Surges and Instability: the Maturity Shortening Channel (2022)
with Xiang Li
[Publisher Version] [SSRN] [Replication Files] [Abstract]
Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.
Journal of International Economics (Vol. 139)
MLU School of Economics and Business Best Paper Award
Total Factor Productivity Growth at the Firm-Level: The Effects of Capital Account Liberalization (2022)
with Xiang Li
[Publisher Version] [SSRN] [Replication Files] [Abstract]
This study provides firm-level evidence on the effect of capital account liberalization on total factor productivity (TFP) growth. We find that a one standard deviation increase in the capital account openness indicator constructed by Fernández et al. (2016) is significantly associated with a 0.18 standard deviation increase in firms’ TFP growth rates. The productivity-enhancing effects are stronger for sectors with higher external finance dependence and capital-skill complementarity, and are persistent five years after liberalization. Moreover, we show that potential transmission mechanisms include improved financing conditions, greater skilled labor utilization, and technology upgrades. Finally, we document heterogeneous effects across firm size and tradability, and threshold effects with respect to the country's institutional quality.
Journal of International Economics (Vol. 139)
Trust, Finance, and the Intangible Economy (Latest version: July 2024)
with Rusi Yan
[Draft] [Abstract]
We emphasize the significant social and financial hurdles in a country's transition to an intangible economy. Our findings reveal a strong correlation between a country's *social trust*, its *economic structure* —reflected by the proportion of intangible-intensive sectors—and its *financial structure*, marked by the prevalence of cash-flow-based over asset-based lending. This relationship is explained through a two-sector growth model with endogenous economic and financial structures, where trust affects the difficulty of borrowing without collateral. Our model identifies multiple steady states and illustrates that in a high-trust equilibrium, the feedback loop between the development of earnings-based lending technology and the growth of the intangible-intensive sector significantly boosts aggregate productivity. Lastly, our quantitative analysis underscores the crucial role of social trust in explaining cross-country differences in productivity and intangible capital via the *type* of financial friction channel.
The Crumbling Wall between Crypto and Non-crypto Markets: Risk Transmission through Stablecoins (Latest version: May 2024)
with Yiping Huang, Yang Ji, Juan Lin, and Peng Wang
[Draft] [Abstract]
The crypto and non-crypto markets used to be separate from each other. However, we argue that risks are now being transmitted across the two markets via stablecoins, which are pegged to dollars and hold a crucial role in crypto trading. We employ a theoretical framework to demonstrate that the risks originating from the dollar market are shifted to cryptocurrencies through changes in stablecoins' token supply, and risks originating from cryptocurrencies could be shifted to the dollar market by adjustments in stablecoins' dollar reserves. Moreover, the risk transmission could be asymmetric, when stablecoins have ample reserves to effectively absorb all initial shock from the crypto market but are unable to hedge against the shocks from the dollar market. Employing copula-based CoVaR approaches, we provide empirical evidence consistent with the model predictions.
Firm-level Uncertainty and Productivity: the Financial Friction Channel (Latest version: May 2024)
with Xiang Li
[Draft] [Abstract]
This paper examines the real implications of firm-level risk amid financial friction. Empirically, we demonstrate that productivity accounts for approximately 68% of the negative impacts of uncertainty on output, whereas the reduction in physical capital investment accounts for only 3%. We interpret these findings using a dynamic model with endogenous productivity growth and defaultable debt. Uncertainty has little impact on the expected level of cash flows but increases the default probability and hence tightens the borrowing limit. This leads firms to replace productivity-enhancing efforts with physical capital accumulation, which is important for corporate liquidation value and therefore the debt price.
Why Do Powerful Firms Hold Excessive Cash? (Latest version: May 2024)
[Draft] [Abstract]
This paper investigates the cross-sectional relationship between corporate market power and cash holdings. To begin with, we empirically show that firms with higher markup tend to have larger cash holdings on their balance sheets. Then we rationalize this empirical finding in a model with risky markup and costly external financing. Changes in consumers' taste for quality and producers' marginal production cost increase the earnings-quality gradient sharply in the right tail, which generates a "winners-take-most" phenomenon but also makes current winners inherently riskier. In the presence of external financing costs, firms with risky market power are inclined to rely more on internal financing. Finally, when taken to the data, our model is able to quantitatively match both the upward trend and the cross-sectional variation in corporate cash.
Magic Formula or Futile Effort: Lessons from China's Two-Tiered Government Guided Funds (Latest version: April 2024)
with Erica Xuenan Li and Zhao Jin
[Draft] [Abstract]
Governments worldwide have increasingly embraced industrial policies in recent years. Can these endeavours lead to sustainable growth and on what conditions? Learning from Chinas unique two-tiered Government Guided Funds, we demonstrate that the selection of targeted industries and the political and economic endowments of the government are pivotal factors influencing the success of industrial policies. Sustainable growth is observed only when targeted industries are under-invested by private investors and exhibit high externality, diffusing growth along the production network. In addition, governments must exhibit low corruption and high efficiency, while regions possess ample investment opportunities, sufficient talent pools, and high labor productivity.
BigTech Credit, Small Business, and Monetary Policy Transmission: Theory and Evidence (Latest version: April 2024)
with Yiping Huang, Xiang Li, Han Qiu, and Changhua Yu
[Draft] [Abstract]
This paper provides both theoretical and empirical analyses of the differences between BigTech lenders and traditional banks in response to monetary policy changes. Our model integrates Knightian uncertainty into portfolio selection and posits that BigTech lenders possess a diminishing informational advantage with increasing firm size, resulting in reduced ambiguity when lending to smaller firms. The model suggests that the key distinction between BigTech lenders and traditional banks in response to shifts in funding costs, triggered by monetary policy changes, is more evident at the extensive margin rather than the intensive margin, particularly during periods of easing monetary policy. Using a micro-level dataset of small business loans from both types of lenders, we provide empirical support for our theoretical propositions. Our results show that BigTech lenders are more responsive in establishing new lending relationships in an easing monetary policy environment, while the differences in loan amounts are not statistically significant. We also discuss other loan terms and the implications of regulatory policies.
