My research spans the areas of banking, corporate finance and macroeconomics. In my job market paper, I study how near-zero interest rates affect bank competition and financial regulation. A common theme in my other papers is the growing importance of intangible and human capital, and its implications for corporate finance, investment, and the wider macro-economy.
How do near-zero interest rates affect bank competition, risk taking and regulation? I study these questions in a tractable dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, and deposit insurance may induce excessive risk taking. The zero lower bound on deposit rates (ZLB) makes capital regulation less effective in curbing risk shifting incentives, exactly during times of low interest rates when risk taking incentives are already heightened. The problem is that at the ZLB banks cannot pass on the cost of capital to depositors, such that tight capital requirements erode franchise value, countervailing the usual "skin in the game" effect. As a result, optimal capital requirements vary with the level of interest rates, highlighting a novel interaction between monetary and macro-prudential policies. Complementing existing regulation with policy tools that subsidize the funding cost of banks may improve welfare at the ZLB.
Skill-biased technological progress enhancing the productivity of intangible capital can account for major financial trends since 1980. Creating intangibles requires commitment of human capital rather than physical investment, so firms need less external finance. As innovative technology becomes more productive, innovators gain a rising income share. The general equilibrium effect is a falling credit demand that can explain declining investment and corporate leverage in a period of falling interest rates. Lower rates boost asset valuation, and lead to rising mortgage credit demand to fund house purchases. The combination of rising house prices and increasing wage inequality raises household leverage and mortgage default risk. A strongly redistributive shift towards intangibles can account for the evolution of major economic and financial variables since 1980, including income polarization and a reallocation of credit from productive to asset financing. While demographics, trade and capital flows may have a strong impact on savings glut and factor productivity, they cannot explain the weak demand for external finance by firms.
We model how technological change leads to a shift in corporate investment towards intangible capital, and test its implications for corporate financial policy. While tangible assets can be purchased and funded externally, most intangible capital is created by skilled workers investing their human capital, so it requires lower upfront outlays. Indeed, U.S. high-intangibles firms have larger free cashflows and lower measured investment spending, and do not appear more financially constrained. We model and test how these firms optimally retain cash for both a precautionary as well as a retention motive. The optimal reward for risk-averse human capital involves deferred compensation and a commitment to retain cash. High-intangibles firms also should favor a payout policy of repurchases over dividends to avoid penalizing unvested claims. Our empirical evidence supports these predictions.
We analyze private fixed investment across European economies and in the US over the past 20 years, focusing on tangible and intangible investment and the role of competition and financial constraints. In both regions, we find that investment is weak, but we argue that the reasons are more cyclical in Europe and more structural in the US. In the US, we find that investment is lower than predicted by fundamentals starting around 2000, and that the gap is driven by industries where competition has decreased over time. The decline in US investment has coincided with increased concentration and decreased anti-trust enforcement. In Europe, on the other hand, investment is roughly in line with measures of profitability and Tobin’s Q for the majority countries, except at the peak of the crisis, most notably Spain and Italy. Unlike in the US, concentration has been stable or even declining in Europe, while product market regulation have decreased and anti-trust regulation has increased. Regarding intangible investment, we find that it accounts for some but not all of the weakness in measured investment. We also find that EU firms have been catching up with their US counterparts in intangible capital. The process of intangible deepening happens mostly within firms in Europe, as opposed to between firms in the US.