UCLA

In Chapter 1, we investigate how price discovery in the credit default swap (CDS) market has been impacted by regulation implemented since the Global Financial Crisis. We find that single-name CDS spreads impound less private information prior to rating downgrades and adjust more slowly after downgrades are announced. We also show that CDS spreads lead corporate bond spreads less strongly following the adoption of stringent margin requirements that apply only to derivatives. This decline is sharpest for reference entities that are most exposed to the new rules. Price discovery appears to be unharmed for CDS indices, which are largely centrally cleared and, thus, less affected by many of the reforms. We rationalize the findings with a model in which increased transaction costs for single names drive informed agents to trade indices. Together, the results highlight a lesser-studied channel through which post-crisis regulation has influenced financial markets.

In Chapter 2 (with Wenxin Du, Michael Gordy, and Clara Vega), we investigate how market participants price and manage counterparty credit risk in the post-2008 global financial crisis period using confidential traderepository data on single-name CDS transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is low. Our results suggest that credit rationing may arise under wider circumstances than previously recognized.

In Chapter 3 (with Jason Sockin), we use a sample of prominent scandals to study how employees are impacted by corporate misconduct. We find that worker sentiment decreases sharply and persistently following a scandal, driven by diminished perceptions of a firm’s culture and senior management. Further, fewer employees receive variable pay and those that do see it fall 10 percent on average. Base pay and fringe benefits remain unchanged, however, highlighting that variable-pay earners are differentially exposed to firm-level shocks. As rank-and-file employees receive no compensation to offset the declines in job satisfaction and variable pay, we conclude that corporate misconduct leaves them strictly worse off.