The number of varieties of financial products that firms can use to raise funds from investors has rapidly expanded over the past decades. And yet, many firms issue only a few standard products, such as common stocks and bonds. This paper studies innovation in financial products using a combination of granular data on security issuance and a model of allocation of financial products to firms in specific sectors. We find three key patterns. First, the differential adoption of products across firms explains most of the observed variation in the amounts of funds raised. Second, firms that adopt new products are more successful in raising funds. Finally, most funds raised from new financial products come from a large number of distinct products that are highly specialized in that only a few firms use them. Our analysis indicates that innovation in financial markets is akin to innovation in consumer markets, which results not just in improvements in the quality of standardized products, but also in increasing varieties in a given market as products become more specialized.
Innovation for Innovators: The Financing of Intangibles
with Ana Babus and Sara Moreira, [AEA Papers and Proceedings, May 2023] [Working Paper version]
This paper examines the characteristics of firms that adopt new financial products and its association with measures of performance. We build a novel firm-level panel dataset and document a positive association between intangible capital and the adoption of new products. We also find that access to external financing through new types of securities is associated with size growth and further investments into intangibles. These findings have important implications for understanding the role that financial innovation can play in meeting the financing needs of firms that rely heavily on intangible capital.
Debt maturity, term premium and the entrepreneurial choice of risk
Job Market Paper [draft available upon request]
This paper studies the interaction between the optimal choice of risk and debt maturity by financially constrained firms. Such interaction has the potential to play an important role in explaining the observed heterogeneity in risk and debt maturity. To obtain a joint theory of debt maturity and project selection, I build a model in which the optimal maturity is defined by a trade-off between the relatively higher rollover risk associated with short-term debt and the relatively higher risk-taking incentives associated with long-term debt. Risk neutral creditors penalize firms that can later on increase their risk more easily and therefore have higher default probability. This in turn induces firms to select into projects with lower opportunities to change risk. Policies or external shocks affecting the term structure of interest rates can have a distinct impact on these choices, changing the incentives to undertake risky projects. Using firm-level data on allocation of resources to business segments I document evidence consistent with the relation between debt maturity and the selection of risky projects.