Lucian (Luke) Taylor
Assistant Professor of Finance
University of Pennsylvania
Phone: (215) 898-4802
Dynamic Debt Runs and Financial Fragility: Evidence from the 2007 ABCP Crisis
Enrique Schroth )
(Revised May 6, 2013)
We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed ten-fold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility. Allowing lenders to coordinate may not help a distressed conduit roll over its debt.
Published and Forthcoming Papers
CEO Wage Dynamics: Estimates from a Learning Model
Journal of Financial Economics, 2013, 108(1): 79-98
The level of Chief Executive Officer (CEO) pay responds asymmetrically to good and bad news about the CEO's ability. The average CEO captures approximately half of the surpluses from good news, implying CEOs and shareholders have roughly equal bargaining power. In contrast, the average CEO bears none of the negative surplus from bad news, implying CEOs have downward rigid pay. These estimates are consistent with the optimal contracting benchmark of Harris and Holmstrom (1982) and do not appear to be driven by weak governance. Risk-averse CEOs accept significantly lower compensation in return for the insurance provided by downward rigid pay.
Why are CEOs Rarely Fired? Evidence from Structural Estimation
Journal of Finance, 2010, 65(6): 2051-2087
I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features costly turnover and learning about CEO ability. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. In addition, the model helps explain the relation between CEO firings, tenure, and profitability.
Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Profitability
(with Lubos Pastor and Pietro Veronesi)
The Review of Financial Studies, 2009, 22(8): 3005-3046.
We develop a model of the optimal IPO decision in the presence of learning about the average profitability of a private firm. The entrepreneur trades off diversification benefits
of going public against benefits of private control. Going public is optimal when the firm's
expected future profitability is suffciently high. The model predicts that firm profitability
should decline after the IPO, on average, and that this decline should be larger for firms
with more volatile profitability and firms with less uncertain average profitability. These
predictions are supported empirically in a sample of 7,183 IPOs in the United States between
1975 and 2004.