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v:ext="edit" spidmax="1026"/> </xml><![endif]--><!--[if gte mso 9]><xml> <o:shapelayout v:ext="edit"> <o:idmap v:ext="edit" data="1"/> </o:shapelayout></xml><![endif]--> </head> <body lang=EN-US link=blue vlink=purple style='tab-interval:.5in'> <div class=WordSection1> <p class=MsoNormal><a href="http://www.chicagogsb.edu/" target="_blank"><span style='mso-fareast-font-family:"Times New Roman";mso-no-proof:yes;text-decoration: none;text-underline:none'><img border=0 width=150 height=32 id="_x0000_i1027" src="images/Chicago_Booth_logo_sm.png" alt="Description: Description: Description: C:\Users\rajan\Documents\My Files\newwebpage\images\Chicago_Booth_logo_sm.png"></span></a><span style='mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> <div id="double_main"> <div id="nameplate_sm"> <p class=MsoNormal><a href="index.htm"><span style='mso-fareast-font-family: "Times New Roman";mso-no-proof:yes;text-decoration:none;text-underline:none'><img border=0 width=177 height=28 id="_x0000_i1026" src="images/NamePlate_sm.png" alt="Description: Description: Description: Raghuram G. Rajan"></span></a><span style='mso-fareast-font-family:"Times New Roman";mso-no-proof:yes'><img border=0 width=261 height=28 id="_x0000_i1025" src="images/head_recent.png" alt="Description: Description: Description: Recent Work"></span><span style='mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> </div> <div id="main_content"> <div> <div> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'>See my blog for recent articles/comments:</span><span style='font-size:10.0pt; font-family:"Arial","sans-serif";mso-no-proof:yes'> <a href="http://blogs.chicagobooth.edu/faultlines">http://blogs.chicagobooth.edu/faultlines</a></span><span style='mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='font-size:11.0pt'><a href="papers/The%20Corporation%20in%20Finance%20ver%208.pdf">The Corporation in Finance</a>:<span style='mso-spacerun:yes'>  </span>Paper behind my presidential speech to the American Finance Association, Jan 2012.<o:p></o:p></span></p> <p class=MsoNormal><span style='font-size:11.0pt'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='font-size:11.0pt'>The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments. <o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span class=MsoHyperlink><span style='mso-fareast-font-family: "Times New Roman"'><a href="papers/Sov_debt_24Aug2011_Final.pdf">Sovereign debt, government myopia, and the financial sector</a></span><o:p></o:p></span></p> <p class=MsoNormal><span class=MsoHyperlink><span style='color:windowtext; text-decoration:none;text-underline:none'>With Viral <span class=SpellE>Acharya</span><o:p></o:p></span></span></p> <p class=MsoNormal><span class=MsoHyperlink><o:p><span style='text-decoration: none'>&nbsp;</span></o:p></span></p> <p class=MsoNormal><span style='font-size:11.0pt'>What determines the sustainability of sovereign debt?<span style='mso-spacerun:yes'>  </span>In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, the greater the advantage it sees in borrowing, and therefore the less likely it will be to default (in contrast to models where sovereigns repay because they are concerned about their long term reputation).<span style='mso-spacerun:yes'>  </span>More myopic governments are also likely to tax in a more distortionary way, and create more dependencies between the domestic financial sector and government debt that raise the costs of default. We use the model to explain recent experiences in sovereign debt markets. <o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/land_sales_5.pdf">The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s</a><o:p></o:p></span></p> <p class=MsoNormal><span class=GramE><span style='mso-fareast-font-family:"Times New Roman"'>with</span></span><span style='mso-fareast-font-family:"Times New Roman"'> Rodney <span class=SpellE>Ramcharan</span><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal style='margin-bottom:10.0pt'><span style='font-size:11.0pt; mso-fareast-font-family:Calibri'>How important is the role of credit availability in inflating asset prices? And does greater credit availability make the economy more sensitive to changes in sentiment or fundamentals?<span style='mso-spacerun:yes'>  </span>In this paper we address these questions by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When fundamentals turned down, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates. We draw lessons for regulatory policy.<o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/Mcfadden%20Aug%202011.pdf">Constituencies and Legislation: The Fight over the McFadden Act of 1927</a><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'>With Rodney <span class=SpellE>Ramcharan</span><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal style='margin-bottom:10.0pt'><span style='font-size:11.0pt; mso-fareast-font-family:Calibri'>The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. We find congressmen in districts in which landholdings were concentrated (suggesting a landed elite), and where the cost of bank credit was high and its availability limited (suggesting limited banking competition and high potential rents), were significantly more likely to oppose the act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they themselves are likely to be shaped by <span class=SpellE>well organized</span> elites, even in countries with benign political institutions.<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/Trade%20Credit%20Contracts.pdf">Trade Credit Contracts</a> <o:p></o:p></span></p> <p class=MsoNormal><span class=GramE><span style='mso-fareast-font-family:"Times New Roman"'>with</span></span><span style='mso-fareast-font-family:"Times New Roman"'> Leora Klapper and Luc Laeven, forthcoming, Review of Financial Studies<o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal>We employ a novel dataset on almost 30,000 trade credit contracts to describe the broad characteristics of the parties that contract together and the key contractual terms of these contracts. Whereas prior work has typically used information on only one side of the buyer-seller transaction, this paper utilizes information on both, allowing for the first analysis of buyer-seller pairs. An equally important distinction is that we have multiple contracts for the same buyer or supplier firms, rather than a firm-average response, allowing for the correction of time-invariant firm characteristics that might determine the choice of credit terms. We find that the largest and most creditworthy buyers receive contracts with the longest maturities from smaller suppliers, and that discounts for early payment tend to be offered to riskier buyers.