Browsing by Author "Rampini, Adriano"

In Chapter 1, I document a negative (positive) relationship between changes in large (small) blockholders' ownership and abnormal returns. The evidence in this paper suggests that an increase in the relatively large blockholders' ownership raises the consumption of private benefits while an increase in the relatively small blockholders' ownership constrains large blockholders from expropriating minority shareholders. Moreover, I find an inversely U-shaped relationship between changes in the largest blockholders' ownership and firm value. As large blockholders' ownership and control increase, the negative effect of firm value driven by expropriating minority shareholders starts to exceed the incentive benefits of monitoring by the largest blockholder. I also show that the negative relationship between changes in institutional investors' control and abnormal returns declines as analysts' following increases.

In Chapter 2, I study the role of trading as a governance mechanism. I hypothesize that governance through trading plays a significant monitoring role in practice and that engaging in "voice" and "exit" can be substitutes. I show that abnormal turnover following earnings announcements is significantly higher for firms with large institutional blockholders than for those with small individual

shareholders. For firms with majority institutional ownership, I demonstrate that abnormal trading is higher for firms with multiple blockholders than for those with a single large blockholder and that abnormal trading increases with the number of institutional investors and declines with the percent of stocks owned by the

largest institutional investor. Moreover, this excess trading is driven by mutual fund investors, which are non-interventionist and thus are more likely to engage in "exit" than "voice". I also show that for firms with large institutional blockholders, abnormal trading following public announcements increases with liquidity.

During 2007-2009 the U.S. economy experienced the most severe financial crisis since the Great Depression. Why did the financial crisis turn into such a severe recession? And what were the causes of the Great Recession? This dissertation consists of two essays examining these questions. In the first essay I study the extent to which the increase in uncertainty might have contributed to the severity of the crisis. The second essay examines the reasons behind the fall in the personal saving rate as measured in the National Income and Product Accounts.

In the first essay I study the effects of changes in uncertainty on optimal financing and investment in a dynamic firm financing model in which firms have access to complete markets subject to collateral constraints. Entrepreneurs finance projects with their net worth and by issuing state-contingent securities, which have to be collateralized with physical capital. An increase in uncertainty leads to deleveraging, as entrepreneurs reduce their demand for external financing and fund a larger share of their investment from net worth. Upon an increase in uncertainty, investment initially falls as entrepreneurs decrease the scale of their projects. Investment recovers as entrepreneurs build up net worth and transition into an environment with high uncertainty. Quantitatively, changes in uncertainty have large effects on optimal leverage and investment dynamics.

The spendthrift nature of U.S. households leading up to the financial crisis has been cited as a major contributing factor for the Great Recession. Indeed, the personal saving rate has been falling since the end of the 1970s, dropping to as low as nearly 1 percent before the financial crisis. The reasons behind the decline in the personal saving rate have yet to be understood, and thus constituting an important puzzle for economic research. In the second essay, joint work with Maurizio Mazzocco, we provide a potential explanation for the decline in the personal saving rate. Specifically, we show that a single variable can potentially explain the decline in the U.S. personal saving rate from 10 percent in the early eighties to nearly 1 percent in 2007. This variable is medical expenditure by health institutions net of the employers' contributions to pension and insurance funds. Furthermore, if we differentiate between contributions to pension funds and to health plans, we find that the main reason behind the dramatic reduction in the U.S. personal saving rate is the stagnation of employers' contributions to pension funds that started in the early eighties combined with the sharp rise in expenditure by health institutions.

I study firms' debt maturity decisions. I provide two models for optimal debt maturity choices when facing stochastic productivity and rollover risk. The first model is based on firms' need to smooth their capital when facing uncertainties in external financing. When the capital market freezes, new external financing is difficult. Firms with large debt repayments due have to forego good investment opportunities and in severe cases cut back on dividends. Long-term debt reduces immediate repayments and allows firms to keep the borrowed capital for future production. Therefore, when freezes are likely, firms respond by using more long-term financing and are better prepared. However, when the probability of freezes is low, firms turn to short-term financing. When a freeze suddenly occurs, the impact is significant and costly. The model predicts that constrained firms use more short-term debt. Based on the model, I propose investment-debt sensitivity as a new measure for financial constraints.

