Corporate Finance and Product Market Competition
“Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry,” with Patrick Dennis, and Kristopher Gerardi, May 2020 (R&R).
Winner: Best Overall Paper Award at the 2018 European Finance Association Meeting
Institutions often own equity in multiple firms that compete in the same product market. These institutional “common owners” may induce or mandate anti-competitive pricing behavior among the product market rivals. This paper evaluates prior evidence of such behavior between competing airlines. The measure of common ownership is a function of each airline’s market share, as well as the cash flow and control rights held by the institutions that own the airlines competing in the same market. Using placebo tests, we show that the documented positive correlation between common ownership and ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components. We examine other econometric and data measurement issues and show that the previously documented results are fragile to reasonable alternative mappings of equity votes into control rights, as well as alternative assumptions about equity holders’ ownership and control during bankruptcy. Our results obviate the need for policy aimed at restricting the holdings of institutional managers.
“Incentives and Competition in the Airline Industry,” with Raj Aggarwal
The Review of Corporate Finance Studies, 2019, Vol. 8 (2), 380-428.
We examine how performance changes at airlines in response to a change in executive incentives. Airlines with executive bonuses contingent on on-time arrival do improve on-time performance. We find evidence of strategic gaming of the incentive as some carriers increase scheduled flight times, making it easier for flights to arrive on-time. This effect is more pronounced on competitive routes. Carriers also do not decrease the frequency of flights or the number of passengers to make it easier to be on-time, but they do slightly decrease fares. Competitors on the same routes also improve their on-time performance, even when their executive bonuses are not contingent on on-time performance, consistent with competition in strategic complements.
Are the Bankrupt Skies the Friendliest? with Federico Ciliberto
The Journal of Corporate Finance, July 2012, Vol. 18, 1217-1231.
We use data from the US airline industry to investigate whether firms that are under bankruptcy protection, as well as these firm’s product market rivals, change the quality of the products they offer. We measure the quality of the services offered by a carrier using flight cancellations and delays, and the age of the aircraft used by the carrier. We find that delays and cancelations are less frequent during bankruptcy filings but return to their pre-bankruptcy levels once the bankrupt firm emerges from
bankruptcy. We also find that firms use Chapter 11 filings to permanently reduce the age of their fleet. We do not find evidence of statistically and economically significant changes by the airline’s competitors along any of the dimensions above.
Bankruptcy and Product-Market Competition: Evidence from the Airline Industry, with F. Ciliberto
The International Journal of Industrial Organization, November 2012, Vol. 30, Issue 6, 564–577.
We investigate the effects of Chapter 11 bankruptcy filings on product market competition using data from the US airline industry. We find: i) bankrupt airlines permanently downsize their national route structure, their airport-specific networks, and their route-specific flight frequency and capacity; ii) bankrupt airlines lower their route-specific prices while under bankruptcy protection, and increase them after emerging. We do not find robust evidence of significant changes by the bankrupt airline’s
competitors along any of the dimensions above.
Corporate Finance And Banking
The Effect of Banking Relations on the Firm’s IPO Underpricing
The Journal of Finance, December 2004, Vol. 60, No. 6, 2903-2958.
Nominee, 2005 Brattle Prize, most outstanding Journal of Finance paper in Corporate Finance.
Reprinted in “Financing Entrepreneurship,” edited by P. Auerswal of The School of Public Policy at George Mason University, and A. Bozkaya of the John F. Kennedy School of Government, Harvard University.
Publisher: Edward Elgar Publishing Ltd.
This paper investigates the effects of pre-IPO banking relationships on a firm’s IPO. Using a new and unique data set, which compares the firm’s pre-IPO banking relationships to the underwriters managing the firm’s new issue, I test whether banking relationships established before the firm’s IPO ameliorate asymmetric information problems behind high IPO underpricing. The results show that firms with a pre-IPO banking relationship with a prospective underwriter face about 17% lower underpricing than firms without such banking relationships. These results are robust to controlling for the firm’s endogenous selection of the pre-IPO banking institution.
Lending Relationships and Information Rents: Do Banks Exploit their Information Advantage?
The Review of Financial Studies, March 2010, Vol. 23, No. 3, 1149-1199.
In the process of lending to a firm, a bank acquires proprietary firm-specific information that is unavailable to non-lenders. This asymmetric evolution of information between lenders and prospective lenders grants the former an information monopoly. This article empirically investigates whether relationship banks exploit this advantage by charging higher interest rates than those that would prevail were all banks symmetrically informed. My identification strategy hinges on the notion that large information shocks that level the playing field among banks erode the relationship bank’s information monopoly. I use the borrower’s initial public offering (IPO) as such an information releasing event, and build a panel dataset in which the unit of observation is a firm’s lending relationships before and after its IPO. Prior to a firm’s IPO, I find a U-shaped relation between borrowing rates and relationship intensity. After the IPO, interest rates are decreasing in relationship intensity. Furthermore, mean interest rates drop after an IPO. The results are robust to firm and loan-year fixed effects, and to controls for firm leverage pre- and post-IPO. Thus, the reported interest rate pattern is clean of any confounding effects that might arise from changes in financial risk.
Conflict of Interest and Certification: Long-Term Performance and Valuation of U.S. IPOs Underwritten by
Relationship Banks, joint with Luca Benzoni
The Journal of Financial Intermediation, April 2010, Vol. 19, No. 2, 235-254.
We examine the long-term return performance of U.S. IPOs underwritten by relationship banks. We show that, over one- to three-year horizons, IPOs managed by relationship banks experience buy-andhold benchmark-adjusted returns that are similar to those observed for a matching sample of stocks managed by non-relationship underwriters. This result holds even when the returns’ skewness and cross-sectional correlation is accounted for. Further, we examine the calendar-time returns on a portfolio that is long the stocks underwritten by relationship banks and short ex-ante similar stocks taken public by non-relationship institutions. Again, we conclude that the two groups of IPOs yield similar long-run returns. These findings support the certification role of relationship banks and suggest that, in this respect, the effect of the 1999 repeal of Sections 20 and 32 of the Glass–Steagall Act has not been negative.
Investment Banking Relationships: 1933-2009, with Alan Morrison, Aaron Thegeya, and Bill Wilhelm.
The Review of Corporate Finance Studies, Vol. 7, Issue 2, Sept. 2018, 194–244.
We study the evolution of investment-banking relationships from 1933 to 2007. Relationship exclusivity and client concerns for the state of their banking relationships were strong through the first part of our sample period but then entered a period of sharp decline beginning around 1970. We interpret the bank-client relationship as an informal governance mechanism for curbing opportunistic behavior in a weak contracting environment and examine how technological change aggravated conflicts of interest within investment banks and between banks and their clients. This perspective sheds light on why trust between banks and their clients now appears to be in short supply.