Job Market Paper
The Downstream Channel of Financial Constraints and the Amplification of Aggregate Downturns (with G. Cortes)
Runner up, Best Paper in Corporate Finance, FMA 2021
Presentations (*scheduled): Eastern Finance Association 2022*, AFA 2022 (Poster Session), Australasian Finance & Banking Conference 2021, FMA 2021, Vietnam Symposium in Banking and Finance 2021, Latin American Meeting of the Econometric Society 2021, UIUC.
We identify a novel channel through which financial constraints propagate in the production chain. Exploiting recent developments on production network data of US-listed firms, we show that firms experience greater valuation losses during industry downturns when their suppliers are financially constrained. Importantly, our empirical approach allows us to disentangle and quantify the contribution of both horizontal and vertical relations on firms' exposure to aggregate shocks. Our baseline downstream amplification effect corresponds to roughly 60% of the horizontal amplification documented in the literature. We find stronger impacts of downturns when: (i) suppliers are more constrained; (ii) firms depend more on specific inputs; and (iii) suppliers are more concentrated. The effects are attenuated or muted at high levels of downstream firms' accounts payable and upstream firms' accounts receivable, suggesting trade credit as a mechanism through which the downstream channel operates. Our findings uncover two network implications of financing constraints: a more severe contagion of negative shocks through supplier-customer links and an amplification of downstream industries' aggregate valuation losses. Our results lend support to policies that facilitate trade credit in upstream segments during crises.
We develop a model in which feedback effects from equity markets to firms' access to finance allow uninformed traders to profit by short selling a firm's stock while going long on its competitor. Because this strategy distorts the investment incentives of the firm targeted by short selling to the benefit of its rival, we label it predatory stock price manipulation. Our model shows that predatory manipulation decreases investment efficiency and affects market concentration. Our analysis further unveils product market competition as a channel through which buy orders increase manipulation profits and effectiveness, providing new insights into short sales regulation.
Trade Networks and Diffusion of Regulatory Standards (with P. Thakur)
Presentations ( By coauthor): MEA 2021, North American Meeting of the Regional Science Association 2020, Mid-Continent Regional Science Association 2019 , UIUC.
We study network effects in the diffusion of regulatory standards through international trade. Employing spatial econometric techniques to trade networks, we show that countries are more likely to domestically adopt regulations that they comply with while exporting. We find evidence of such diffusion primarily in regulations concerning attributes of the final product rather than production processes. Consistent with a network effect, we show that countries more open to international trade are the drivers of regulatory diffusion. In an analysis of diffusion in individual features within labelling regulations—the most prevalent regulations in our data—we find that labelling requirements ensuring the safety of use propagate the most, and countries tend to domestically adopt features similar to those imposed by their importing partners. Overall, our results support the argument that economic integration can facilitate the strengthening of regulatory standards.
Short Selling and Product Market Competition (with R. Matta and P. Vaz)
Presentations ( By coauthor): Latin American Meeting of the Econometric Society 2019, Brazilian Meeting of the Econometric Society 2019 , UFPE , UIUC.
This paper empirically investigates how short selling affects product market performance. First, we document a negative association between short interest and US-listed firms' share of industry sales that is driven solely by large firms. To causally identify the effects of short selling, we exploit a natural experiment in which constraints on short sales were relaxed for a randomized group of firms. We show that treated firms experienced decreases in market share relative to industry peers in the control group. The effects are stronger in larger firms, concentrated industries, and industries where firms compete in strategic substitutes. Further tests suggest that product market interactions amplify the responsiveness of firms' output levels to the release of information caused by short selling. Our findings are consistent with a managerial disciplining channel in which short interest reveals information of inefficient overreach by firms with market power, leading to downsizing and spin-offs. Hence, short selling can act as a substitute to competitive pressure in terms of inducing better governance.
Work in Progress
We will study the impact of retailers' entry and exit decisions on local markets. We explore synergies between stores at nearby localities to gauge economies of agglomeration and estimate the local propagation of shocks related to entry/exit decisions of retailers. We will investigate whether financially sound firms are better able to exploit investment opportunities during local market shocks. We combine data from multiple sources to build a comprehensive sample of U.S retailers. We use these data to compute local stores connectedness in a novel way to capture how financial fragility shapes the responses of stores to local shocks. We believe this project will broaden our understanding of the financial aspects of the "retail apocalypse" phenomenon.
Transboundary Diffusion of Regulations: Role of Product Proximity and Product Heterogeneity (with P. Thakur)
International trade can foster policy coordination among countries by facilitating regulatory diffusion from regulation-imposing importers to their exporting partners. Moreover, the ease of adoption of a regulation depends on the value added from adoption, which can vary by type of commodity, and the proximity of the commodity to another for which the regulation has already been implemented. In this project, we expand our analysis in Rocha and Thakur (2021) to assess indirect propagation across commodities and product characteristics driving regulatory diffusion. We use an extensive dataset of multiple regulations imposed on imported goods by countries over the years for several traded commodities. Expanding usual spatial econometric techniques to panels of high dimensionality, we intend to quantify and contrast the direct within-commodity and indirect cross-commodity channels of diffusion. By combining our data with information on product complexity, hazardousness, and end-use, we will be able to determine product characteristics that are more strongly associated with diffusion due to pressure from importers.