Jie Yang
Title
Assistant Professor of Finance
Department
MCDONOUGH SCHOOL OF BUSINESS
Research
SSRN
Research Interest
empirical corporate finance, capital structure, financing constraints, corporate governance, and institutional investors
Publications
2010, "The Cost of Debt," Journal of Finance, 65, 2089-2136 (with Jules van Binsbergen and John Graham)
- Featured in the NBER Digest and the Harvard Law School Form on Corporate Governance and Financial Regulation
- Nominated for the Brattle Prize (best annual corporate finance paper in JF)
- Abstract: We use exogenous variation in tax benefit functions to estimate firm-specific cost of debt functions that are conditional on company characteristics such as collateral, size, and book-to-market. By integrating the area between the benefit and cost functions, we estimate that the equilibrium net benefit of debt is 3.5% of asset value, resulting from an estimated gross benefit (cost) of debt equal to 10.4% (6.9%) of asset value. We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute only half of the total ex ante costs of debt.
- Featured in the Harvard Law School Forum on Corporate Governance and Financial Regulation and then the Dow Jones Banking Intelligence
- Abstract: We study optimal capital structure by first estimating firm-specific cost and benefit functions for debt. The benefit functions are downward sloping reflecting that the incremental value of debt declines as more debt is used. The cost functions are upward sloping, reflecting the rising costs that occur as a firm increases its use of debt. The cost functions vary by firm to reflect the firm’s characteristics such as asset collateral and redeployability, asset size, the book-to-market ratio, profitability, and whether the firm pays dividends. We use these cost and benefit functions to produce a firm-specific recommendation of the optimal amount of debt that a given company should use. In textbook economics, equilibrium occurs where supply equals demand. Analogously, optimal capital structure occurs where the marginal benefit equals the marginal cost of debt. We illustrate optimal debt choices for specific firms such as Barnes & Noble, Coca-Cola, Six Flags, and Performance Food Group, among others. We also calculate the cost of being underlevered for companies that use too little debt, the cost of being overlevered for companies that use too much debt, and the net benefit of debt usage for those that are correctly levered. Finally, we provide formulas that can be easily used to approximate the cost of debt function, and in turn to determine the optimal amount of debt, for any given firm.
- Abstract: Recent literature has shown that liquidity is important in explaining price effects for firms and firm decisions. For example, see Morellec (2001) and Bharath et al. (2009). We follow and extend that literature by looking at the liquidity of market based options to forecast REIT capital structure changes. REITs, unlike typical listed firms, tend to have high leverage and a more dynamic capital structure because of regulation. Thus, understanding potential management behavior could be important to investors. By looking at actions of the managers as revealed through the liquidity in the option’s market, we are able to estimate what REIT managers are likely to do in terms of future capital structure changes. We do so using option data which update at higher frequency than traditional accounting characteristics. Our results are similar to those of Borochin and Yang (2016) who study this issue for non-REIT firms. We find that REITs with higher historical volatility or lower option market liquidity (as measured by number of daily unique call options, daily call open interest, and daily volume of option traded) are less likely to increase leverage in the following quarter. REITs with higher option liquidity or lower realized volatility are more likely to increase net long-term debt (issuing more debt or retire less debt) in the following quarter.
Working Papers
"The Effects of Institutional Investor Objectives on Firm Valuation and Governance" with Paul Borochin
- Revise and resubmit at the Journal of Financial Economics
- Abstract: We find that ownership by different institutional investor types has distinct implications for future firm overvaluation, misvaluation, and governance characteristics, with firms held by dedicated institutions displaying more favorable characteristics and posting better long-term performance. Dedicated institutional investors decrease future firm misvaluation relative to fundamentals, as well as the magnitude of this misvaluation. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having advantage in firm-specific analysis. We use characteristic matching to rule out institutional self-selection into misvalued firms. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results implies a more nuanced relationship of institutional ownership with firm value and corporate governance.
- Under review at Management Science
- Previously titled "Financing Constraints and Acquisitions"
- Abstract: The paper examines whether financially constrained firms are able to use acquisitions to ease their constraints. The results show that acquisitions do ease financing constraints for constrained acquirers. Relative to unconstrained acquires, financially constrained firms are more likely to use undervalued equity to fund acquisitions and to target unconstrained and more liquid firms. Using a propensity score matched sample in a difference-in-difference framework, the results show that constrained acquirers become less constrained post-acquisition and relative to matched non-acquiring firms. This improvement is more pronounced for diversifying acquisitions and constrained firms that acquire rather than issue equity and retain the proceeds. Following acquisition, constrained acquirers raise more debt and increase investments, consistent with experiencing reductions in financing constraints relative to matched non-acquirers. These improvements are not seen for unconstrained acquirers. Finally, the familiar diversification discount is non- existent for financially constrained acquirers.
