Department of Finance, KMC 9-83
Areas of Research and Teaching Interests:
Corporate Finance, Valuation, Corporate Governance, Financial Intermediation and Banking, Economics of Asymmetric Information, Financial Contracting
Degree in Business Economics (Finance),
· Visiting Assistant Professor of Finance, Stern School of Business, New York University, September 2005 – present.
Assistant Professor of Finance,
Assistant Professor of Finance & Ph.D. Student,
Honors and Awards:
Voted in top 3 of Best Professors in Executive MBA Program Stern,
Award, PMBA Electives,
Award, PMBA Electives,
Award, BSBA Electives,
Award, BSBA Electives,
Award, BSBA Electives,
· Best Finance Paper published in Economische Statistische Berichten, 1999-2000
· Member of the American Finance Association (AFA)
· Member of the Western Finance Association (WFA)
· Member of the Financial Intermediation Research Society (FIRS)
· Member of the European Finance Association (EFA)
My research focuses primarily on the interaction between financial intermediaries and firms’ financing choices. In particular, I examine the economic role of financial intermediaries (e.g., banks and credit rating agencies), and analyze how the organization and the competitive structure of the financial sector affect the financial contract and funding source choices made by corporations. In addition, I am interested in the design of effective corporate governance arrangements within firms and industries.
Working Papers and Work in Progress:
Abstract: In this paper we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordination mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a “focal point” for firms and their investors, and explore the vital but previously overlooked implicit contractual relationship between a credit rating agency and a firm via its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several new empirical predictions and insights regarding the expected price impact of rating changes.
Abstract: This paper provides a rationale for the use of discretion in bank loan contracts. Discretion allows banks which produce information on borrowers to optimally adapt contract terms to “soft” or non-verifiable information in the course of lending. This facilitates investment efficiency and also allows for wealth redistributions in favor of firms with good investment opportunities. I show that the optimality of discretion depends critically on bank quality and the degree of lender competition. If bank quality is low and/or lender competition is limited, enforceable bank contracts and financial market contracts dominate discretionary contracts. Moreover, I show that the relative importance of bank financing vis-à-vis financial market financing is non-monotonic in bank quality. The paper has implications for the competitive position of banks and emphasizes the value of relationship lending in a competitive environment.
Abstract: In this paper we identify the tradeoff between
objectivity and proximity as fundamental to the corporate governance debate. We
stress the value of objectivity that comes with distance (e.g., the market-oriented
Abstract: In this paper we empirically examine the stock price response to credit rating changes, with a particular focus on the credit watch procedure. The credit watch procedure allows for an ongoing monitoring role of the credit rating agency and implicit contracting between the rating agency and a firm in the event of a potential change in the firm’s credit quality. Previous empirical work has not conditioned on the presence of a credit watch, and thus may not have accurately measured the true informational content of rating changes. This paper builds on our theoretical paper which provides a novel rationale for credit ratings and the credit watch procedure (see Boot, Milbourn and Schmeits, 2004). We revisit some of the mixed empirical evidence regarding rating changes and test several new predictions with respect to cross-sectional differences in stock price responses to rating changes, credit watch announcements and the resolution of credit watch procedures, as well as the likelihood that firms are put on credit watch. We furthermore analyze how the introduction of Regulation FD has affected the informational value of credit ratings. Finally, we examine in a broader context in what type of economic environment credit rating agencies can be expected to have more or less impact (looking at factors like transparency, industry factors and uncertainty).
Abstract: This paper focuses on the determinants of the prime (base) bank lending rates for a large number of countries. Using monthly Datastream data on bank and market interest rates, we examine: (i) the correlation between bank and market-determined interest rates within and across countries; (ii) the relative size and determinants of intermediation spreads (i.e., the margin of the prime rate over banks’ underlying cost of funds); and (iii) the sensitivity of prime rate changes to changes in the banks’ cost of funds (i.e., the “stickiness” of bank interest rates). Our preliminary findings indicate that, during the period 1986-1998: (i) the correlations between bank loan rates are much weaker than those between government bond rates; (ii) there are substantial international differences in the relative size of the intermediation spread as well as in the degree of asymmetry in prime rate responses to changes in the banks’ cost of funds. These results point at differences in the competitive structure of the banking industry between countries and allow for a novel way of modeling bank competition. We also try to determine a way to empirically differentiate between an “intertemporal smoothing” effect and a “market power effect”, both of which could be consistent with our preliminary findings.
