The Efficiency of Municipal Bond Tax Shields

Job market paper

U.S. states exempt residents from taxation on the interest income of local municipal bonds. I evaluate the efficiency of these tax shields. I use changes in millionaire taxes to calibrate an equilibrium model of the municipal bond market with state competition over tax shields. I show that state tax shields raise resident demand for local municipal bonds but impose negative externalities on other states and distort risk-sharing across municipal investors. Welfare could be significantly improved by repealing state tax shields. Reducing state tax shields by 1 percentage point raises aggregate welfare by about 0.07% of state GDP. 

Regulation and Competition in Global Banking

How do U.S. and Chinese regulators shape and compete over global banking? To answer this, I hand-collect data on civil and criminal settlements across 45 jurisdictions. I show that U.S. and Chinese regulators differ in their regulatory approaches. While U.S. regulators use settlements to discipline bank activity, Chinese regulators use them to induce cross-border bank expansion. This discrepancy has adverse consequences for the long-term dominance of Western banks. I present a multi-period model to rationalize these patterns. U.S. regulators should act strategically to preserve their banks’ global dominance.

Asset Purchases and Preferred Habitats in the Municipal Bond Market

I show that state tax policy affects the transmission of asset purchase programs into municipal bond prices. I establish two parameters that cross-sectionally determine bond yields: a state’s top income tax rate and the wealth of the state’s top 10% of households. More segmented municipal markets react more to the Federal Reserve’s announcement of the Municipal Liquidity Facility in April 2020 by up to 21% relative to less segmented markets. I rationalize this finding in a calibrated model and validate home bias in municipal bonds with another policy shock in 2012.

The Long Shadow of Public Interventions in the Financial Sector

With Giovanni Dell'Ariccia, Deniz Igan, Paolo Mauro, Alexander Tieman, and Aleksandra Zdzienicka

The IMF Economic Review, Volume 70, Pages 212–250, 2022 

We take stock of the costs of government interventions in the financial sector over the period 2007–2017 and track the assets still under government control. We build a new bank-level dataset on interventions and holding divestitures covering 1,114 financial institutions in 37 countries. At end-2017, few countries had fully divested their financial sector holdings. On average, public holdings were divested faster in more capitalized, profitable, and liquid banks. They remained higher in countries where private investment and credit growth grew slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.

Media coverage: Bloomberg, WSJ

Corporate Transactions in Hard-to-Value Stocks

With Itzhak Ben-David, Byungwook Kim, and Darren Roulstone

The Review of Corporate Finance Studies, Volume 12, Issue 3, Pages 539–580, 2023

Hard-to-value stocks provide opportunities for managers to exploit their informational advantage through trading on their firms’ and their own personal accounts. In contrast to the prediction that such transactions reflect private information about future events, they are contrarian and heavily depend on past returns. Corporate transactions in hard-to-value stocks outperform those in easy-to-value stocks in the early part of our sample, but this difference disappears after 2002, coinciding with a general decline in the profitability of stock market anomalies. Our evidence is consistent with managers’ perception of mispricing, rather than private information, being a key motivator of their transactions.

Media coverage: RCFS blog