Publications

In July 2013, Moody's unexpectedly increased the amount of equity credit speculative-grade firms receive for preferred stock from 50% to 100%. Firms affected by the rule change were suddenly considered less levered by Moody's, even though their balance sheets did not change. These firms responded by issuing debt to restore the original leverage ratio as defined by Moody's and growing their assets. The rule change transferred value from debt to equity holders and led to an increase in preferred stock issuance. How rating agencies assess risk thus has a significant causal impact on firms' financing, investment, and security design decisions.

Theories of competition typically predict a positive relationship between market concentration and prices. However, in loan markets, adverse selection can reverse this relationship as riskier borrowers become more likely to receive funding. Using supervisory data, we show that interest rates, borrower risk, and lending volume are higher in markets with more banks. We also create a novel measure of markup that is orthogonal to borrower risk, and find that, consistent with adverse selection, markups are higher after repeated borrowing relationships. Finally, we use a shock to large banks lending costs to provide further support for the adverse selection channel.

We investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases---roughly 1% on existing products---do not drive this growth. The launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross-sectional results on target firms, PE firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.

In recent years, data privacy has vaulted to the forefront of public attention. Scholars, policymakers, and the media have, nearly in unison, decried the lack of data privacy in the modern world. In response, they have put forth various proposals to remedy the situation, from the imposition of fiduciary obligations on technology platforms to the creation of rights to be forgotten for individuals. All these proposals, however, share one essential assumption: we must raise greater protective barriers around data. As a scholar of corporate finance and a scholar of corporate law, respectively, we find this assumption problematic. Data, after all, is simply information, and information can be used for beneficial purposes as well as harmful ones. Just as it can be used to discriminate and to embarrass, information can be used to empower and to improve. And while data privacy is often pitched at ending unauthorized data sharing, it all too often leads simply to the end of data sharing, period. This comes at a cost. Data silos can inhibit consumer choice, protect the positions of powerful incumbents, and reduce the efficiency of markets. The best example of these costs comes from the financial industry. For more than a century, banks and other financial institutions have built their information technology systems to keep financial records as private and nonshareable as possible. While security concerns can be a primary reason for such closed systems, banks also understand that financial data is an advantage that can protect them from market entry and competition. Banks can hold up consumers with unfavorable rates and inferior products as a result, and a set of market failures make it difficult for consumers to opt out. First, information asymmetries between consumers and financial institutions are large and difficult to resolve. Second, search and switch costs, the difficulty of finding out more information about the risks and benefits of financial products and of switching to a better financial service, are high in the financial industry. Finally, individuals struggle to take advantage of even simple financial strategies to save, borrow, and invest. Data sharing can help resolve these problems. The emergence of a new regulatory and technological framework called open banking raises the possibility of consumers being able to task trusted intermediaries with automatically analyzing their financial data, nudging them to achieve their goals, and switching them to better products, all in order to reduce the substantial inefficiencies in their financial lives. There is one problem, however. A combination of market failure and regulatory ambiguity has led to a situation in which data is limited, siloed, and inaccessible, thereby preventing individuals from using their data in efficient ways. Ultimately, this Article contends, resolving these problems will require us to replace the clarion call of data privacy with a new, more comprehensive concept, that of data autonomy, the ability of individuals to have control over their data. Data autonomy balances the need for data to be protected and secure with the need for it to be accessible and shareable. In this Article, we lay out a set of key principles that grant individuals a legal right to data autonomy, including a right of ownership over data, as well as obligations on institutions to safely share standardized and interoperable data with third parties that consumers so choose. Perhaps counterintuitively, the only way of expanding consumer welfare and protection today is by breaking down the barriers of data privacy.

We document a strong decline in corporate-diversification activity since the late 1970s, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance.

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues, and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience.

We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the same firm across rating agencies. These differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads, consistent with mispricing. Moreover, the pricing effects are the largest among firms that are the most opaque, likely exacerbating financing constraints. We find that masters of business administration (MBAs) provide higher quality ratings. However, optimism increases and accuracy decreases with tenure covering the firm. Our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets.

