Research

Job Market Paper

“The Effect of Trade Secrets on the Design of Loan Syndicates and Contracts”

Abstract: I examine how proprietary information in the form of trade secrets affects lending syndicate composition and contracting. Trade secrets derive economic value from exclusivity, and as such impose information risks and exacerbate agency conflicts in debt contracting. Using the staggered adoption of the Uniform Trade Secrets Act as an exogenous shock to borrowers’ reliance on trade secrecy and a text measure to identify borrowers with trade secrets, I document that trade secrecy shapes syndicate composition by increasing the probability of relationship lending between the lead arranger and the borrower, the lead arranger and syndicate participants, and the participants and the borrower. Further, I find that the lead arrangers retain a larger share of the loan and form syndicates with fewer overall lenders and more lead arrangers in lieu of syndicate participants. Next, I show that institutional lenders are more likely to fund borrowers with trade secrets. Finally, I document that lenders relax securitization requirements and require higher loan spreads. Collectively, this study shows that trade secrecy creates information risk and agency conflicts that have a first-order effect on the design of lending syndicates.

Committee: Robert Bushman (Chair), Stephen Glaeser, Eva Labro, Wayne Landsman

Other Working Papers

“Ownership Uncertainty and the Role of Intellectual Property as Collateral”, with Alex Liss

Abstract: We estimate the valuation of intellectual property collateral in loan pricing and provide evidence on the economic significance of a key risk associated with patenting activity, litigation risk. By comparing loans of the same borrower at the same origination date, we show that securing credit with IP reduces the yield spread. Further, the reduction in yield spread is increasing with the number of IP pledged, where patent collateral is more valuable than trademark collateral. In a novel analysis, we use data on the outcomes of litigation over ownership of intellectual property to assess the uncertainty over IP on loan contracting. We document that litigation risk over IP ownership rights indeed represents a fundamental source of uncertainty for borrowers, and that greater uncertainty results in lenders placing lower value on both IP collateral and other collateral types. The increase in credit spreads is significantly pronounced when there is current litigation over IP relative to cases where IP litigation risk has been resolved. Credit spread also increases with the number of IP litigation cases.

“The Special Role of Bank Earnings for Predicting GDP Growth”, with Robert Bushman

Abstract: Prior research documents that aggregate accounting earnings growth is informative about future GDP. These studies typically aggregate earnings using equal- or value-weighted schemes. In contrast, we hypothesize that banks’ earnings are special with respect to forecasting future macroeconomic outcomes. We examine whether tilting the weighting of firm-specific earnings towards bank earnings in the aggregation process increases the informativeness of aggregate earnings for GDP growth. Using mixed data sampling methods, we allow a firm’s contribution to the aggregate to differ for banks and non-banks. We find that the optimized aggregate tilts significantly towards banks and outperforms traditional weighting schemes in the association with future GDP growth. This tilted aggregate also has a stronger positive association with forecast errors of macroeconomic forecasters. Further, we distinguish banks based on the transparency of their financial reports and regulatory capital ratios, finding that the optimized aggregate tilts towards more transparent banks, and towards banks with high regulatory capital ratios