- Under review at the Journal of Financial and Quantitative Analysis
- Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2014
- Abstract: We use exchange-traded options to identify risks relevant to capital structure adjustments in firms. These forward-looking market-based risk measures provide significant explanatory power in predicting net leverage changes in excess of accounting data. They matter most during contractionary periods and for growth firms. We form market-based indices that capture firms’ magnitudes of, and propensity for, net leverage increases. Firms with larger predicted leverage increases outperform firms with lower predicted increases by 3.1% to 3.9% per year in buy-and-hold abnormal returns. Finally, consistent with the leverage and distress risk puzzles, firms with lower predicted leverage increases are riskier but earn lower abnormal returns.
- Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2015
- Abstract: We explore the importance of cash for shaping rivalry outside the product domain by studying its implications for firms defending against patent litigation by rivals. War chests of cash can make firms more formidable targets, reducing rivals' expected gains from litigation. However, cash holdings have agency costs and carry the risk of allowing value-destroying litigation spending. We find that while defendant cash holdings reduce plaintiffs' abnormal returns from litigation, they also reduce defendants' own abnormal returns and result in greater joint loss of shareholder value for both sides. In addition, we find that defendant cash holdings are associated with cases progressing to later and more expensive stages of litigation.
- Abstract: I construct a structural model in which firms maximize value conditional on being restricted from issuing equity and unsecured debt. Using GMM estimation, I find that a model with both equity and debt constraints fits better than models without constraints or with only one constraint. The estimated financing constraint measures are consistent with financing behavior and firm characteristics believed of constrained firms, with debt being the limiting constraint. Furthermore, equity constrained firms decrease R&D expenses over the next period while debt constrained firms decrease capital expenditure. Finally, I find a positive but insignificant risk premium for debt constraints amounting to 3.0% over one year that does not exist for equity constraints.
- Abstract: We document a negative (positive) relationship between firm performance and changes in the ownership of large (small) institutional investors. Small investors "exit" while blockholders increase their holdings following poor performance. We find evidence that large investors increase ownership following poor performance to protect the value of initial holdings and to benefit from undertaking value-enhancing interventions. We observe that poorly performing firms in which blockholders increase their ownership experience more aggressive restructuring policies than firms in which blockholders reduce their ownership. Finally, we find that firms with passive investors recover faster than firms with active investors following poor performance.
- Abstract: We construct network centrality measures for customer and supplier industries in the U.S. economy. Consistent with Ahern, et al. (2014), we find central suppliers have higher levels of systematic risk than central customers and therefore more exposed to sectoral shocks. We posit that central suppliers have incentives to channel funds to their customers. Our empirical results are consistent with such a view. We find that the cash to cashflow sensitivity and value of cash is significantly higher for central suppliers than non-central firms, even among those financially unconstrained. In contrast, central customers have no cash to cash flow sensitivity, consistent with supplier trade credit redistribution helping to relieve customers’ financial constraints. Using the 2008 financial crisis as an exogenous shock, we document that central suppliers with high pre-crisis liquidity decrease their investment, while only customers without central suppliers are sensitive to the crisis.
- Semifinalist for the Best Paper Award in Corporate Finance at FMA Meeting 2013
- Abstract: Involvement in patent litigation creates substantial direct and indirect costs for firms. We present evidence that pairs of firms involved in patent litigation are more evenly-matched in financial profiles than pairs of firms not involved in litigation. We take advantage of a novel, hand-collected data set that combines data on observed instances of patent litigation with product-level data to form dyadic plaintiffs-defendant pairs at risk of litigation in the semiconductor industry from 1984 to 2000. Product-level data for more than 200,000 semiconductor devices coupled with firm patent data allows us to construct fine-grained controls for risk of litigation between pairs of potential litigants. We consider several variables associated with a firm’s cost of capital: 1) the Whited and Wu (2006) index for financing constraints, 2) analyst coverage, and 3) institutional ownership concentration. We find evidence that, controlling for technological and product overlap, pairs of firms involved in litigation are more similar in terms of financing constraint, analyst coverage, and institutional ownership concentration than pairs of firms not involved in litigation.
Work in Progress
"The Influence of the Board: Evidence from the Hospital Industry" with Sean S.H. Huang
"Corporate Structure: Evidence from the Hospital Industry" with Sean S.H. Huang
"Does the Source of Cash Matter to Its Value?" with Salman Arif and Matthew Billett
"Network Centrality and the Cost of Debt" with Li Xu and Rongrong Zhang
"Network Centrality and Institutional Investors" with Paul Borochin and Rongrong Zhang
"Leverage and Collateral: Evidence from the Gold Industry" with Ryan Williams and Panos Markou
"Hedging Under Uncertainty" with Paul Borochin and Bèla Szemely
"Corporate Structure: Evidence from the Hospital Industry" with Sean S.H. Huang
"Does the Source of Cash Matter to Its Value?" with Salman Arif and Matthew Billett
"Network Centrality and the Cost of Debt" with Li Xu and Rongrong Zhang
"Network Centrality and Institutional Investors" with Paul Borochin and Rongrong Zhang
"Leverage and Collateral: Evidence from the Gold Industry" with Ryan Williams and Panos Markou
"Hedging Under Uncertainty" with Paul Borochin and Bèla Szemely