· “Loan Syndication: Competition and Coordination between Lenders” (joint with Arnoud W.A. Boot).
· “The Holding Company Discount” (joint with Anthony Saunders).
· “Endogenous Liquidity and Precommitment” (joint with Phil H. Dybvig).
Abstract: In this paper we show that an asset market with adverse selection can be subject to financial fragility, in the form of multiple equilibria. We analyze the implications of this coordination problem, and examine under which conditions precommitment by market makers to provide liquidity (i.e., a promise by market makers to make a market) can be beneficial. We find that precommitment does not only eliminate financial fragility, but dominates the best equilibrium in the absence of precommitment. Finally, we analyze the impact of the ex ante competitive structure of the market on these results.
Policy-Oriented Papers and Publications in Dutch:
interest in the Private Equity Market”, Maandblad voor Accountancy en
Bedrijfseconomie 81, 312-322, July 2007. Reprinted in Private
Equity and Shareholder Activism (Arnoud W.A. Boot, ed.), Topics
in Corporate Finance 15,
in the Capital Market and Government Intervention” (joint with Arnoud W.A.
Boot), Chapter 4 in Pre-advice on Government Policy, Finance and
Innovation in the
· Editorial on “Competition in the Dutch banking Sector”, Het Financieele Dagblad (Dutch Financial Times), February 12, 2002.
· “Firms and Financial Markets” (joint with Arnoud W.A. Boot), Chapter 3 in Pre-advice on the Repositioning of Firms (H. Schenk ed.), Koninklijke Vereniging voor de Staathuishoudkunde (Dutch Society of Economists’ Advice to Government), 31-63, September 2001 (invited article).
· “The Efficiency of the Conglomeration Wave in Banking” (joint with Arnoud W.A. Boot), Economische Statistische Berichten, 704-709, October 1999 (awarded best paper in finance and reprinted in Annual Volume of the Dutch Society of Economists, 1999-2000).
· “The Cost of Capital, Agency and Informational Problems” (joint with Jeroen E. Ligterink), Maandblad voor Accountancy en Bedrijfseconomie 73, 196-207, April 1999.
· “An International Comparison of the Cost of Capital” (joint with Jeroen E. Ligterink and Arnoud W.A. Boot), Maandblad voor Accountancy en Bedrijfseconomie 73, 329-340, June 1999.
· “The Market for Corporate Bonds” (joint with Jeroen E. Ligterink), Economische Statistische Berichten, 404-406, May 1998.
· “The Cost of Debt from an International Perspective” (joint with Arnoud W.A. Boot and Jeroen E. Ligterink), Research Report, Ministry of Finance, April 1997.
· “Government Intervention in the Financing of Industry” (joint with Arnoud W.A. Boot), Economische Statistische Berichten, 928-932, November 1996.
· “The Interaction between Investment and Finance; An Integrated Approach”, Maandblad voor Accountancy en Bedrijfseconomie 67, 14-27, March 1993.
I have taught Corporate Finance, Advanced Corporate Finance and Valuation in all degree programs at Olin (BSBA, Full-time MBA, Professional MBA and Shanghai Executive MBA) before joining NYU. At Stern, I have taught Corporate Finance in the Full-time MBA and Langone Programs, Financial Management in the BSBA Program, and both Corporate Finance and Valuation in the Executive MBA Program. In addition, I teach customized finance courses in Executive Programs at Stern.
All my teaching materials and course information are posted at Blackboard and can be accessed by students enrolled in the course at http://sternclasses.nyu.edu/.