Research

PUBLICATIONS

“It's not (only) personal, it's business: Personal bankruptcy exemptions and local small business credit" (with Rebel Cole, Jason Damm, and Masim Suleymanov) SSRN

Review of Finance, forthcoming


In the U.S., state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-MSA variation in personal bankruptcy exemptions created by state borders and a stacked regression approach to identify the spillover effects of these laws on business credit extended to small firms. Subsequent to exemption increases, we find a reduction of 1–2% in originations of business credit. The effect is strongest for the smallest firms, which are more financially constrained. We provide household-level evidence that both business debt and personal debt decline for borrowers whose home equity becomes covered by the exemption, suggesting an overall decrease in credit availability for small businesses. As a result, increases in exemptions lead to fewer small establishments and lower employment, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.

“What is fueling FinTech lending? The role of banking market structure” (with Tetyana Balyuk and Allen Berger) SSRN

Review of Corporate Finance Studies, forthcoming

FinTech growth raises questions about its competitive advantages vis-à-vis traditional providers, the relative risks of FinTech products, and real economic effects. We study FinTech platform small business lending, yielding new answers that may apply to FinTech more generally. Findings suggest that FinTech tends to replace loans by large/out-of-market banks more than small/in-market banks. This is consistent with FinTech advantages in more efficient processing of hard information, rather than hardening of soft information. Additional results suggest that FinTech loans are relatively risky, but become safer after replacing bank loans. Both FinTech and bank loans are found to benefit the real economy.

“Small business lending in financial crises: The role of government-guaranteed loans” SSRN

Review of Finance, 2023, 27.1, 247-287 


This paper examines whether the presence of government-guaranteed lenders helps alleviate small business financial constraints during financial crises. The results indicate that during the 2007-2009 financial crisis, areas with a greater share of Small Business Administration 7(a) lenders: 1) experience a 2.2% increase in small business loan volume, 2) a 3.7% increase in small firm employment and 3.5% increase in establishments, and 3) partially substitute government-guaranteed loans for traditional loans without increasing default rates. Bank-county-year analysis suggests that SBA banks increase lending when they are capital-constrained, and in areas with lower median income. IV analysis utilizing SBA program characteristics confirms the baseline results. The findings suggest that targeted government support can play a beneficial role in the presence of private credit market frictions, especially when bank capital is limited and small business financial constraints are severe.

“Buying the vote? The economics of electoral politics and small business loans” (with Ran Duchin) SSRN

Journal of Financial and Quantitative Analysis, 2021, 56(7), 2439-2473 


We study the role of electoral politics in government small business lending, employment, and business formation. We construct novel measures of electoral importance capturing swing and base voters using data from Facebook ad spending, independent political expenditures, the Cook Political Report, and campaign contributions. We find that businesses in electorally important states, districts, and sectors receive more loans following the onset of the Covid-19 crisis, controlling for funding demand and both health and economic conditions. Estimates from survey and observational data show that government funding weakens the adverse effects of the crisis on employment, small business activity, and business applications.

“Short selling, convertible bond pricing, and convertible arbitrage” (with Tyler Henry and Jennifer Koski) SSRN

Journal of Corporate Finance, 2020, 65, 101687

Prior literature examines the effect of either informed or arbitrage short selling on equity markets. We test the relative importance of informed and uninformed short selling around convertible bond issues and earnings announcements for the same firms over the same time period. Convertible arbitrage short selling is associated with temporary price pressure, consistent with downward sloping demand curves. Earnings announcement short selling is consistent with informed traders who anticipate future returns. Firm-specific characteristics related to the cost of short selling similarly affect both informed and arbitrage short selling. Deal-specific characteristics capturing hedging demand also strongly determine convertible arbitrage short selling. 

