Financial institutions & FinTech
Financial Institutions
“Politicizing Consumer Credit,” (w/ P. Akey and S. Lewellen, 2021)
Journal of Financial Economics, 139(2): 627-655. [+ bibtex]
Powerful politicians can interfere with the enforcement of regulations. As such, expected political interference can affect constituents’ behavior. Using rotations of Senate committee chairs to identify variation in political power and expected regulatory relief, we study powerful politicians’ effect on consumer lending to communities protected by fair-lending regulations. We find a 7.5% reduction in credit access to minority neighborhoods in states with new committee chairs. Larger reductions occur in Community Reinvestment Act-eligible neighborhoods and when Senators serve on committees that oversee the enforcement of fair-lending laws. Banks headquartered in powerful Senators’ states are responsible for the reduction in credit access.
"Law and Finance Matter: Lessons From Externally Imposed Courts," (w/ Brown and Cookson, 2017)
Review of Financial Studies. 30(3): 1019-1051. [+ bibtex]
Best Paper Award in Financial Markets and Institutions at FMA Annual Meetings
This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business and household credit, reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing.
“Courting Economic Development,” (w/ J. Brown and J.A. Cookson, 2017)
World Bank Economic Review, 30(3): S176-S187. [+ bibtex]
We show that court enforcement uncertainty hinders economic development using sharp variation in judiciaries across Native American reservations in the United States. Congressional legislation passed in 1953 assigned state courts the authority to resolve civil disputes on a subset of reservations, while tribal courts retained authority on unaffected reservations. Although affected and unaffected reservations had similar economic conditions when the law passed, reservations under state courts experienced significantly greater long-run growth. When we examine the distribution of incomes across reservations, the average difference in development is due to the lower incomes of the most impoverished reservations with tribal courts. We show that the relative under-development of reservations with tribal courts is driven by reservations with the most uncertainty in court enforcement.
R&R, Review of Financial Studies [+ bibtex]
Best paper winner at MFA 2021
We develop modified benchmarking tests for disparate treatment that we apply to 25 years of mortgage lending. Our tests limit the scope for omitted variables by linking high-frequency mortgage decisions to an economic mechanism—loan officers have volume quotas that cause increased approval rates at month-end. We estimate that these quotas at least halve the unexplained 7 ppt Black approval gap. Loan officers more likely to miss their quotas have larger increases in Black approvals. Suggesting supply-side mechanisms, applications arrive at a constant rate within-month, and neither differences in credit risk nor applicant preferences explain the month-end decline in racial differences.
"The Financial Restitution Gap in Consumer Finance: Insights from Filings with the CFPB" (w/ Haendler)
Working Paper [+ bibtex]
Consumers seek restitution for disputed financial services by filing complaints with the Consumer Financial Protection Bureau (CFPB). We find that filings from low-socioeconomic (i.e., low-income and African American) zip codes were 30% less likely to be resolved with the consumer receiving financial restitution. At the same time, low- and high-socioeconomic zip codes submitted an equal share of the CFPB complaints. The socioeconomic gap in financial restitution was scarcely present under the Obama administration, but grew substantially under the Trump administration. We attribute the change in financial restitution under different political regimes to companies anticipating a more industry-friendly CFPB, as well as to the more industry-friendly leadership of the CFPB achieving less financial restitution for low-socioeconomic filers. The financial restitution gap cannot be explained by differences in product usage nor the quality of complaints, which we measure using textual analysis.
"Pushing Boundaries: Political Redistricting and Consumer Credit," (w/ Akey, Dobridge, and Lewellen)
Working Paper [+ bibtex]
Consumers lose access to credit when their congressional district boundaries are irregularly redrawn to benefit a political party (i.e., are gerrymandered). We identify this effect by matching a longitudinal panel of consumer credit data with changes in congressional district boundaries following decennial censuses. Reductions in credit access are concentrated in states that allow elected politicians to draw political boundaries and in districts where subsequent congressional elections are less competitive. We find similar reductions in credit access when state senate district boundaries are irregularly redrawn and when states make it more difficult for constituents to vote. Overall, our findings are consistent with theories suggesting that less-competitive political races reduce politicians’ incentives to cater to their constituents’ preferences.
Financial Technologies for Retail Trading
“Should Retail Investors’ Leverage Be Limited?” (w/ A. Simsek, 2019)
Journal of Financial Economics, 132(3): 1-21. Lead article. [+ bibtex]
Best paper finalist in Asset Pricing at SFS Cavalcade
Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.
“Peer Pressure: Social Interaction and the Disposition Effect,” (2016)
Review of Financial Studies, 29(11): 3177-3209. [+ bibtex]
Social interaction contributes to some traders’ disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader’s disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.