Working Papers
A Liquidity-based Resolution to the Dividend Puzzle (Job Market Paper) Click here for the latest version.
Abstract: Contrary to the renowned irrelevance theory proposed by Modigliani and Miller in 1961, empirical evidence suggests that assets which pay dividend would demand a price premium, despite the fact that dividend payment is generally taxed heavier than capital gain. In this paper, I use a monetary-search model and propose a new resolution to understand this puzzle, that the price premium of dividend assets arises
due to the superior liquidity role dividend plays when comparing to return in the form of capital gain. As dividend is almost identical to money in facilitating consumption, it helps stockholders to avoid selling their assets at an undesirable price in financial markets with search and bargaining frictions. Under this framework, I further study firms’ optimal decision in paying dividend, and show that an increase in interest rate can hurt the economy through not only reduction in real money holdings, but also through the reduction in aggregate R&D activities.
Money and Competing Means of Payment (with Athanasios Geromichalos)
Abstract: Common wisdom suggests that if agents have access to more unsecured credit or if the society get access to more payment instruments, the frictions in the economy would be reduced and hence is welfare improving. But is this always true? In this paper, we analyze the dynamic general equilibrium model and show that the introduction of alternative means of payment such as credit or secondary markets, where agents can boost their liquidity, is not always welfare improving. More specifically, if the access to credit is low to begin with, increasing credit can hurt the economy’s welfare. What gives rise to this counter-intuitive result? We argue that even though more credit ex post means that transactions will not be limited by lack of liquidity, ex ante, easier access to credit makes agents to carry less money and thus hinders trade in meetings where transaction is in quid pro quo manner and credit is not available. Because of the two opposing forces, we show that there exists a range of parameter values such that the negative force dominate, and welfare decreases as credit availability increases. This model prediction holds true for other types of alternative means of payments other than just credit, i.e. financial assets or access to secondary asset market for boosting liquidity. Our model offers a simple and intuitive explanation to the growing empirical literature suggesting that increased access to credit is often followed by recessions and other economic hardships.
Work In Progress
The Liquidity of Coupon Bonds (with Nicolas Caramp, Athanasios Geromichalos, and Sukjoon Lee)
Abstract: Why do many bonds pay coupons? We suggest that the answer to this question is the superior liquidity service coupon payments provide. Coupon payment, which can be used directly for urgent consumption by bond holders, helps avoiding the need of selling assets in the frictional OTC market. The liquidity feature of coupons thus commands a premium, which allows bond issuers to raise more funding upfront. In this paper, we provide a theoretical framework of this mechanism. To quantify such coupon premium, we have located a dataset that contains data on the prices of STRIPS. Empirically, we would first construct the synthetic price of a bond from its stripped pieces, and compare this synthetic price with the price of the original bond, to find the coupon premium.
A Liquidity-based Resolution to the Dividend Puzzle (Job Market Paper) Click here for the latest version.
Abstract: Contrary to the renowned irrelevance theory proposed by Modigliani and Miller in 1961, empirical evidence suggests that assets which pay dividend would demand a price premium, despite the fact that dividend payment is generally taxed heavier than capital gain. In this paper, I use a monetary-search model and propose a new resolution to understand this puzzle, that the price premium of dividend assets arises
due to the superior liquidity role dividend plays when comparing to return in the form of capital gain. As dividend is almost identical to money in facilitating consumption, it helps stockholders to avoid selling their assets at an undesirable price in financial markets with search and bargaining frictions. Under this framework, I further study firms’ optimal decision in paying dividend, and show that an increase in interest rate can hurt the economy through not only reduction in real money holdings, but also through the reduction in aggregate R&D activities.
Money and Competing Means of Payment (with Athanasios Geromichalos)
Abstract: Common wisdom suggests that if agents have access to more unsecured credit or if the society get access to more payment instruments, the frictions in the economy would be reduced and hence is welfare improving. But is this always true? In this paper, we analyze the dynamic general equilibrium model and show that the introduction of alternative means of payment such as credit or secondary markets, where agents can boost their liquidity, is not always welfare improving. More specifically, if the access to credit is low to begin with, increasing credit can hurt the economy’s welfare. What gives rise to this counter-intuitive result? We argue that even though more credit ex post means that transactions will not be limited by lack of liquidity, ex ante, easier access to credit makes agents to carry less money and thus hinders trade in meetings where transaction is in quid pro quo manner and credit is not available. Because of the two opposing forces, we show that there exists a range of parameter values such that the negative force dominate, and welfare decreases as credit availability increases. This model prediction holds true for other types of alternative means of payments other than just credit, i.e. financial assets or access to secondary asset market for boosting liquidity. Our model offers a simple and intuitive explanation to the growing empirical literature suggesting that increased access to credit is often followed by recessions and other economic hardships.
Work In Progress
The Liquidity of Coupon Bonds (with Nicolas Caramp, Athanasios Geromichalos, and Sukjoon Lee)
Abstract: Why do many bonds pay coupons? We suggest that the answer to this question is the superior liquidity service coupon payments provide. Coupon payment, which can be used directly for urgent consumption by bond holders, helps avoiding the need of selling assets in the frictional OTC market. The liquidity feature of coupons thus commands a premium, which allows bond issuers to raise more funding upfront. In this paper, we provide a theoretical framework of this mechanism. To quantify such coupon premium, we have located a dataset that contains data on the prices of STRIPS. Empirically, we would first construct the synthetic price of a bond from its stripped pieces, and compare this synthetic price with the price of the original bond, to find the coupon premium.