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Professor Guillaume Frechette
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Marjorie Lesser
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Job Market Candidate

Farzad Saidi | Papers

Job market paper

The Rise of the Universal Bank: Financial Architecture and Firm Volatility in the United States (with Daniel Neuhann) [pdf]

This paper relates increases in firm-level volatility of publicly traded companies in the United States to the rise of universal banking following the repeal of the Glass-Steagall Act. On the theoretical side, we argue that economies of scope in the provision of concurrent lending and underwriting improve the access to finance for risky enterprises. Empirically, we distinguish between financial intermediaries that become universal banks through mergers with investment banks and those that establish securities affiliates (Section 20 subsidiaries). We then exploit deregulatory shocks to the scope of their banking activities to identify the effect on firm risk. Using transaction-level data, we document a run-up in sales-growth volatility and idiosyncratic risk not just across but also within public firms that obtain financing from universal banks. Characterizing the risk-return relationship, we find that firms funded by universal banks exhibit lasting increases in total factor productivity of up to 7%, especially in the presence of close relationship banking and cross-selling. Our evidence points to increased efficiency of financial intermediation by universal banks, thereby constituting a novel link between financial development and growth. By enabling firms to invest in riskier projects with higher return prospects, universal-bank finance is a key contributor, which we estimate to account for up to three-quarters of the increases in firm-level volatility and productivity since the late 1980s.

Research papers

Cash is King - Revaluation of Targets after Merger Bids
(with Ulrike Malmendier and Marcus Opp) [pdf]

We provide evidence that a significant fraction of the returns to merger announcements reflects target revaluation rather than the causal effect of the merger. In a sample of unsuccessful merger bids from 1980 to 2008, we find that targets of cash offers are revalued by 15% after deal failure, which is a sizeable portion of the average announcement effect of 25%. In contrast, stock targets revert to their pre-announcement levels. These results hold for deals where failure is exogenous to the target's stand-alone value. We show that the differential revaluation of cash and stock targets is not explained by differences in future takeover activity. We also find that the values of cash bidders revert to pre-announcement levels, while stock bidders fall below. Our revaluation estimates imply economically large mismeasurement when using naive announcement-based estimates of the causal effect of mergers.

Networks, Finance, and Development: Evidence from Hunter-Gatherers [pdf]

Using household survey data from an Amazonian hunter-gatherer society, I analyze the relationship between kinship networks and informal finance. While the default financing contract can be characterized as debt, insurance in the form of equity-like financing is available only from fellow villagers. By examining the financing streams and sources, I contrast the benefits of intra-village financing and insurance with their cost of taxing individual efforts directed at connecting with the outside labor market, such as human capital investments. I provide evidence that informal finance can, thus, explain a substantial portion of the observed heterogeneity in human capital and income.

Inequality, Relative Income, and Development: Field-Experimental Evidence from the Bolivian Amazon (with Jere Behrman, Ricardo Godoy, and Eduardo Undurraga) [pdf]

Much macroeconomic research hypothesizes income distribution to play an important role for economic growth, as inequality shapes the process of development through its interaction with credit market imperfections or the political economy. However, the nature of this research remains conjectural, and all hitherto available evidence comes from correlations in observational data. As a consequence, little is known empirically about the causal relationship between inequality and growth, its determinants, and its direction. To obtain evidence on the causal link from inequality to growth, this paper presents an analysis of a randomized controlled trial in 40 villages of an Amazonian foraging-farming society. In the experiment, we randomly allocated substantial income transfers in the form of rice, altered their associated degree of village income inequality, and measured the short-run effects on important individual-level determinants of development. We find that human capital investments (in the form of studying Spanish) and modern-asset wealth, both of which increase the villagers' expected future earnings through exposure to the outside labor market, are driven by relative social comparisons. Our results establish a causal link between inequality and economic growth, and - exploiting the village-level variation in our experiment - suggest a U-shaped relationship.

Informational Differences and Performance: Experimental Evidence (with Iris Bohnet)

Understanding the Gender Pay Gap: What's Competition Got to Do with It?
(with Alan Manning), Industrial and Labor Relations Review, 63(4), 681-698 (2010)

Research in progress

A Model of Universal Banking, Real Effects, and Inequality (with Daniel Neuhann)