The second model depicts an economy in which entrepreneurs reallocate capital resources through borrowing and lending in either short-term or long-term debt. In expansions, productivity is more persistent and uncertainty in productivity is low, so entrepreneurs can better predict their future prospects. Hence, they choose to use more long-term debt to finance their productions. In recessions, future prospects are less clear to the entrepreneurs; therefore, they choose to use more short-term debt. The model explains the documented facts on pro-cyclical debt maturity in the economy. It also highlights that the shortening debt maturity structure causes capital resources to be less efficiently allocated in recessions further exacerbates the bad times. I argue that the change in the predictability of TFP drives pro-cyclical debt maturity, and that the maturity structure further amplifies the fluctuations in aggregate production.

Bank stress test has become a centerpiece of post crisis bank supervision. Current studies have thus far examined the optimal policies on stand-alone single banks, but financial systems are interconnected in practice, and disclosure about banks influences the counterparty risks of other banks. This dissertation studies the optimal stress test design in a financial network, where banks' endogenous default outcomes are determined by a fixed point payment problem that accounts for both project qualities and interbank contagion.

The first part examines the joint stress test design on all banks in the financial network. In addition to the cross-state risk sharing in models of single banks, this model highlights the novel cross-bank risk sharing that arises from the spillover effects of disclosures via interbank payments. When expected bank profitability is high or counterparty exposures are large, disclosure is non-discriminatory, and either all banks pass or all banks fail the stress tests; otherwise only less impaired banks may pass. For network structures, I find: (i) in a ring network, banks at least a specific distance away from the nearest bank with asset impairment may pass; (ii) a more connected network is not necessarily more stable under the optimal disclosure; (iii) typically more connected banks receive preferred treatment.

The second part studies a selective stress test in a financial network, where the regulator selects an optimal subset of banks for stress tests and accordingly design the optimal disclosures only on these banks. Compared with the first part, systemic risk becomes more important as the regulator is less able to fine tune beliefs about contagion and needs to contain the risks from unselected banks. For network structures, I find: (i) in a ring network, stress test is either "balanced'' on banks positioned evenly and disclosure is non-discriminatory, or on "connected'' banks and disclosure is truth-telling on potential shocks; (ii) in a star network, stress test is conducted on the center bank when counterparty exposure is either sufficiently small or sufficiently large.

In my first chapter, I present a model in which sellers can signal the quality of an asset both by retaining a fraction of the asset and by choosing the liquidity of the market in which they search for buyers. Although these signals may seem interchangeable, I present two settings which show they are not. In the first setting, sellers have private information regarding only asset quality, and I show that liquidity dominates retention as a signal in equilibrium. In the second setting, both asset quality and seller impatience are privately known, and I show that both retention and liquidity operate simultaneously to fully separate the two dimensions of private information. Contrary to received theory, the fully separating equilibrium of the second setting may contain regions where market liquidity is increasing in asset quality. Finally, I show that if sellers design an asset-backed security before receiving private information regarding its quality, then the optimality of standard debt is robust to the paper's various settings.

In my second chapter, I explore the question of how informative bank stress tests should be. I use Bayesian persuasion to formalize stress tests and show that regulators can reduce the likelihood of a bank run by performing tests which are only partially informative. Optimal stress tests give just enough failing grades to keep passing grades credible enough to avoid runs. The worse the state of the banking system, the more stringent stress tests must be to prevent runs. I find that optimal stress tests, by reducing the probability of runs, reduce the optimal level of banks' capital cushions. I also examine the impact of anticipated stress tests on banks' ex ante incentive to invest in risky versus safe assets.