We find strong evidence that three key dimensions of national culture (trust, hierarchy, and individualism) affect merger volume and synergy gains. The volume of cross-border mergers is lower when countries are more culturally distant. In addition, greater cultural distance in trust and individualism leads to lower combined announcement returns. These findings are robust to year and country-level fixed effects, time-varying country-pair and deal-level variables, as well as instrumental variables for cultural differences based on genetic and somatic differences. The results are the first large-scale evidence that cultural differences have substantial impacts on multiple aspects of cross-border mergers.

We propose and test a view of corporate diversification as a strategy that exploits internal information markets, by bringing together information that is scattered across the economy. First, we construct an inter-industry network using input-output data, to proxy for the economy information structure. Second, we introduce a new measure of conglomerate informational advantage, named excess centrality, which captures how much more central conglomerates are relative to specialized firms operating in the same industries. We find that high-excess-centrality conglomerates have greater value, and produce more and better patents. Consistent with the internal-information-markets view, we also show that excess centrality has a greater effect in industries covered by fewer analysts and in industries where soft information is important.

We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO-director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. We also find that firms with more CEO-director ties engage in more value-destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.

Constant-Product Automated Market Makers (CPAMMs) are an established mechanism for trading crypto-assets and may soon support trading of tokenized equities. We develop a minimal-structure model in which traders' strategies and valuations are continuous. Despite its simplicity, the model delivers a rich set of sharp predictions. CPAMM markets provide incentives for perfectly competitive liquidity provision. Equilibrium prices are invariant to liquidity supply. Traders' valuations can be recovered linearly from reserves and transaction prices, allowing variation in traders' motivations to be decomposed into information-driven and liquidity-driven trading components. A simple equilibrium relation links liquidity provision, price spreads, and price impact; and the model provides a closed-form measure of expected adverse selection costs. We test these predictions using Uniswap V2 as the CPAMM market and Binance as the alternative market. Consistent with the theory, Uniswap reserves Granger-predict trading volume, estimated relationships among reserves, price spreads, and slippage have the predicted signs, and adverse selection costs are positively related to the variance of the permanent (information-driven) component of valuations.

We provide the first comprehensive causal analysis of the economic footprint of international anti-money laundering (AML) standards. Leveraging the staggered timing of Financial Action Task Force (FATF) mutual evaluations as an exogenous shock, we find that strengthening AML policies has a mixed impact on international economic activity. While bilateral cross-border trade declines by 4% on average, this adverse effect is substantially reduced for countries whose AML policies become more harmonized with their trading partners. Furthermore, we find that these policies result in an 8% increase in foreign direct investments. FATF assessments also significantly increase the detection of money laundering cases by 31% but show no measurable impact on other illegal activities like drug trafficking, human trafficking, or fraud. Our findings highlight the tradeoff faced by anti-money laundering policies, and the benefits of global coordination to minimize the costs associated with AML compliance.

Momentum is one of the most widespread, persistent, and puzzling phenomenon in asset pricing. The prevailing explanation for momentum is that investors under-react to new information, and thus asset prices tend to drift over time. We use a unique feature of cryptocurrency markets: the fact that they are open 24/7, and report returns over the last 24 hours. Thus, the one-day return is subject to predictable fluctuations based on the removal of lagged information. We show that investors respond positively to changes in reported returns that are unrelated to any new release of information, or change in the asset fundamentals. We call this behavioral anomaly Pure Momentum.

The regulatory treatment of cryptoassets depends primarily on three main governance characteristics: transparency, decentralized decision-making, and the effect of governance on token prices. We offer the first comprehensive analysis of the decision-making process of Ethereum, the leading programmable blockchain. We find that its governance is open and transparent, with all Ethereum Improvement Proposals (EIPs) disclosed and discussed in public venues, engaging thousands of people. At the same time, EIPs are predominantly shaped by a core group of influential authors: 10 individuals are responsible for proposing 68% of all implemented Core EIPs. The success of these proposals is significantly associated with key attributes of the proposers, including their social outreach, community engagement, and company affiliation. Furthermore, we observe a notable concentration in client development, where on average 10 people per client implementation are responsible for 80% of all software changes, and identify stablecoin issuers and oracle providers as potential governance centralization vectors. The governance concentration has been slowly decreasing over time, with the Ethereum Foundation still playing an important role. Finally, we find that governance decisions influence crypto prices: Ether price increases 12% leading to the final discussion of Core EIPs.

