We assess the role of banks in the Paycheck Protection Program (PPP), a large and unprecedented small business support program enacted as a response to the Covid-19 crisis in the US. The PPP administered over $525 billion in loans and grants to small businesses through the banking system. First, we provide empirical evidence of heterogeneity in the allocation of PPP funds. Firms that are larger and less affected by the Covid-19 crisis received loans earlier, even in a within-bank analysis. Second, we develop a model of PPP allocation through banks that is consistent with the data. We show that research designs based on bank or regional shocks in PPP disbursement, common in the empirical literature, cannot directly identify the overall effect of the program. Bank targeting implies that these designs can, at best, recover the effect of the PPP on a set of firms that is endogenous, changes over time, and is systematically different from the overall set of firms that receive PPP loans. We propose and implement a model--based estimation method of the overall effect of the program and find that the PPP saved 7.5 million jobs.
{"title":"Bank Incentives and the Impact of the Paycheck Protection Program","authors":"Gustavo Joaquim, Felipe Netto","doi":"10.2139/ssrn.3704518","DOIUrl":"https://doi.org/10.2139/ssrn.3704518","url":null,"abstract":"We assess the role of banks in the Paycheck Protection Program (PPP), a large and unprecedented small business support program enacted as a response to the Covid-19 crisis in the US. The PPP administered over $525 billion in loans and grants to small businesses through the banking system. First, we provide empirical evidence of heterogeneity in the allocation of PPP funds. Firms that are larger and less affected by the Covid-19 crisis received loans earlier, even in a within-bank analysis. Second, we develop a model of PPP allocation through banks that is consistent with the data. We show that research designs based on bank or regional shocks in PPP disbursement, common in the empirical literature, cannot directly identify the overall effect of the program. Bank targeting implies that these designs can, at best, recover the effect of the PPP on a set of firms that is endogenous, changes over time, and is systematically different from the overall set of firms that receive PPP loans. We propose and implement a model--based estimation method of the overall effect of the program and find that the PPP saved 7.5 million jobs.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122248125","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Large literatures in operations and economics analyze dynamic models of profit-optimizing firms. The insights and algorithms in these literatures can be adapted to maximize value if the model excludes external strategic interactions and risk of bankruptcy. The insertion of external strategic interactions in such a model converts it from a dynamic optimization model to a sequential game. This paper shows that the resulting sequential games are analogous to dynamic optimization models of the firm in the following sense. Insights and algorithms based on sequential games with a profit criterion and negligible bankruptcy risk can be adapted to their value-criterion counterparts. The illustrations in the paper are a model of the palm oil supply chain in Indonesia and a dynamic oligopoly in which inventories affect competition between firms.
{"title":"Value Games","authors":"M. J. Sobel","doi":"10.2139/ssrn.3930782","DOIUrl":"https://doi.org/10.2139/ssrn.3930782","url":null,"abstract":"Large literatures in operations and economics analyze dynamic models of profit-optimizing firms. The insights and algorithms in these literatures can be adapted to maximize value if the model excludes external strategic interactions and risk of bankruptcy. The insertion of external strategic interactions in such a model converts it from a dynamic optimization model to a sequential game. This paper shows that the resulting sequential games are analogous to dynamic optimization models of the firm in the following sense. Insights and algorithms based on sequential games with a profit criterion and negligible bankruptcy risk can be adapted to their value-criterion counterparts. The illustrations in the paper are a model of the palm oil supply chain in Indonesia and a dynamic oligopoly in which inventories affect competition between firms.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123611386","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Covid-19 pandemic poses an existential threat to European SMEs' financial resilience with significant consequences for the European economy. Using a unique firm‐level survey data on SME financing conditions and a new measurement approach, this paper focuses on the insolvency risk of European SMEs and their access to finance around pandemic. We show that SME insolvency risk increased, on average, by around 21% during the pandemic. Finding customers and the cost of production and labor have contributed notably to SME insolvency risk around this period. Heightened insolvency risk results in deterioration in expected access to finance in general. During the pandemic, though, no particular worsening is observed in access to bank lending. Overall, our results have important policy implications for designing suitable policy measures to mitigate SME liquidity shortages and avoid unnecessary insolvencies during and in the aftermath of the pandemic.