WORKING PAPERS

“How big is small? The economic effects of access to small business subsidies” (with J. David Brown, Matt Denes, and Ran Duchin) SSRN


Industry size standards that determine eligibility for small business subsidies have vastly increased over the past decade. We exploit quasi-random variation in the implementation of size standard increases to study the effects on small firms, subsidy allocation, and industry outcomes using Census Bureau microdata. Following size standard increases, revenues decline for an industry's smallest firms, and they are less likely to survive. We link these effects to a reallocation of government procurement contracts from smaller to larger firms. Consequently, industries become more concentrated and growth declines. These findings highlight the broad economic effects of changing eligibility for small business subsidies. 


“Financial Literacy and Financial Crime: A Regression Discontinuity Approach” (with Paul Freed) SSRN


This study investigates how financial literacy shapes the propensity of individuals to commit financial crime. Using state-level administrative data on criminal charges linked to comprehensive public records, we exploit a policy-based discontinuity in grade-level assignment based on individual birth dates that exogenously requires certain high school cohorts to attend a financial literacy course. Our estimates suggest that exposure to the course reduces the propensity to commit financial crime by 37%. The reduction is driven by sizable declines in embezzlement and is stronger for low-income individuals. Additional evidence suggests that the reductions are primarily explained by improvements in household balance sheets.


“The Role of Sentiment in One-Click FinTech Borrowing" (with Ran Duchin and Paul Freed) SSRN


FinTech lending allows borrowers to apply for loans anytime and anywhere, complete their applications quickly, and obtain immediate credit decisions. Hence, transient mood swings that would be mitigated in traditional loan settings can impact FinTech credit demand. Using hourly fluctuations in local sunshine as instruments for sentiment, we find that positive sentiment leads to higher loan demand at the extensive and intensive margins. The effects lead to higher default rates, especially for lower-income and inexperienced borrowers. We also find evidence of self-corrective actions where individuals later withdraw their applications, suggesting that “cooling-off” periods can be an effective consumer protection mechanism.


"Cybersecurity Risk and Mortgage Lender Selection" (with Paul Freed)


We examine the importance of perceived data security risk for FinTech use in the US residential mortgage market. We find areas that experience a local data breach reduce FinTech mortgage application volume by 2.6%. These effects are short-lived and larger when the breach involves technology and is reported in news media, consistent with a temporary shock to the salience of data security threats. Additional analyses using geographic exposure to the 2013 Target data breach confirm the baseline results. Overall, the findings suggest that the salience of data security risk is an important driver of FinTech demand, and that breaches have negative spillover effects on FinTech service providers.

“Who’s holding the bag? Regulatory compliance pressure and bank risk-shifting” (with Lamont Black)

Banks in the U.S. undergo examinations for Community Reinvestment Act compliance during discrete periods of time. We find that this CRA compliance pressure leads to an increase in small business lending by small banks but not large banks. Small banks increase origination volume of their smallest business loans by 19 percent during CRA exam years[LB1] . We also find that these loans are more likely to be funded with Small Business Administration government guarantees. The SBA loans granted in the quarter in which a CRA exam is announced have higher default rates and lower likelihood of being a revolving loan, indicating risk-shifting to the government. This cyclicality in lending has real effects. More CRA-induced lending leads to a short-term increase in employment for local small businesses but a long-term decrease as the increased risk is realized. Our findings highlight an important interaction between CRA and SBA for small banks, small businesses, and local communities.

“Debtor protection, credit provision, and local crime” (with Chao Jiang)

We examine how debtor protection affects local property crime. We find that property crime increases with personal bankruptcy exemptions, especially in low-income counties. Credit to small businesses decreases and small business separations increase in low-income counties, especially among young, male workers. These results suggest that lenders react to increases in debtor protection by reducing credit supply to lower-wealth small businesses, leading to an increase in separations and crime. Changes in enforcement or economic conditions are unlikely to explain our results. The results suggest that debtor protection laws and access to finance are important determinants of property crime. 

“Information asymmetry and organizational structure: evidence from small business lending”


WORK IN PROGRESS


“Flexible Work and Household Financial Behavior” (with Ran Duchin, Paul Freed, and Da Ke)