This paper examines empirically the principal concerns in the CFTC's request for comment (RIN 3038-AF75) on whether 24/7 trading and perpetual contracts create materially different market-quality and market-integrity risks from existing futures-market arrangements. On 24/7 trading, weekend sessions exhibit lower trading volume, realized volatility, and forced liquidations than weekday sessions. Furthermore, market closure concentrates weekend price risk rather than eliminating it: the CME Sunday reopening produces one-minute absolute returns of 51 to 191 basis points while venues that never closed show jumps only a third to three-fifths as large. On perpetuals, funding-based convergence anchors more tightly than dated futures expiration, with CME dated Bitcoin futures running a mean absolute basis of 41 basis points against 2.6 to 4.9 for offshore perpetuals and 3.2 for a CFTC-regulated one, and funding rates transmit financing costs and convenience yield exactly as the basis does in a dated future. For energy, where no continuously traded spot tape exists, a perpetual must reference the dated futures contract, and this turns out to be a feature rather than a defect. The referenced market's cash-and-carry arbitrageurs already price storage cost, convenience yield, and seasonality, all of which flow into the perpetual without any change to the funding formula, and the arbitrage tether pushes price discovery occurring in the perpetual back into the dated contract, so a migration of directional flow does not fragment information. The cost is a calendar-predictable reference roll that traders rolling dated futures already bear. Three implications follow: evaluate off-hours liquidity against other markets the Commission already accepts rather than daytime parity; treat the absence of a continuous spot market as a question of reference design; and require disclosure of funding-rate sampling methodology, with continuous accrual in place of snapshot application.

For decades, income growth from capital has dramatically outpaced that from labor, but capital ownership remains a privilege of the few. We must bridge this divide by transitioning from the current system that excludes the majority to one that empowers them. The solution lies in the convergence of technology and policy. By harnessing the transformational potential of tokenization and open blockchains, we unlock global markets for billions of savers and those wishing to raise capital. When the barriers of traditional financial infrastructure disappear, access to investment opportunities becomes as normal as owning a phone. This allows ordinary people to finally capture the upside from innovation and economic growth. This is how we narrow the capital chasm and increase economic freedom.

Coinbase Institute’s International Survey of Web3 Adoption, covering more than 32,000 adults with internet access across 16 countries, finds that Web3 and crypto are now widely known globally—82 percent of respondents are at least somewhat aware of crypto and 66 percent recognize at least one concrete Web3 use case—but actual usage still lags, with about 31 percent currently using any Web3 service and adoption skewed toward emerging markets. Payments, NFTs, and trading on centralized exchanges are the best-known and most used services, centralized exchanges are the dominant entry point into Web3, and self-hosted wallets are gaining traction (around 39 percent use a software wallet and 29 percent a hardware wallet), even as most users still rely on custodial platforms. Looking ahead, respondents expect their Web3 usage to grow by roughly 50 percent over the next three years, but cite volatility, lack of understanding, and lack of funds as key barriers for non-users, underscoring the need for clearer rules, better education, and more user-friendly products to unlock the next wave of global onchain adoption.

A decentralized autonomous organization (DAO) is a new type of organization that is user-owned and user-governed. DAOs aim to build more cohesive, transparent, equal, and democratic communities by lowering agency costs, empowering users, and enhancing trust through decentralization. At the same time, decentralized decision making also has its costs, including lower levels of expertise, weaker protection of trade secrets and confidential information, and challenges in coordination. Thus, how decentralized should DAOs be? Decentralization happens on a spectrum. It depends on how the technology behind the DAO alters the tradeoff between costs and benefits in specific contexts. Organizers of DAOs thus have to carefully decide which decisions are taken as a group, which ones are delegated to representative agents, to strike the most appropriate balance for their situation and achieve better outcomes.

