Giorgia Piacentino Associate Professor

Contact Information

CV

Accepted Papers

Conflicting Priorities: A Theory of Covenants and Collateral forthcoming at the Journal of Finance (Slides)

We develop a model in which the absolute priority of secured debt leads to conflicts among creditors, but can be optimal nonetheless. The option to use collateral to dilute unsecured debt, even in violation of covenants, helps borrowers to avoid under-investment problems. But covenants embed an option to accelerate that helps creditors avoid over-investment problems.

Money Runs 2022, Journal of Monetary Economics 126 (March 2022) (Slides, NBER WP, CEPR WP)

With Jason R Donaldson

We present a banking model in which, as in practice, bank debt is both a financial security used to raise funds and a kind of money used to facilitate trade. This dual role of bank debt provides a new rationale for why banks do what they do. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. And they are endogenously fragile.

Intermediation Variety 2021, Journal of Finance 76 (6) (NBER WP, CEPR WP)

With Jason R Donaldson and Anjan Thakor

Non-depository financial intermediaries ("non-banks") have a higher cost of capital than depositories ("banks") do, because they do not benefit from government safety nets. How do they still compete with banks? Non-banks use their high cost of capital as a commitment device not to fund traditional projects, inducing entrepreneurs to innovative efficiently.

Deadlock on the Board 2020, Review of Financial Studies 33 (10) (Slides, NBER WP, CEPR WP)

With Jason R Donaldson and Nadya Malenko

RFS Editor’s Choice article

ASU Sonoran Wfinter Finance Conference 2018 Best Paper Award

In a dynamic model of board decision making, directors strategically block proposals that benefit other directors. Such deadlock on the board explains CEO entrenchment and strategic inertia. We study how board composition affects deadlock, and find, for example, that board diversity can exacerbate it.

The Paradox of Pledgeability 2020, Journal of Financial Economics 137 (3) (Slides)

With Jason R Donaldson and Denis Gromb

We develop a model in which collateral serves to protect creditors from the claims of competing creditors. We find that collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment---there is a collateral overhang.

Response to a critique of this paper

Household Debt and Unemployment 2019, Journal of Finance 74 (3)

With Jason R Donaldson and Anjan Thakor

Using a search model, we find that levered households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. The equilibrium level of household debt is inefficiently high due to a household-debt externality.

Venture Capital and Capital Allocation 2019, Journal of Finance 74 (3)

I show that venture capitalists’ career concerns can have beneficial effects in the primary market: they can mitigate information frictions, helping firms go public.

Warehouse Banking 2018, Journal of Financial Economics 129 (2) (Slides)

With Jason R Donaldson and Anjan Thakor

We develop a theory of banking that explains why banks started out as commodities warehouses. Our theory helps to explain how modern banks create funding liquidity and why they combine warehousing (custody and deposit-taking), lending, and private money creation within the same institutions.

Contracting to Compete for Flows 2018, Journal of Economic Theory 173

With Jason R Donaldson

Delegated asset managers frequently refer to public information, such as credit ratings and benchmark indices, in the contracts they offer their investors. However, regulators have advised against this. Why do asset managers refer to public inforamtion in their contracts? We show that it is a way for asset managers to compete for flows of investor capital, even though it is socially inefficient.

The Wall Street Walk when Blockholders Compete for Flows 2015, Journal of Finance 70 (6)

With Amil Dasgupta

Many blockholders are money managers. We show that, when money managers compete for investor capital, the threat of a block sale ("exit") loses credibility, weakening its governance role.

Working Papers

A New Theory of Credit Lines (With Evidence) 2024 (Slides)

With Jason R Donaldson, Naz Koont and Victoria Vanasco

We develop a model that suggests a heretofore unexplored role of credit lines: To mitigate debt dilution. The results give a new perspective on the literature on leverage ratchet effects, suggesting they can be curbed by (latent) credit lines. The model explains numerous facts, including why credit lines are pervasive but rarely drawn down and why they are bundled with loans, especially for riskier borrowers. We find that the risk of credit line revocation increases borrower leverage and riskiness, suggesting that limited bank commitment can contribute to corporate distress. We find empirical support for this prediction.

Systemic Risk in Financial Networks Revisited: The Role of Maturity 2022, R&R at the Journal of Finance (Slides)

With Jason R Donaldson and Xiaobo Yu

We ask how liquidity risk propagates in interbank networks. We show that the answer turns on the maturity of interbank debt. Indebtedness and connectedness are sources of fragility if debt is short term, but of stability if it is long term. The right network of long-term debts implements the optimal allocation of liquidity.

Restructuring vs. Bankruptcy 2022, R&R at the Journal of Finance (Slides)

With Jason R Donaldson, Ed Morrison, and Xiaobo Yu

How can firms resolve financial distress? Bankruptcy is one way, albeit a costly one. A less costly way is out-of-court restructuring. But hold-out problems can make it infeasible. Do policies that encourage bankruptcy filings, by, e.g., decreasing costs, crowd out restructuring? We find that the answer is no. We study how regulatory interventions can further increase welfare.

Sovereign Bond Restructuring: Commitment vs. Flexibility 2022

With Jason R Donaldson and Lukas Kremens

Sovereigns in distress often engage in bond restructuring. Does the ability to restructure one class of bonds benefit that class? Does it benefit other classes too? Evidence from a landmark UK High Court ruling suggests the answers: yes and yes.

Collateral Reallocation 2021

With Jason R Donaldson and Denis Gromb

Assets pledged as collateral for secured debt cannot be sold unless the debt is paid or otherwise renegotiated. We develop a model of this role of collateralization. We find that debt market frictions (alone) can cause the asset market to fail, causing misallocation.

The Opportunity Cost of Collateral 2018

With Jason R Donaldson and Jeongmin (Mina) Lee

Interbank debt is money-like, but not a perfect substitute for cash: it can be hard to convert to cash to fund new investments. Hence, interbank lending comes with an opportunity cost that generates positive spreads even absent any credit risk. These spreads enter banks’ collateral constraints, generating a feedback between the opportunity cost in the credit market and the price of collateral in the asset market. This results in instability in the form of multiple equilibria, casting light on repo runs. We provide a new rational for counter-cyclical capital regulation.

Netting 2018

With Jason R Donaldson

Banks hold gross debts without netting them out. Why? These gross debts implement valuable contingent transfers via the option to dilute. Proposition 1 of this paper is superseded by Debt Maturity in Financial Networks (above).

Do Institutional Investors Improve Capital Allocation?

(Largely subsumed by Venture Capital and Capital Allocation)