The Change in Corporate Production Function: Theory and Evidence (Latest version: September 2023)
with Erica Xuenan Li and Guoliang Ma
[Draft] [Bloomberg] [Abstract]
The assumption of a concave production function is a key foundation in the economics literature. However, using the Bayesian Markov Chain Monte Carlo (MCMC) changepoint estimation, we document that the corporate production function has changed to a sigmoidal (convex-concave) one since the 1980s, and the convexity component has become increasingly important over time. This long-run trend occurs for the majority of the industries. Finally, we build a dynamic framework to study the implications of such change in production function on markup, net earnings, and asset prices, and provide empirical evidence.
The Macroeconomics of BigTech (Latest version: July 2023)
[Draft] [Abstract]
This paper investigates the macroeconomics of BigTech. Compared to banks whose key characteristic is the standard collateral-based borrowing constraint, the essential feature of BigTech is the expected-earnings-based lending. Our model implications are twofold. First, BigTech has an efficiency-instability tradeoff as it leads to less misallocation but a higher default rate in the steady state. Second, BigTech can be interpreted as a different financial accelerator from the classical one as it generates persistent impacts on aggregate outputs through amplifying and propagating the second-moment micro-uncertainty shocks. Finally, we discuss the role of algorithm bias and optimal BigTech development.
Journal of Finance and Data Science Conference Best Paper Award
The Capital Matthew Effect: Directed Technical Change and International Capital Flows (Latest version: July 2023)
[Draft] [Abstract]
This study shows that technological specialization is the primary driver of long-term international capital flows. The underlying mechanism comprises the two faces of capital scarcity: although a shortage of capital currently generates a higher marginal product, it also makes a country inclined toward capital-saving technology. Therefore, in equilibrium, the rate of capital returns is jointly determined by a convergence effect from the law of diminishing return and an opposing divergence effect from directed technological change. Initially capital-rich countries favor capital-complements-biased technology and continuously import capital from capital-poor countries that develop capital-substitutes-biased technology. We name this anti-convergence force on capital allocation the capital Matthew effect. This new perspective can help rationalize many related international finance puzzles, including the Lucas paradox, global imbalance, and allocation puzzle. Finally, we provide some empirical evidence supporting this new model mechanism.
The "Misallocation" of Internal Financing (Latest version: May 2023)
[Draft] [All About Finance] [Abstract]
This paper investigates the "misallocation" implications of corporate internal financing. We introduce corporate risk management into a standard continuous-time heterogeneous agent model with incomplete markets. We show that the economy's ability to allocate resources through the price mechanism is bounded by corporate internal savings as there is no market to equalize the marginal value of internal resources across firms. In other words, corporate cash can help achieve dynamic efficiency across times at the firm level but not static efficiency across individuals at the macro level. More importantly, misallocation -- defined as the static resource allocation efficiency across individuals -- increases in an economy where firms rely more on internal financing due to the increased earnings risk. Finally, our model can quantitatively match the deteriorating capital allocation efficiency in the U.S. data.
Western Finance Association Ph.D. Candidate Awards For Outstanding Research
Within Gain, Structural Pain (Latest version: July 2018)
with Xiang Li
[Draft] [Abstract]
This paper is the first to study the effects of capital account liberalization on structural transformation and compare the contribution of within term and structural term to economic growth. We use a 10-sector-level productivity data set to decompose the effects of opening capital account on within-sector productivity growth and cross-sector structural transformation. We find that opening capital account is associated with labor productivity and employment share increment in sectors with higher human capital intensity and external financial dependence, as well as non-trad-able sectors. But it results in a growth-reducing structural transformation by directing labor into sectors with lower productivity. Moreover, in the ten years after capital account liberalization, the contribution share of structural transformation decreases while that of within productivity growth increases. We conclude that the relationship between capital account liberalization and economic growth is within gain and structural pain.
How do government guidance funds affect enterprise digital transformation? Evidence from China’s new energy industry
by 韩洁 刘涛 伍骏骞
第六届微观经济数据与经济学理论创新论坛
Misallocation and Asset Prices
by Winston Wei Dou, Yan Ji, Di Tian, and Pengfei Wang
CFRC 2024
Technology Adoption and Leapfrogging: Racing for Mobile Payments
by Pengfei Han and Zhu Wang
CFRC 2024
Optimal Inflation Rate in a Heterogeneous Agent Economy
by Yitong Wang and Shenghao Zhu
NSD Money Study Group Workshop 2024
Diversity, Equity, and Inclusion
by Simon Glossner, Alex Edmans, and Caroline Flammer
Paris December Meeting 2023
Consumption-led Industrial Upgrading
by Xuewen Liu and Sichuang Xu
CFRC 2023
How does Strategic Cooperation in Fintech Field Affect the Efficiency of Commercial Banks? Evidence from China
by Zhiming Ao, Yonghong Jiang, Bin Mo, and He Nie
AMES China 2023
法治建设与债券市场⾼质量发展：基于破产法庭成⽴的准⾃然实验
by 李松楠 李劢 李波 刘晓蕾
2022 光华国际⾦融研讨会
Competitiveness, 'Superstar' Firms and Capital Flows
by Lidia Smitkova
Lisbon Macro Workshop 2022