Anup Srivastava Wins Best Paper Award

Srivastava, an assistant professor of business administration, received the award at this year’s annual European Financial Management Association conference.

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Tuck Professor Anup Srivastava
Tuck professor Anup Srivastava co-authored an award-winning study examining borrower behavior.

Anup Srivastava, an assistant professor of business administration at Tuck who specializes in accounting and capital markets, was one of three co-authors of a working paper to receive the Larry Lang Corporate Finance Best Paper Award from the European Financial Management Association (EFMA).

Srivastava, along with Hyun Hong and Ji Woo Ryou received the award on June 30 at the EFMA conference in Athens, Greece. The award recognizes “the research paper that has the most potential to advance our understanding in the field of corporate finance,” according to the EFMA announcement.  

The co-authors won the award for their Tuck working paper “You Blinked: The role and incentives of managers in increasing corporate risks following the inception of credit default swap trade.” In it, they studied what happens to borrower behavior when a lender obtains insurance, in the form of a credit default swap (CDS), on a loan. They hypothesized that the insurance would cause the lender to reduce its monitoring efforts on the borrower, which would then, in turn, cause the borrower to engage in more risky investments to increase the values of call options built into shareholder investments. The authors’ findings did not align with their hypothesis, on average.

The authors then argue that their stated hypothesis ignores the interests of managers, the third key stakeholder in modern corporations, characterized by a separation of ownership and control. When the authors considered the interests of managers, they found that the borrowing company changes its investment policy in the interest of lenders or shareholders depending on the managerial incentives. If managers’ wealth increases convexly with firm assets, then the borrowing firm increases riskier investments, benefiting shareholders but harming lenders’ interests. If managers’ compensation structure makes them risk averse, then they pursue more conservative investment policies, consistent with lenders’ interests.

“Our results show that shareholders do not always lose upon CDS inception …because of increased threat of foreclosure from lenders who lose interest in efficient continuation of the company,” they write. “Shareholders could benefit from the increased value of a call option built into their investments, when managers enhance activities that were previously constrained by lender monitoring.”