<span style='mso-spacerun:yes'>  </span><span style='mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span class=MsoHyperlink><a href="papers/Illiquidity%20and%20interest%20rate%20policy.pdf"><span style='mso-fareast-font-family:"Times New Roman"'>Illiquid Banks, Financial Stability, and Interest Rate Policy</span></a><o:p></o:p></span></p> <p class=MsoNormal><span class=GramE><span style='mso-fareast-font-family:"Times New Roman"'>with</span></span><span style='mso-fareast-font-family:"Times New Roman"'> Douglas Diamond<o:p></o:p></span></p> <p class=MsoNormal style='margin-bottom:10.0pt'><span style='font-size:11.0pt; mso-fareast-font-family:Calibri'>Do low interest rates alleviate banking fragility?<span style='mso-spacerun:yes'>  </span>Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may choose to bail out banks being run. Unconstrained bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to promise depositors more, increasing intervention and making the system worse off.<span style='mso-spacerun:yes'>  </span>By contrast, constrained intervention to lower rates maintains private discipline, while offsetting contractual rigidity.<span style='mso-spacerun:yes'>  </span>It may still lead banks to make excessive liquidity promises. Anticipating this, central banks can reduce financial fragility by raising rates in normal times to offset their propensity to reduce rates in adverse times. <o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/fear%20july%202010%20final.pdf">Fear of Fire Sales, Illiquidity Seeking, and the Credit Freeze</a>&nbsp;<o:p></o:p></span></p> <p class=MsoNormal><span class=GramE><span style='mso-fareast-font-family:"Times New Roman"'>with</span></span><span style='mso-fareast-font-family:"Times New Roman"'> Douglas Diamond, <i style='mso-bidi-font-style:normal'>Quarterly Journal of Economics</i> Volume: <span style='mso-bidi-font-weight:bold'>126</span> Issue: <span style='mso-bidi-font-weight: bold'>2</span> Pages: <span style='mso-bidi-font-weight:bold'>557-591</span>: <span style='mso-bidi-font-weight:bold'>May 2011<b><o:p></o:p></b></span></span></p> <p class=MsoNormal><span class=databold1><span style='font-size:9.0pt; font-family:"Arial","sans-serif";color:#333333'><o:p>&nbsp;</o:p></span></span></p> <p class=MsoNormal>Is there any need to  clean up a banking system in the midst of a crisis, for instance, by closing some weak banks and forcing others to sell bad assets, or can one wait till the crisis is over? We argue that an  overhang of impaired banks that may be forced to sell assets in the future can increase the private returns to holding illiquid assets sufficiently that weak banks have no interest in selling them. Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding cash, which also reduces their incentive to lock up money in term loans. The potential for a worse fire sale than necessary, as well as the associated decline in credit origination, could make the crisis worse, which is one reason it may make sense to clean up the system even in the midst of the crisis. We discuss alternative ways of cleaning up the system, and the associated costs and benefits.</p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/JF%20Final1.pdf">Land and Credit:<span style='mso-spacerun:yes'>  </span>A Study of the Political Economy of Banking in the United States in the Early 20th Century</a><o:p></o:p></span></p> <p class=MsoNormal><span class=GramE><span style='mso-fareast-font-family:"Times New Roman"'>with</span></span><span style='mso-fareast-font-family:"Times New Roman"'> Rodney <span class=SpellE>Ramcharan</span>, forthcoming, Journal of Finance<o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/Land%20and%20Credit%20Web%20Appendix.pdf">Web Appendix</a> to the paper.<o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><a name="OLE_LINK1"></a><a name="OLE_LINK2"><span style='mso-bookmark:OLE_LINK1'>We find that in the early 20th century, counties in the United States where the agricultural elite had disproportionately large land holdings had significantly fewer banks per capita, even correcting for state level effects. Moreover, credit appears to have been costlier, and access to it more limited, in these counties. The evidence is suggestive that elites may restrict financial development in order to limit access to finance, and they may be able to do so even in countries with </span></a><span class=SpellE><span style='mso-bookmark:OLE_LINK2'><span style='mso-bookmark:OLE_LINK1'>well developed</span></span></span><span style='mso-bookmark:OLE_LINK2'><span style='mso-bookmark:OLE_LINK1'> political institutions. </span></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/Internal%20governance%20of%20firms.pdf">The Internal Governance of Firms</a> &nbsp;with Viral <span class=SpellE>Acharya</span> and Stewart Myers, </span><i style='mso-bidi-font-style:normal'><span style='color:#333333'>Journal of Finance </span></i><span class=label2><span style='color:#333333'>Volume: </span></span><span class=databold1><span style='color:#333333'>66</span></span><span style='color:#333333'> <span class=label2>Issue: </span><span class=databold1>3</span> <span class=label2>Pages: </span><span class=databold1>689-720</span><span class=label2>: </span><span class=databold1>Jun 2011</span></span><span style='mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'>We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates.<span style='mso-spacerun:yes'>  </span>Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors.<span style='mso-spacerun:yes'>  </span>Internal governance works best when both top management and subordinates are important in generating cash flow.<span style='mso-spacerun:yes'>  </span>External governance, even if crude and uninformed, can complement internal governance and improve efficiency.<span style='mso-spacerun:yes'>  </span>This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control.<span style='mso-spacerun:yes'>  </span>Our paper can explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.<o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><a href="papers/Internal%20governance%20Online%20appendix%20Sep%202010%20jvg.pdf">Web Appendix to Internal Governance</a><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> <p class=MsoNormal><span style='font-size:24.0pt;mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> </div> </div> </div> </div> </div> </body> </html>