Job Market Paper

Knightian Uncertainty and Capital Structure: Theory and Evidence

Abstract

    I derive the optimal capital structure of a firm when its manager is ambiguity-averse. My model predicts substantially lower leverage for such firms, in comparison to traditional static trade-off models. I use the 1982 Voluntary Restraint Agreement (VRA) on steel import quotas between the U.S. government and the European Community as an exogenous reduction in Knightian uncertainty faced by firms in the U.S. steel industry. Using a difference-in-difference methodology, I find that when uncertainty is resolved, a median firm in the U.S. steel industry increases its market and book leverage by approximately 12% relative to a matched control firm from another industry. The results are not explained away by changes in traditional risk factors or by a change in expected future profitability.

Working Paper

A New Measure of Knightian Uncertainty

Abstract

    I develop a new measure of Knightian uncertainty using a mixture of normal distributions. Using this novel measure, I find that a median firm in the sample increases its market leverage by approximately 3.6%, when the firm’s measure of uncertainty increases by one standard deviation. I also find an increase in a firm’s uncertainty measure from the minimum to the maximum is associated with a 6.3% increase in the firm’s propensity of taking almost zero leverage, fixing the other control variables as their means.

Work in Progress

Knightian Uncertainty and Dynamic Capital Structure

Knightian Uncertainty and Optimal CEO compensation with Uday Rajan

Master Thesis

Bayesian Stochastic Volatility Model with non-Gaussian Errors

Presentation Slides

Software Production

Stochastic Volatility Model Estimation with Flexible Normal Mixture MCMC (written in C and OX).  Version 3.1, 2008

U.S. Patent

    “Recovery from errors in a data processing apparatus,” U.S. Patent Number: 20050207521.  Issued: September 22, 2005.