Job Market Paper
Bottleneck Risk: The Effect of Approval Times on Investment
Draft available soon.
Abstract
How do approval times influence firms’ investment decisions? Within the real options framework, firms have full control over their actions. However, in reality, critical investments often require approval, which is out of the firm’s direct control. I propose a simplified model where a firm’s decision to remain in or exit the approval process depends on two conflicting costs: re-entry costs and carrying costs during the wait. I take the question to the US electricity sector, where new power plants spend years waiting in interconnection queues before receiving approval to connect to the grid. I exploit a queue reform enacted by PJM, the largest regional transmission organization in the US, which raised carrying costs and was applied retroactively to projects that had already entered the queue under previous rules. As a result, exposure to the reform does not reflect anticipation or selection at entry. Following the reform, exit from the queue rises by roughly 50% relative to comparable projects in other regions. Consistent with the model predictions, these exits are mainly concentrated among more speculative projects with low re-entry costs, while projects with prearranged commitments and higher re-entry costs show little response.
Publications
Institutional Investors and the Fight Against Climate Change (2024), Corporate Governance: An International Review, with Zacharias Sautner
Paper (SSRN) | Paper (Journal) | UZH Research Highlight | Top 10 Most-Cited Article in 2024
Abstract
This article examines the role of institutional investors in the fight against climate change. We explain the institutional context, provide evidence highlighting institutional investors’ bright and dark sides in this fight, and develop multiple ideas for future research. We show that climate change has a significant impact on institutional investors. Simultaneously, we demonstrate that institutional investors can have a significant positive impact on fighting climate change, particularly if they actively engage with portfolio firms to reduce carbon emissions. For risk management reasons, this is in their own interest, and it is also in the interests of society. We highlight possible future research avenues on the link between institutional investors and climate change, emphasizing issues related to environmental, social, and governance (ESG) rating agencies, greenwashing, and the risk of a loss of trust in ESG products. Climate change constitutes one of the grand challenges of our time, and substantially more research on the role of finance is required.
Working Papers
The Ratchet Effect of Climate Investments, with Solveig Erlandsen and Emilia Garcia-Appendini
Draft under revision and available soon. | Poster
Abstract
Does monetary policy accelerate or hinder the green transition? We address this question using novel investment-level data on climate and non-climate projects by Norwegian firms, overcoming the limitations of prior studies that rely on financial proxies by observing real investment choices. We find that high-emission firms and those most exposed to transition risk are the most active in emissions mitigation and green product development. These climate investments display a ratchet effect: they increase under lower interest rates but remain stable under higher interest rates, relative to non-climate investments. In contrast, adaptation investments, undertaken by firms with substantial physical capital and exposure to physical climate risks, do not respond differently from non-climate investments. These dynamics reveal that monetary policy not only affects overall firm investment but also influences firms’ investment composition and the pace of the low-carbon transition.
Selected Presentations: NBER Climate Finance PhD Workshop, Columbia University, ECB, Norges Bank
The Resilience of MDB Bonds to Credit Rating Downgrades, with Steven Ongena and Christopher Humphrey
Abstract
We show that credit rating downgrades do not consistently impact multilateral development banks (MDBs) in the same way as they do firms and sovereigns. Unlike other entities, MDBs do not experience significant market reaction in bond yield spreads following credit rating downgrades. Additionally, downgrades of shareholder countries’ credit ratings do not systematically affect bond yield spreads for MDBs. The study suggests that the unique attributes of MDBs, such as preferred creditor treatment and callable capital, may account for these differences. Furthermore, MDBs’ bond issuance behavior is not significantly altered by credit rating downgrades.
Companion Paper: Multilateral Development Bank Bonds
Abstract: Multilateral development banks (MDBs) play a key role in development finance. MDBs raise capital by issuing a substantial quantity of bonds, both in terms of face value and volume. We are the first to analyze the bond issuance behavior and yield spread determinants of MDBs. Our findings highlight the increase in bond issues over time, driven by new MDB establishments and an increase in bonds issued per MDB. We also observe a shift from long-term to short-term bonds post-global financial crisis. Additionally, our analysis identifies factors such as credit ratings, governance indicators, and shareholder conflict as determinants of bond yield spreads.
Data: Country Shareholdings in MDBs available on request