Curriculum Vitae

Asset Pricing with Entry and Imperfect Competition (Job Market Paper)

Abstract: I study the implications of fluctuations in new firm creation across industries for asset prices and macroeconomic quantities. I write a general equilibrium model with heterogeneous industries, allowing for firm entry and time variation in markups. Firms entering an industry increase competition and displace incumbents' monopoly rents. This mechanism is strongest in industries that exhibit high profit margins and high elasticity of innovation to the cost of entry. A positive shock to the aggregate cost of entry increases the marginal utility of consumption —the price of entry risk is negative. Therefore, firms with more exposure to rents' displacement have higher expected excess returns. Using micro-level data on entry rates, I trace out the impact of firm creation on incumbent firms' profitability and stock returns. The effect is strongest for the types of industries the model predicts. I confirm aggregate entry risk is priced: differential exposure to the aggregate entry shock explains a large fraction of the cross-industry variation in expected returns.

Working papers

Buyout activity and aggregate discount rates (with Valentin Haddad and Matthew Plosser)

Abstract: We provide a novel explanation of leveraged buyout (LBO) waves based on the role of aggregate discount rates. We develop a model in which an LBO eliminates agency costs that impede the firm's growth but require investors to hold an undiversified position. Discount rates impact the value of a deal through two channels: the value of agency costs and the illiquidity premium demanded by buyout investors. We conclude that more LBOs should occur when risk-free rates are high and the risk premium is low. In a panel dataset of public companies from 1980 to 2009, we confirm that LBO activity is positively related to the risk-free rate and negatively related to expected excess returns. We find the aggregate discount rate explains a large portion of the time-series variation and is a more important determinant of activity than credit market factors. We find further support for our view in the cross-section; the model predicts firms with higher exposure to systematic shocks and higher idiosyncratic risk are less attractive LBO candidates. In the data, we find firms are less likely to privatize if they have a high market beta, residual variance, or cash flow volatility.

References:

Prof. Jonathan A. Parker (Committee Chair)
Prof. Martin Eichenbaum
Prof. Lars Peter Hansen
Prof. Dimitris Papanikolaou