"Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles," with Janice Eberly; prepared for the 2018 Jackson Hole symposium.
Abstract: We document that the rise of factors such as software, intellectual property, brand, and innovative business processes, collectively known as “intangible capital,” can explain much of the weakness in physical capital investment since 2000. Moreover, intangibles have distinct economic features compared to physical capital. For example, they are scalable (e.g., software) though some also have legal protections (e.g., patents or copyrights). These characteristics may have enabled the rise in industry concentration over the last two decades. Indeed, we show that the rise in intangibles is driven by industry leaders and coincides with increases in their market share and hence, rising industry concentration. Moreover, intangibles are associated with at least two drivers of rising concentration: market power and productivity gains. Productivity gains derived from intangibles are strongest in the Consumer sector, while market power derived from intangibles is strongest in the Healthcare sector. These shifts have important policy implications, since intangible capital is less interest-sensitive and less collateralizable than physical capital, potentially weakening traditional transmission mechanisms. However, these shifts also create opportunities for policy innovation around new market mechanisms for intangible capital.
Supplemetary material: Online appendix.
"Small and Large Firms Over the Business Cycle," with Neil Mehrotra.
Abstract: This paper uses new confidential Census data to revisit the relationship between firm size, cyclicality, and financial frictions. First, we find that large firms (the top 1% by size) are less cyclically sensitive than the rest. Second, high and rising concentration implies that the higher cyclicality of the bottom 99% of firms only has a limited impact on aggregate fluctuations. Third, differences in cyclicality are not simply explained by financial frictions, and in fact appear largely unrelated to proxies for financial strength. Industry variation instead suggests that large firms have less cyclical customer bases, in particular due to export exposure.
"On the Effects of Restricting Short-Term Investment," with Ian Dew-Becker and Charles Nathanson.
Revise and resubmit, Review of Financial Studies.
Abstract: We study the effects of policies proposed for addressing “short-termism” in financial markets. We examine a noisy rational expectations model in which the exposures of investors and their information about fundamentals endogenously vary across horizons. In this environment, taxing or outlawing short-term investment has zero effect on the information in prices about long-term fundamentals. However, such a policy reduces the profits and utility of short- and long-term investors. Limiting the release of short-term information helps long-term investors (an objective of some policymakers) at the expense of short-term investors, but it also makes prices less informative and increases costs of speculation.
"Default, debt maturity, and investment dynamics."
Abstract: This paper studies the optimal maturity structure of debt in a standard investment model. Firms operate long-term assets, and may want to use long-term debt to reduce short-term refinancing risk. However, long-term financing may lead to debt overhang and distort investment. The maturity structure of debt should trade off these two forces. In numerical calibrations of the model, however, debt maturity is much shorter than observed among US firms. Firms shun long-term debt because debt overhang costs are large, and the benefits from long-term financing small. Potential reconciliations of the model with the data include investment irreversibility and debt covenants.
"Firm Investment and the Composition of Debt."
Abstract: This paper analyzes optimal debt structure when firms simultaneously choose the size of the project to be financed (investment), and the composition of debt between intermediated debt (bank loans) and arm's length debt (bonds). The key distinction between the two forms of debt is that, when liquidation looms, intermediated debt is easier to restructure. Absent deadweight losses in liquidation, debt structure is irrelevant to the investment choices of the entrepreneur. With liquidation losses, I show that investment is financed by a combination of bank and market finance so long as 1) banks have higher intermediation costs than markets and 2) internal resources of entrepreneurs are sufficiently small. The share of bank finance in total investment then depends non-monotonically on internal resources: firms with very limited internal resources are increasingly reliant on bank finance to expand investment, while medium-sized firms reduce the contribution of bank finance as their internal resources increase. The model's predictions finds support in cross-sectional data on the debt structure of US manufacturing firms.
"Aggregate Implications of Corporate Debt Choices."
Review of Economic Studies, October 2017.
Abstract: This paper studies the transmission of financial shocks in a model where corporeate credit is intermediated via both banks and bond markets. In choosing between bank and bond financing, firms trade off the greater flexibility of banks in case of financial distress against the lower marginal costs of large bond issuances. I find that, in response to a contraction in bank credit supply, aggregate bond issuance increases, but not enough to avoid a decline in aggregate borrowing and investment. Retiring bank loans while keeping total leverage constant would expose firms to a larger risk of financial distress; they offset this by reducing total borrowing. A calibration of the model to the Great Recession indicates that this precautionary mechanism can account for one-third of the total decline in investment by firms with access to public debt markets.
Supplemetary material: Online appendix; replication material.
"What Do Inventories Tell Us About News-Driven Business Cycles?," with Hyunseung Oh.
Journal of Monetary Economics, May 2016.
Abstract: There is widespread disagreement regarding the quantitative contribution of news shocks to business-cycle fluctuations. This paper provides a simple identifying restriction, based on inventory dynamics, that tightly pins down the contribution of news shocks to business-cycle volatility. We show that finished-good inventories must fall when there is an increase in consumption and investment induced by news shocks. A structural VAR with these sign restrictions indicates that news shocks account for at most 20 percent of output volatility. Since inventories comove positively with consumption and investment in the data, shocks that generate negative comovement cannot account for the bulk of fluctuations.
Supplemetary material: Online appendix; replication material; older version of the paper; older version of the appendix.
"Intangibles, Investment and Efficiency," with Janice Eberly.
American Economic Review, Papers and Proceedings, May 2018.
Abstract: Recent work on macroeconomic trends has emphasized slowing capital investment, but strong business profits and valuations. The retail sector is a microcosm of these trends, and accounts for a large share of the increase in aggregate business concentration also observed in recent years. We show that, in that sector, weak investment and rising concentration are associated with rising productivity. Additionally, stronger productivity is correlated with intangible investment, both over time and across sub-industries. Intangible investment may thus provide a joint explanation for rising productivity, weak capital investment and increasing industry concentration.
Online appendix; replication material.
"The Interplay Between Financial Conditions and Monetary Policy Shocks," by Bassetto, Benzoni and Serrao. Slides; replication material.
"Demand Disagreement," by Heyerdahl-Larsen and Illedistch. Slides; replication material.
"The Finance-Uncertainty Multiplier," by Alfaro, Bloom and Lin. Slides; replication material.
"Leverage Over the Life-Cycle and Implications for Firm Growth and Shock Responsiveness," by Dinlersoz, Kalemli-Ozcan, Hyatt and Penciakova. Slides; replication material.