Laura Gonzalez, Ph.D., assistant professor of finance, studies the information content of bank loans, and bubbles.
As part of her doctoral research, she examined how banks made loans to private tech firms during the dot.com bubble of the late 1990s. She concluded that banks were good at screening the potential of their high-risk borrowers before their initial public offerings (IPOs). She also studied loans made to public firms; even though most public firms have bank loans, the market still shows surprise and welcomes press announcements of those loans.
With her research grant, Gonzalez will look at bank loans during the recent lending bubble of 2005 to 2008, and examine the effect on the financial press and capital structure across industries.
According to prior evidence, banks gather and produce information on each approved loan candidate. This “positive-private” analysis is much like a letter of recommendation in the financial market.
“It’s positive because it means that the banks see potential in you,” Gonzalez said. “And it’s private because only the lending banks really know that information.”
Gonzalez will ask the question: When the financial press reported on the waves of bank loans during the recent aggressive lending bubble, was it “caught in the bubble?”
“The Fed and other regulators’ roles in the current crisis are under scrutiny, and credit agencies—to satisfy a pool of investors that needed safe labeling—were excessively positive in their assessments,” Gonzalez said.