Publications

Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture, with Justin Murfin
Journal of Finance, forthcoming
    We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive backed products, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints.
Comparables Pricing, with Justin Murfin
Review of Financial Studies, forthcoming
    Finance professionals commonly set prices based on the analysis of recently-closed, comparable transactions. Using data on syndicated loans, we exploit the lag between loans' closing dates and their inclusion in a widely-used comparables database to identify the effect of past transactions on new transaction pricing. Comparables pricing is an important determinant of individual loan spreads, but a failure to account for overlap in information across loans leads to pricing mistakes. Comparables used repeatedly are overweighted as they develop redundant channels of influence on later transactions. Market conditions prevailing at the time a comparable was priced also unduly influence subsequent loans.

Working Papers

The Capitalization of Consumer Financing into Durable Goods Prices, with Bronson Argyle, Taylor Nadauld, and Christopher Palmer
    A central question in the study of the relationship between business cycles and credit is the degree to which equilibrium asset prices reflect borrowing conditions. In this paper, we investigate the link between willingness to pay for durable goods and financing terms, testing whether consumers will pay more for a given good if it  secures a debt contract that is particularly valued by the consumer. Given differentiation across durables and unobserved heterogeneity across buyers, a key empirical challenge in this literature is holding demand and the composition of purchased goods constant to separately identify the effect of credit-supply shocks on prices. Using loan-level data from hundreds of auto-loan lenders and millions of borrowers, a quasi-experimental regression discontinuity design, and year-make-model-trim fixed effects that allow us to hold good quality fixed, we document that loan maturity is capitalized into the price consumers pay for otherwise identical cars; borrowers pay for longer maturity offered by independent lenders in the form of higher car prices. Our estimates suggest that a one additional year of loan maturity (with its attendant lower monthly payments) is worth about 6% of the  car’s purchase price to the average consumer. We conclude that a key source of credit-market specialness is the empirical importance of borrowing conditions in explaining equilibrium demand.
A Structural Model of Human Capital and Leverage
    I study the effect of human capital on firms' leverage decisions in a structural dynamic model. Firms produce using physical capital and labor. They pay a cost per employee they hire, thus investing in human capital. In default a portion of this human capital investment is lost. The loss of human capital constitutes a significant cost of financial distress. Labor intensive firms are more heavily exposed to this cost and respond by using less leverage. Thus the model predicts a decreasing relationship between leverage and labor intensity. Consistent with this prediction, I show in the data that high labor intensity leads to significantly less use of debt. In the model a move from the lowest to the highest decile of labor intensity is accompanied by a drop in leverage of 21 percentage points, very close to the 27 percentage point drop in the data. Overall, I argue that human capital has an important effect on firm leverage and should receive more attention from capital structure researchers.