Research
Pricing Disaster Risk in Corporate Bonds
Presentation: 2024 AFA Poster Session; Penn State
Abstract: Realized default rates and losses are too low relative to high corporate credit spreads in the data. I explain this ``credit spread puzzle" through a dynamic capital structure model with long-term bonds and disaster risk. In contrast to models with one-period bonds, long-term bonds serve as hedge investments under disaster risk concerns, generating different economic mechanisms. I explore the effects at firm level. Disaster risk affects corporate credit spreads through default risk, risk premium, and corporate capital structure. In disaster states, default risk dominates other channels due to firms' high likelihood of default. In normal times, the disaster risk premium induces lower optimal capital levels, which leads to higher leverage and credit spreads. When exploring the effect of real and financing frictions in the model, I find that both lead firms to act conservatively and reduce their leverage, giving rise to lower credit spreads. However, I also find that, after a disaster, financially constrained firms lose more equity value, and their credit spreads sharply increase in the model.
Can We Be Cleaner? Capital Substitutability and Complementarity
(solo-authored) Draft coming soon!
Abstract: Can we successfully transition to a clean economy? Existing literature argues that sustainable investors’ preferences alter firms’ cost of capital, leading to a reallocation of firms toward clean capital. However, in this paper I argue the strong complementarity between dirty and clean capital severely limits investors’ ability to affect firms’ capital choices even if they are successful in affecting the differential cost of these two forms of capital. In particular, I propose a dynamic model to study firms’ optimal investment decisions under the assumption that clean capital is cheaper than dirty capital from a cost of capital perspective. If the two types of capital are perfectly substitutable, firms’ investment decisions rely only on the potential damage from climate change, eventually leading to the discard of dirty capital. In contrast, strong complementarity generates concerns about productivity, strongly hindering the transition to clean capital. My model highlights that technological innovation in substitution is the key to achieving the net-zero emission goal.
Socially Responsible Investment and Gender Equality in the United States Census
(with Minsu Ko) Draft coming soon!
Abstract: With administrative data, we test whether firm-level institutional ownership with a preference for gender equality is correlated with employee-level gender equality. We show that although the proportion of female employees is correlated with socially responsible investments, the gender wage gap, which is an unexplained part of the lower wage of female employees, has a weak relationship with socially responsible investments. Next, we show that female directorship strengthens the relationship between socially responsible investments and the gender wage gap. When there is at least one female director, socially responsible investments have a robust relationship with a lower wage gap. This is because female directorship facilitates the diversity of information for investors and because female directors vote for corporate policies to promote gender equality.