Published PapersSubramanian, Krishnamurthy., Tantri, Prasanna.,Sarkar, Arkodipta. (Forthcoming) "Effects of CEO Turnover in Banks: Evidence Using Exogenous Turnovers in Indian Banks", Journal of Financial and Quantitative AnalysisRead Abstract >Close >We examine the effect of CEO turnover on earnings management in banks. Since banking is intrinsically an opaque activity, we hypothesize that an incoming CEO of a bank is more likely to manage earnings than a counterpart in a non- financial firm. To identify the hypothesized effects, we exploit exogenous variation generated by age-based CEO retirement policies in Indian public sector firms. Com- pared to banks where there is no turnover, banks experiencing CEO turnover report 23% lower profit-to-sales and 25% lower return-on-assets in the transition quarter. This decrease occurs due to increased provisions, though such provisions do not associate with increased non-performing assets subsequently. Shorter CEO tenure exacerbates earnings management by the incoming CEO. The stock price declines by 1%, and lending is 2% lower than average, which highlight the real effects of earnings management by incoming CEOs. In contrast to banks, we observe no earnings management coinciding with CEO turnover for other public sector firms. As evidence of motivation, we show that earnings management increases likelihood of directorship positions in other firms within two years of retirement.

Published PapersMurphy, Dermot., Thirumalai, Ramabhadran S. (2017) "Short-Term Return Predictability and Repetitive Institutional Net Order Activity", Journal of Financial Research, 40 (455-477)Read Abstract >Close >Half-hour returns are predictive of same half-hour returns in subsequent days. Using a unique dataset that provides masked trader identification and trader type, we find that the half-hour net order submission activity of institutional traders is positively and significantly associated with same half-hour returns on subsequent days, and that this relationship subsumes the return predictability in shorter intervals. We hypothesize that institutional net order activity is predictive of returns either because of repetitive order submission activity across days, or because of the slow diffusion of information that is initially revealed by institutional traders. Our evidence supports the former hypothesis.

Published PapersKapoor, Mudit.,Jagannathan, Ravi.,Ernst Schaumburg. (2013) "Causes of the Great Recession of 2007-9, The Financial Crisis is the Symptom not the Disease", Journal of Financial Intermediation, 22 (1), 4-29Read Abstract >Close >Globalization has brought a sharp increase in the developed world’s labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world’s labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession: The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored.

Published PapersChava, Sudheer.,Oettl, Alexander.,Subramanian, Ajay., Subramanian, Krishnamurthy. (2013) "Banking Deregulation and Innovation", Journal of Financial Economics, 109 (3), 759-774Read Abstract >Close >We document empirical support for a key micro-level channel innovation by young, private firms-through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.

Published PapersAllen, Franklin.,Chakrabarti, Rajesh.,De, Sankar.,Qian, Jun.,Qian, Meijun. (2012) "Financing Firms in India", Journal of Financial IntermediationRead Abstract >Close >With extensive cross-country datasets and India firm samples, as well as our own surveys of small and medium firms, we examine the legal and business environments, financing channels, and growth patterns of different types of firms in India. Despite the English common-law origin and a British-style judicial system, Indian firms face weak investor protection in practice and poor institutions characterized by corruption and inefficiency. Alternative finance, including financing from all non-bank, non-market sources, and generally backed by non-legal mechanisms, constitutes the most important form of external finance. Bank loans provide the second most important external financing source. Firms with access to bank or market finance are not associated with higher growth rates. Our results indicate that bank and market finance is not superior to alternative finance in fast-growing economies such as India.

Published PapersBubna, Amit.,Prabhala, N R. (2011) "IPOs With and Without Allocation Discretion: Empirical Evidence", Journal of Financial Intermediation, 20, 530-561Read Abstract >Close >Book building is the dominant offering mechanism for IPOs in the U.S. and other markets. It is controversial, in large part because it gives underwriters extensive power over IPO allocations. Critics argue that allocations could be abused to generate kickbacks for underwriters while proponents hold that allocation power could improve pre-market price discovery. We examine the effect of varying underwriter power over IPO allocations in the Indian IPO market, exploiting natural variation induced by market regulations. When underwriters control allocations, book building is associated with lesser under-pricing, but this effect quickly dissipates when regulations withdraw allocation powers. Using proprietary data sets on IPO books, we examine how underwriters use allocation powers. We …find that allocation discrimination is pervasive, economically significant, and is used to differentiate between institutional bidders based on the size of the bid as well as non-bid information such as the type of the bidder and other soft information possessed by IPO managers. Our evidence supports book building theories in which giving underwriters allocation powers assists in pre-market price discovery.

Published PapersSubramanian, Krishnamurthy., Viral V Acharya. (2009) "Bankruptcy Codes and Innovation", Review of Financial Studies, 22 (12), 4949-4988Read Abstract >Close >We consider the investment and financing choices of a firm as a function of the bankruptcy code under which it operates. We model investment as a choice between innovative exploration and pursuit of tried-and-tested strategy, and financing as the choice of leverage given the tradeoff between its tax benefits and deadweight costs in bankruptcy. Deadweight costs in bankruptcy arise due to creditors’ preference for liquidating assets or that of debtors in excessively continuing with assets, and their severity depends upon the nature of investment as well as on the relative creditor-friendly or debtor-friendly nature of the bankruptcy code. We show that under mild parametric restrictions, stronger creditor rights result in lower value and lower leverage-based financing of innovative investments relative to triedand- tested strategies.

Published PapersSonti, Ramana., Naveen Khanna, Thomas H Noe. (2008) "Good IPOs draw in bad: Inelastic banking capacity and hot markets", Review of Financial Studies, 21 (5), 1873-1906Read Abstract >Close >We posit that screening IPOs requires specialized labor which is in fixed supply. A sudden increase in demand for IPO financing increases the compensation of IPO screening labor. This results in reduced screening, encouraging sub-marginal firms to enter the IPO market, further fueling the demand for screening labor. The model’s conclusions are consistent with empirical findings of increased underpricing during hot markets, positive correlation between issue volume and underpricing, and with tipping points between hot and cold markets. Finally, the model makes sharp predictions relating the IPO market to fundamental values of firms and to investment banking returns. (JEL G20, G24)