[Finance] Raunaq Pungaliya - Financial maintenance covenants in bank loans

SKK GSB Prof. Raunaq Pungaliya, with co-authors from the University of Toronto and Texas Tech University, has published a paper titled &ldquo;Financial maintenance covenants in bank loans,&rdquo; in Economic Theory, a premier economics journal.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> We develop a model of financial maintenance covenants under moral hazard, adverse selection, and informative signals of varying quality. We explain how public signals can improve the outcome for lenders and borrowers by reducing inefficient risk-taking (in both the pooling and separating equilibrium), and by shielding good firms from the actions of bad (separating) ones. We find that a reduction in signal quality moves the equilibrium from pooling to separating, to no covenants at all. We also demonstrate that signal quality has a non-monotone effect on covenant strictness. In an extension, we model manipulation of the accounting signal and show that it is isomorphic to a particular kind of noise.

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[Finance] Raunaq Pungaliya, Hassan Naqvi - Bank size and the transmission of monetary policy: Revisiting the lending channel

Prof. Hassan Naqvi and SKK GSB&#39;s Prof. Raunaq Pungaliya have had their paper &quot;Bank size and the transmission of monetary policy: Revisiting the lending channel&quot; accepted for publication in the Journal of Banking and Finance, a peer-reviewed academic journal covering research on financial institutions, capital markets, investments, and corporate finance. Prof. Naqvi is a former professor of finance at SKK GSB, and now teaches banking and finance at Monash University.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> We model how monetary policy shocks affect the lending behavior of small and large banks. Other things being equal, small banks are riskier than large banks since the latter are more likely to be bailed out. Thus, small banks face a higher cost of non-deposit financing and are unable to finance liquidity shocks at a cost below a certain threshold. Consequently, we show that under a tight monetary regime small bank lending is more sensitive to monetary shocks. This relation reverses under loose monetary regimes where large bank lending is more responsive to monetary shocks. Our empirical results strongly support our analysis.

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[Finance] Raunaq Pungaliya, Yanbo Wang - Machine invasion: Automation in information acquisition and the cross-section of stock returns

Professors Raunaq Pungaliya and Yanbo Wang&#39;s paper, &quot;Machine invasion: Automation in information acquisition and the cross-section of stock returns,&quot; has been accepted for publication in the Journal of Financial Markets. The Journal of Financial Markets publishes high quality original research on applied and theoretical issues related to securities trading and pricing.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> We estimate the number of machines &ldquo;covering&rdquo; a firm by separating machine Internet protocols (IPs) from human IPs based on the intensity of information retrieval using the EDGAR web log dataset. We investigate the relationship of machine coverage and the cross-section of stock returns and find that stocks in the lowest quintile of machine coverage outperform those in the highest quintile by 6% annually after adjusting for risk. Our results indicate that automation in information processing has a significant impact on the cross-section of stock returns.

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[Finance] Raunaq Pungaliya- The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management

Professor Raunaq Pungalia&rsquo;s article was accepted by The Accounting Review.<br /> <br /> <br /> <br /> <strong>Abstract&nbsp;</strong><br /> <br /> We show that Ccommonly used Jones-type discretionary accrual models applied in quarterly settings do not adequately control for nondiscretionary accruals that naturally occur due to firm growth. We show that the relation between quarterly accruals and backward-looking sales growth (measured over a rolling four-quarter window) and forward-looking firm growth (market-to-book ratio) is non-linear. Failure to control for the effects of firm growth and performance on innate accruals leads to excessive Type-I error rates in tests of earnings management. We propose simple refinements to Jones-type models that deal with non-linear growth and performance effects and show that the expanded models are well specified and exhibit high power in quarterly settings where one is testing for earnings management. The expanded models are able to identify the presence of earnings management in a sample of restatement firms. Our findings have important implications for the use of discretionary accrual models in earnings management research.

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