Working Papers:

Domestic Bank Channeled Foreign Credit — a Blessing or a Curse: Evidence from China
(with Douglas Xu) (Job Market Paper) [Draft]


Domestic banks in emerging market economies (EMEs) are playing an increasingly important role in transmitting cross-border credit to these economies. This paper proposes and empirically identifies a novel channel through which this structural change in cross-border credit flow generates impact on real economic outcomes. Through exploiting a unique cross-region heterogeneity of domestic global bank distribution in China, we investigate the real effect of structural difference in cross-border credit across cities in China during the 2003-2009 global financing cycle. We find that regions in which a larger share of foreign credit being channeled by domestic banks are associated with more volatile real economic outcomes over the global financing cycle. Examination of deal level data on the lending relationships of domestic banks without access to international financial market reveals that a more susceptible domestic credit intermediation is a main driving force behind the excess real fluctuations. Furthermore, using disaggregate firm-level balance sheet data, we find evidences suggesting that firms increase their tangible asset holding significantly during the easing phase of global financing cycle when access to domestic bank channeled foreign credit is available. This asset structure distorting behavior on firm side results in a larger plummet in price of fixed-value collateralizable assets when global financial condition tightens and leaves the local economy in more severe downturns.

Rise of Domestic Banks in EME Cross-border Capital Transmission (with Douglas Xu) [Draft]


While the volume of cross-border capital inflow to emerging market economies (EMEs) has been increasing since 1970s, the last three decades has witnessed a more pronounced change in the structure of these cross-border capital flow. In this paper, we document the rise of domestic global banks in EMEs and the growingly important role they play in channelling cross-border capital since 1990s. We further provide evidences suggesting that this structural change in the cross-border capital flow to EMEs is likely to be driven by the transformation in U.S. money market since the end of 1980s. Using detailed documentation on cross-border syndicated loans, we demonstrate that foreign and domestic lenders have drastically different preference on lending bases when extending credit to corporations in EMEs– foreign lenders exhibit much higher reluctance towards lending against hard assets as collateral. Based on the differentiated lending technologies, we show that the rise of domestic global banks in channeling cross-border capital to EMEs has a profound impact on i) who are receiving these capital and ii) how are these capital received. Inspired by these micro-level findings, we conduct a cross-country analysis and find that the rise of domestic global banks in transmitting cross-border capital to EMEs can generate profound real impact on these economies on the aggregate levels. In particular, we find that the rise of domestic global banks in EMEs can greatly i) reshape the industry structure of these economies and ii) increase the economies’ susceptibility to global financing cycles.

Covenant Amendment Fee and Value of Creditor Intervention after Covenant Violations (with Douglas Xu) [Draft]


State-contingent control rights allow creditors to intervene after borrowers’ negative performance. Identifying the value of ex-post creditor intervention remains an empirical challenge due to the unknown counterfactual outcomes and the lack of randomly assigned treatment. In this paper, we investigate this question through examining an important form of renegotiation outcomes following covenant violations– the payment of amendment fee, which has been largely overlooked in the previous literature. Exploiting a hand-collected novel data on covenant amendments in corporate loan contracts, we first document the prevalence of nontrivial amendment fee payment made by borrowers in violation of covenants in exchange for waivers of covenant violations. We find that the amendment fee payment following covenant violation exhibits clear exclusiveness with explicit creditor intervention– only 6.9% covenant violations are followed by both amendment fee payments and creditor intervention on firm policy. This exclusiveness of amendment fee payment and creditor intervention suggests a potential time consistency issue in corporate debt contracting– creditors cannot commit to intervening after borrowers’ negative performance once been offered a side-payment for not doing so. We then examine factors that may affect the occurrence and the size of amendment fee payment following covenant violations. These factors include borrower side factors, creditor side factors and aggregate economic conditions. Eventually, we exploit variations in creditors’ share in borrowers’ outstanding liability as a measure of creditors’ skin-in-the-game to extract exogenous variations in the treatment assignment following covenant violations– whether or not interventions are undertaken. Using this instrumental variable, we identify a significantly positive real value added by creditors taking explicit actions intervening the operation of borrowers in covenant violations.

The Turning Tide: How Vulnerable are Asian Corporates? [Draft]
(with Tahsin Saadi Sedik), IMF Working paper (19/93)


Using a new firm-level data set with comprehensive information on Asian firms’ FX liabilities, we show that Asia’s non-financial corporate sector is vulnerable to a tightening of global financial conditions. Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms. A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy. But the impact is nonlinear-as the firms’ FX liability increases, the balance sheet channel of exchange rate offsets, then dominates, the competitiveness channel. The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.

On Modeling Economic Default Time: A Reduced-Form Model Approach
(with Jia-Wen Gu, Wai-Ki Ching and Harry Zheng), Computational Economics, February 2016, Volume 47, Issue 2. [Draft]


In the aftermath of the global financial crisis, much attention has been paid to investigating the appropriateness of the current practice of default risk modeling in banking, finance and insurance industries. A recent empirical study by Guo et al. (Rev Deriv Res 11(3): 171–204, 2008) shows that the time difference between the economic and recorded default dates has a significant impact on recovery rate estimates. Guo et al. (, 2011) develop a theoretical structural firm asset value model for a firm default process that embeds the distinction of these two default times. In this paper, we assume the market participants cannot observe the firm asset value directly and we develop reduced-form models for characterizing the economic and recorded default times. We derive the probability distributions of these two default times. Numerical experiments with empirical data are given to demonstrate the proposed models. Our approach helps researchers to gain a new perspective for economic and recorded defaults and is more feasible in general practice compared with current method. Our results can also contribute to the understanding of the impacts of various parameters on the economic and recorded default times.