Current Research
(*indicates presentation by coauthor; ^indicates scheduled presentation; ~indicates canceled presentation)
Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms?
with Kunal Sachdeva, André Silva, and Pablo Slutzky
Accepted for publication, Journal of Financial Economics
Abstract: This paper examines the effects of targeted credit rationing by banks on firms likely to generate negative externalities. We exploit an initiative of the U.S. Department of Justice, labeled Operation Choke Point, which compelled banks to limit relationships with firms in controversial industries. Using supervisory loan-level data, we find that, as intended, targeted banks reduced lending and terminated relationships with affected firms. However, most of these firms fully substituted credit through non-targeted banks under similar terms. Overall, the performance and investment of affected firms remained unchanged, suggesting that targeted credit rationing is widely ineffective in promoting change.
Government Litigation Risk and the Decline in Low-Income Mortgage Lending
with Scott Frame, Kristopher Gerardi, Erik Mayer, and Lawrence Zhao
Revise & Resubmit, Journal of Financial Economics
Abstract: We study the effect of Department of Justice lawsuits in the 2010s against large lenders for alleged fraud in the Federal Housing Administration (FHA) mortgage insurance program. The suits led to over $5 billion in settlements and caused targeted banks and their peers to precipitously exit the FHA market. Difference-in-differences and triple differences tests exploiting geographic variation in exposure to exiting banks show a 20% reduction in FHA lending in heavily exposed areas. This reduction was not associated with improved underwriting standards or lower default rates. Large banks’ FHA exit has significantly reduced low-income households’ overall access to mortgage credit.
A previous version of this paper was circulated under the title “Fraud Litigation and FHA Mortgage Lending”
Best Paper semifinalist - Financial Management Association (2023)
Presentations: American Economic Association Annual Meeting, American Real Estate and Urban Economics Association Annual Meeting*, American Real Estate and Urban Economics Association (International) Annual Meeting*, Australian National University*, Boca-ECGI Corporate Finance and Governance Conference, Cornell Real Estate Symposium*, Eastern Finance Association Annual Meeting*, Emory University (Goizueta)*, FDIC Bank Research Conference*, Federal Reserve Bank of Atlanta*, Federal Reserve Bank of Philadelphia*, Financial Management Association Annual Meeting*, FSU-UF Critical Issues in Real Estate Symposium*, Hoyt Institute*, INFORMS*, INSEAD*, Lone Star Finance Conference*, Texas Tech University* (Rawls), University of Maryland Junior Finance Conference*, University of Rochester (Simon), University of Virginia* (Economics), University of Wisconsin-Madison (Wisconsin School of Business)*^, Virtual Household Finance Seminar*
The Consequences of Access to Credit in Early Adulthood: Evidence from the CARD Act
Abstract: I study how access to credit matters for young adults. Using a triple difference strategy, I show that a U.S. federal law reduced the supply of credit cards to consumers under 21. However, affected borrowers with credit records prior to the law experienced an increased likelihood of late payments and decreased credit scores, likely due in part to difficulties refinancing pre-existing credit card debt. The law also impacted future cohorts entering adulthood. Eighteen-year-olds became less likely to own credit cards and have credit records. Those with credit records were less likely to have outstanding late payments, suggesting a change in the composition of early credit market entrants. The increased absence of credit records also led to a decrease in access to car loans but not student loans. My results suggest that laws limiting early credit access can have important unintended consequences.
Presentations: Eastern Finance Association Annual Meeting, Federal Reserve Board of Governors, Financial Management Association (Doctoral Student Consortium), Rice University (Jones), Southern Methodist University (Cox), University of Kentucky (Gatton), University of Rochester (Simon), Virginia Tech~ (Pamplin)
Financial Breakups: Till Debt Do Us Part
with Alexander Butler, Ioannis Spyridopoulos, and Yessenia Tellez
Abstract: We use a large representative sample of individual credit bureau records to document the effect of financial distress and debt relief on divorce rates. Foreclosures increase the rate of marital dissolution, whereas Chapter 13 bankruptcies, which protect debtors from foreclosure, have the opposite effect. These financial events' effects are distinct from health- or employment-related shocks. We exploit post-disaster financial assistance programs and judicial district dismissal rates as instruments to isolate exogenous variation in foreclosure probability and Chapter 13 dismissal rates. Our findings highlight the role of financial stability and housing security as determinants of family structures and suggest that government policies that favor debt relief spill over to non-financial outcomes.
Presentations: American University (Kogod)*, SFS Cavalcade Conference, Commonwealth Finance Workshop*, Eastern Finance Association Annual Meeting, Virginia Tech* (Pamplin), University of Rochester (Simon)
Contagious Deregulation
with Joseph Kalmenovitz and Jakub Hajda
Abstract: Each year, the federal government distributes $900 billion in grants to nonprofit organizations. Grants exceeding a specified threshold are reviewed by an auditor who is chosen by the recipient. Using a unique grant-level dataset covering $23.7 trillion in grants, we exploit a major deregulatory reform that raised the threshold and exempted nearly 10% of grants from auditing. In a difference-in-differences framework, we find that treated auditors -- who had clients below the new threshold before the reform -- nearly ceased to issue negative audits for their remaining clients after the reform. Further tests show that treated auditors struggled to retain clients after the reform and offered more lax supervision to stay competitive. Thus, the deregulation of smaller grants unintentionally weakened the oversight of larger, non-deregulated grants. In a structural model, we identify key cost factors that discourage auditors from issuing negative opinions, especially when the demand for auditors declines. We estimate that the deregulation nearly doubled those costs, prompting auditors to show leniency even when clients potentially mismanage their grants. We evaluate alternative policies, such as subsidizing auditor costs or nationalizing the auditing process, to deregulate markets without compromising the quality of monitoring. Combined, our paper reveals the unintended contagion effect of deregulation, which can impose externalities on non-deregulated firms, service providers, and taxpayers.
Presentations: New York University (Stern)*^