Department of Finance

Job Market Paper: Why Do Firms Pay More for Bank Loans? The Role of
Renegotiation

Firms borrowing from both banks and the corporate bond market pay a substantial premium on bank loans, as shown by Schwert (2020), raising questions about firms’ bargaining power and banks’ competition. In this paper, I show that a large portion of this premium compensates banks for facilitating out-of-court restructurings. I re-estimate the loan premium and use a 2014 U.S. court ruling, which impeded out-of-court restructurings, as a natural experiment. Following the ruling, affected firms experienced an 80–90 bps reduction in the loan premium, due to reduced restructuring opportunities and a diminished potential to avoid bankruptcy costs. These findings suggest that the renegotiation flexibility provided by banks is a key driver of the loan premium, highlighting the unique value that bank lending offers beyond the capital market.

Job Market Paper: Intermediary Option Pricing

I show that the risk premium in S&P 500 options materializes overnight, outside of regular exchange trading hours. Intermediaries’ inventory risk can explain this finding: Dealers have a net-short position in put options, which exposes them to overnight equity “gap risk”, the risk that equity prices change overnight, since overnight equity liquidity is too low for continuous delta-hedging. In contrast, intraday equity liquidity presents few such obstacles.Dealers’ resulting inventory risk predicts overnight option risk premia. Supporting this channel, the growth of overnight equity trading around 2006 leads to a relative reduction in the magnitude of option risk premia over parts of the week that include more overnight periods.This finding suggests a causal effect of equity liquidity on option risk premia, likely through dealers’ inventory risk. I conclude that the risk premium in S&P 500 options results from the combination of options demand and overnight equity illiquidity, which expose risk-averse intermediaries to unhedgeable inventory risk.