of Mind: Nearby Branch Closures and Small Business Growth
Abstract: Since 2010, the total number of commercial bank branches in the United States has fallen by about 20%. Do branch closures meaningfully affect economic activity? We investigate the impact of branch closures on small businesses, whose credit access may be facilitated through local relationships with bankers. We use exogenous variation in branch closures related to mergers and acquisitions to show that closures of nearby branches decrease small business employment growth and entry. Our results are robust to variations in our measure of employment, proximity, and construction of the instrument. Altogether, our analysis highlights the importance of local bank branches to small businesses.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
November 13
Title: Impact of TV Advertising on U.S. Households' Refinancing Decisions
Abstract: It has been documented that many mortgage borrowers, and especially Black and Hispanic borrowers, do not refinance despite large potential savings. Using a comprehensive dataset combining data on TV advertising expenditures and mortgage origination and performance data from HMDA, Agency, and Equifax, this paper investigates (1) the extent to which refinancing advertising impacts borrowers' refinancing decisions, (2) whether the borrowers who are more responsive to advertising are those who stand to gain more from refinancing, and (3) whether advertising ameliorates or exasperates the racial gap in refinancing. Preliminary results show that TV advertising increases refinancing likelihood substantially. This lift is larger for borrowers that stand to save more by refinancing. The magnitude of this lift is no different across White and Black/Hispanic borrowers, leading to a proportionally larger increase in refinancing propensity among Black/Hispanic consumers. These findings suggest that advertising can be an effective tool to attract the borrowers who stand to gain more from refinancing and narrow the racial gap.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
november 20
Title: Revenue Sharing in Corporate Finance: New Evidence from Real Estate Leases
Abstract: Finance theory (e.g., Theorem 2 and its Corollary 1 of Manso et al., 2010) proves that in the absence of information asymmetry between an owner-borrower and a lender, the lending contract that increases equity value is the one that decreases the chances of costly default by sharing future uncertain cash flows between the two parties, both in good times and bad. Yet, whether firms indeed choose to share payoffs thus has not been tested, even by Manso et al. (2010). Using a novel dataset of real estate leases, we show that variable leases that proportion- ately share revenues are significantly more likely in settings of low information asymmetry between the landlord and the tenant, and the corresponding default rates are also significantly lower, as theoretically predicted (but not tested) by Manso et al. (2010).
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570
december 4
Victor Lyonnet
Title: What Do Early Stage Investors Ask? An LLM Analysis of Expert Calls
Abstract: We study how early-stage investors evaluate potential investments by using large language models (LLMs) to analyze 6,800 expert consultation calls. Not only do call volume and overall sentiment predict outcomes, but the specific content of discussions provides significant additional predictive power. Our topic-specific sentiment analysis shows that positive signals about technology integration and customer acquisition are associated with 15% and 16% higher deal likelihood, respectively. We find that the information content of the calls is particularly valuable for younger firms with limited track records, where information asymmetries are most severe. Our findings provide the first systematic evidence of how investors gather and process information in the absence of traditional financial metrics, and suggest some misalignment between topics that investors frequently discuss and those that best predict deal outcomes. Methodologically, we demonstrate the potential of LLMs to extract nuanced insights from complex qualitative data.
Time: 11:45 a.m. - 12:45 p.m.
Location: B3570