Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels
Review-and-resubmit at the Journal of Financial Economics
Co-authors: Viral Acharya, Ryan Banerjee, Tim Eisert, Renée Spigt, November 2023
AFA 2022 · EFA 2022 · NBER SI EFEL 2021 ·  Oxford Macro-Finance 2021 · NBER SI CF/RISK 2022
Paper · BibTeX · Liberty Street · FT · Bloomberg

Abstract: We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels—risky firms just above the IG cutoff—enjoyed subsidized bond financing in 2009-19. This effect is driven by Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, (ii) increased market share affecting competitors’ employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.

Stakeholders’ Aversion to Inequality and Bank Lending to Minorities
Co-author: Hanh Le, November 2023
MoFiR 2023
Paper · BibTeX

Abstract: We find that banks differ in their propensity to lend to minorities based on their stakeholders’ aversion to inequality. Using mortgage application data collected under the Home Mortgage Disclosure Act, we document a large and persistent cross-sectional variation in banks’ propensity to lend to minorities. Inequality-averse banks have a higher propensity to lend to borrowers in high-minority areas and, within census tracts, to non-white borrowers compared to other banks. This higher propensity (i) is not explained by selection of applicants, (ii) allows these banks to retain and attract their inequality-averse stakeholders, and (iii) does not predict worse ex-post loan performance.

Geopolitical Risk and Decoupling: Evidence from U.S. Export Controls
Co-authors: Lina Han, Marco Macchiavelli, André Silva, September 2023
CEPR & Kiel Institute Geonomics Conference 2023
Paper · BibTeX

Abstract: Amid the current U.S.-China technological race, the U.S. has imposed export controls to deny China access to strategic technologies. We document that these measures induced sizable losses on U.S. exporters, prompting a broad-based decoupling of U.S. and Chinese supply chains. Once their Chinese customers are added to the export control list, U.S. suppliers experience negative abnormal stock returns, wiping out $130 billion in market capitalization, as well as a drop in profitability and employment. These suppliers are also more likely to terminate relations with Chinese customers, including those not targeted by export controls. We find no evidence of reshoring.

How do supply shocks to inflation generalize? Evidence from the pandemic era in Europe
Co-authors: Viral Acharya, Tim Eisert, Christian Eufinger, November 2023
CEPR Paris Symposium 2023
Paper · BibTeX · FT

Abstract: We document how the interaction of supply-chain pressures, heightened household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply-chain pressures increased inflation through a cost-push channel and raised inflation expectations. Subsequently, the cost-push channel intensified as firms with high pricing power increased product markups in sectors witnessing high demand. Eventually, even though supply-chain pressures eased, these firms were able to further increase markups due to the stickiness of inflation expectations. The resulting persistent impact on inflation suggests supply-side impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power.