Essays in Household Finance and Corporate Finance

Thesis advisor: Philip StrahanIn the first two essays of this dissertation, I examine the role of third-party debt collectors in consumer credit markets. First, using law enforcement as an instrument, I find that higher density of debt collectors increases the supply of unsecured credit. The estimated elasticity of the average credit card balance with respect to the number of debt collectors per capita is 0.49, the elasticity of the average balance on non-credit card unsecured loans with respect to the number of debt collectors per capita is 1.32. There is also some evidence that creditors substitute unsecured credit for secured credit when the number of debt collectors increases. Higher density of debt collectors improves recoveries, which enables lenders to extend more credit. Finally, creditors charge higher interest rates and lend to a larger pool of borrowers when the density of debt collectors increases, presumably because better collections enable them to extend credit to riskier applicants. In the second essay I investigate the economics of the debt collection industry. The existence of third-party debt collection agencies cannot be explained by the benefits of specialization and economies of scale alone. Rather, the debt collection industry can serve as a coordination mechanism between creditors. If a debt collection agency collects on behalf of several creditors, the practices it uses will be associated will all creditors that hired it. Hence, consumers will be unable to punish individual creditors for using harsh practices. As a result, the third-party agency may use harsher debt collection practices than individual creditors collecting on their own. As long as the costs of hiring third-party debt collectors are below the benefits from using harsh debt collection practices, the debt collection industry will create economic value for creditors. The last essay, written jointly with Thomas Chemmanur, develops a theory of corporate boards and their role in forcing CEO turnover. We show that in general the board faces a coordination problem, leading it to retain an incompetent CEO even when a majority of board members receive private signals indicating that she is of poor quality. We solve for the optimal board size, and show that it depends on various board and firm characteristics: one size does not fit all firms. We develop extensions to our basic model to analyze the optimal composition of the board between firm insiders and outsiders and the effect of board members observing imprecise public signals in addition to their private signals on board decision-making.Thesis (PhD) — Boston College, 2011.Submitted to: Boston College. Carroll School of Management.Discipline: Finance

The Economics of Debt Collection: Enforcement of Consumer Credit Contract,”

Abstract In the U.S., third-party debt collection agencies employ more than 140,000 people and recover more than $50 billion each year, mostly from consumers. Informational, legal, and other factors suggest that original creditors should have an advantage in collecting debts owed to them. Then, why does the debt collection industry exist and why is it so large? Explanations based on economies of scale or specialization cannot address many of the observed stylized facts. We develop an application of common agency theory that better explains those facts. The model explains how reliance on an unconcentrated industry of third-party debt collection agencies can implement an equilibrium with more intense collections activity than creditors would implement by themselves. We derive empirical implications for the nature of the debt collection market and the structure of the debt collection industry. A welfare analysis shows that, under certain conditions, an equilibrium in which creditors rely on third-party debt collectors can generate more credit supply and aggregate borrower surplus than an equilibrium where lenders collect debts owed to them on their own. There are, however, situations where the opposite is true. The model also suggests a number of policy instruments that may improve the functioning of the collections market

Economics of Information

The article describes the problem of asymmetric information and its consequence

Debt collection agencies and the supply of consumer credit

This paper finds that stricter laws regulating third-party debt collection reduce the number of third-party debt collectors, lower the recovery rates on delinquent credit card loans, and lead to a modest decrease in the openings of new revolving lines of credit. Further, stricter third-party debt collection laws are associated with fewer consumer lawsuits against third-party debt collectors but not with a reduction in the overall number of consumer complaints. Overall, stricter third-party debt collection laws appear to restrict access to new revolving credit but have an ambiguous effect on the nonpecuniary costs that the debt collection process imposes on borrowers

A theory of corporate boards and forced CEO turnover

We model a corporate board evaluating a CEO of uncertain management ability. Each director receives a noisy private signal about CEO ability, after which directors discuss this ability and vote to retain or replace the CEO. Directors care about true CEO ability, since it affects their equity holding values; however, a CEO may impose costs of dissent on a director who votes to fire but fails to oust her. We relate the equilibrium CEO firing decision to board size, board composition, the effect of an imprecise public signal, and the cost and probability of finding a good replacement CEO

A theory of inefficient college entry and excessive student debt

When workers are myopic and the amount of financing provided by the government is sufficiently large, some workers acquire education even if they are better off without it. We show that government-provided loans generate a propagation mechanism that exacerbates inefficient college entry. Further, the extent of this inefficiency depends on the speed at which loans are provided, and not just on their amount. The extent of inefficient college entry also depends on the distribution of myopic workers in the population, and inefficiencies can arise even if not all workers are myopic. We extend the model to study the impact of the dropout rate and heterogeneous expectations as well the dynamic implications of inefficient college entry

Do qualifications matter? New evidence on board functions and director compensation

Prior research suggests that the effectiveness of corporate directors depends on their qualifications. We investigate whether directors’ qualifications are reflected in their board functions and compensation. We find that, on average, more qualified directors receive more board functions and therefore higher pay, while CEO-appointed (“co-opted”) directors do not. However, co-opted directors receive more functions and higher pay on boards where the CEO’s influence is high. We also show that some firms award director compensation that is unrelated to board functions, and the likelihood of awarding such compensation depends on CEO power. Overall, our evidence generates new insights into how director roles and financial incentives are allocated within boards and the extent to which this allocation depends on CEO power

Sigma Ventures: Evaluating an Early-stage Venture Capital Investment (A)

Sigma Ventures is a venture capital (VC) firm that invests in technology, intelligent manufacturing, healthcare, and consumer services companies in their early and growth stage. In late 2017 Li Yuan, Sigma Ventures' founder and managing partner, needed to decide whether a startup called Isolimit was worth investing in. If so, then Isolimit was to be valued. The case describes how Sigma Ventures assessed Isolimit's team, market, and technology and shows how Sigma used the venture capital method to evaluate its potential investment. Specifically, the case discusses three aspects of early-stage venture capital investments: (1) How should venture capital firms evaluate early-stage startups? (2) What is the logic of the venture capital method? (3) How should venture capital firms apply the venture capital method to determine the percentage stake they should receive in exchange for their investment