Digital technologies bring new opportunities to all economies. Yet the particular shape of these opportunities depends upon the specific industrial structure and institutional configuration of each economy. This report asks what specific opportunities web3 digital technologies brings to Australia, a well-educated, highly urbanised, prosperous and stable, property-owning democracy with a relatively small but highly open economy that is dominated by export-focused primary industries. The main benefits to Australia of web3 technology innovation will come from the mainstream creation and adoption of digital assets (‘tokenisation’). These will greatly facilitate efficiencies and productivity in trade, capital and financial infrastructure, but will bring innovation at the convergence of fintech, tradetech and regtech. These opportunities will deepen Australia’s competitiveness in primary goods and education and develop a new export industry in digital trade infrastructure (providing, e.g. provenance and certification, plus financial and regulatory services). To realise this opportunity, Australia needs deep institutional self-evaluation and analysis of the type successfully undertaken when well-focused political will sought to deliberately adapt Australia’s economic institutions and regulatory environment to the effects of deep technological change on key sectors.

Coinbase Institute’s systemic risk paper finds that, while crypto is still far too small relative to banking, public markets, and real estate to pose a systemic threat today, policymakers should already be mapping where contagion could arise as the ecosystem grows. Using network analysis of Bitcoin flows, it shows that a handful of centralized entities—especially exchanges, custodians, bridges, and large stablecoins—sit at the core of onchain activity and could either amplify shocks or act as shock absorbers, depending on how they are regulated. The paper argues that crypto’s structural features—decentralization, onchain transparency, and instant settlement—can reduce some traditional financial stability risks, but that opaque off-chain lending, poorly designed stablecoins, and lightly supervised touchpoints with traditional finance warrant closer oversight and continuous monitoring as tokenization and institutional adoption accelerate.

How should we evaluate the recent highs and lows of crypto prices? In taking a market efficiency view, crypto prices are a reflection of the market’s assessment of the future prospects of digital assets. This view can help us understand the historical trends in crypto prices and its correlation with the overall financial markets. Over the last 5 years, crypto markets saw very large returns due in part to adoption by institutional and retail investors, and the laying of the foundations of web3. Whereas crypto markets were originally uncorrelated to the financial markets, the correlation has risen sharply since 2020. Thus, the market expects crypto assets to become more and more intertwined with the rest of the financial system. Nowadays, the risk profile of crypto markets is similar to those of oil prices and technology stocks. The recent decline in crypto markets can be attributed for two-thirds to worsening macro-factors, and for one-third to a weakening of the outlook for cryptocurrencies.

In finance theory, the evaluation of the true risk of an asset includes two components: (i) volatility; and (ii) correlation with the overall market. In examining crypto’s volatility, we find that Bitcoin and Ethereum have similar volatility to commodities such as oil and natural gas, and comparable in size and volatility to stocks such as Tesla, Lucid, and Moderna. In examining crypto’s correlation with the overall market, we find that large cap cryptos have a lower volatility and a higher correlation than other cryptos with the overall market. In examining crypto’s beta, which is the product of volatility and correlation, and the true measure of the risk of an asset, we find that Bitcoin and Ethereum have similar risk profiles to many other commonly held stocks included in the Nasdaq 100.

From the Texas Work Group on Blockchain Matters, this is the report and proposed master plan to expand the blockchain industry in Texas in compliance with House Bill 1576, passed by the 87th Texas Legislature. This report examines the current blockchain industry in Texas, reviews the state’s current academic, educational, and workforce needs required to grow the industry, and identifies areas for economic growth and development opportunities presented by blockchain technology. The report contains legislative and policy recommendations aimed at encouraging the industry’s expansion and establishing regulatory and legal clarity to establish Texas as a leader in the blockchain technology and cryptocurrency space.