{"title":"Insolvency Risk of European SMEs during Pandemic","authors":"Orçun Kaya","doi":"10.2139/ssrn.3809628","DOIUrl":"https://doi.org/10.2139/ssrn.3809628","url":null,"abstract":"Covid-19 pandemic poses an existential threat to European SMEs' financial resilience with significant consequences for the European economy. Using a unique firm‐level survey data on SME financing conditions and a new measurement approach, this paper focuses on the insolvency risk of European SMEs and their access to finance around pandemic. We show that SME insolvency risk increased, on average, by around 21% during the pandemic. Finding customers and the cost of production and labor have contributed notably to SME insolvency risk around this period. Heightened insolvency risk results in deterioration in expected access to finance in general. During the pandemic, though, no particular worsening is observed in access to bank lending. Overall, our results have important policy implications for designing suitable policy measures to mitigate SME liquidity shortages and avoid unnecessary insolvencies during and in the aftermath of the pandemic.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115989509","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the effect of bank credit supply shocks on formal employment in Mexico using a proprietary dataset containing information on all loans extended to firms by commercial banks during 2010–2015. We find large impacts on the formal employment of small and medium firms: a positive credit shock of 1 standard deviation increases yearly employment by 1.4 percentage points. The shares of uncollateralized credit and credit received by family firms, younger firms, and firms with no previous bank relationships also increase, suggesting that credit shocks may play a more prominent role for employment creation in credit-constrained settings. (JEL D22, G21, G32, J23, L25, M51, O16)
{"title":"Do Credit Supply Shocks Affect Employment in Middle-Income Countries?","authors":"David Jaume, E. Gutiérrez, Martin Tobal","doi":"10.2139/ssrn.3805903","DOIUrl":"https://doi.org/10.2139/ssrn.3805903","url":null,"abstract":"This paper studies the effect of bank credit supply shocks on formal employment in Mexico using a proprietary dataset containing information on all loans extended to firms by commercial banks during 2010–2015. We find large impacts on the formal employment of small and medium firms: a positive credit shock of 1 standard deviation increases yearly employment by 1.4 percentage points. The shares of uncollateralized credit and credit received by family firms, younger firms, and firms with no previous bank relationships also increase, suggesting that credit shocks may play a more prominent role for employment creation in credit-constrained settings. (JEL D22, G21, G32, J23, L25, M51, O16)","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115528023","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We argue that political connections help financially constrained firms access external financing and consequently reduce their incentives to use tax planning as a source of internal financing. Consistent with this argument, we find that after a plausibly exogenous increase in political connections arising from close congressional elections, although financially unconstrained firms increase their tax planning, constrained firms decrease it. The decrease in tax planning is more pronounced when the connected politicians serve on the banking-related committees. Constrained firms also experience significant decreases in costs of equity capital, bank loan spreads, and bond yields and receive more government contracts after obtaining more political connections, supporting the idea that alleviating firms’ financial constraints is the mechanism through which political connections affect the tax planning of constrained firms. Collectively, our paper highlights the importance of financial constraints in understanding the tax planning of politically connected firms.
{"title":"Political Connections, Financial Constraints, and Corporate Taxation","authors":"Ke Na, T. Shevlin, Youan Wang, Zigan Wang","doi":"10.2139/ssrn.3893274","DOIUrl":"https://doi.org/10.2139/ssrn.3893274","url":null,"abstract":"We argue that political connections help financially constrained firms access external financing and consequently reduce their incentives to use tax planning as a source of internal financing. Consistent with this argument, we find that after a plausibly exogenous increase in political connections arising from close congressional elections, although financially unconstrained firms increase their tax planning, constrained firms decrease it. The decrease in tax planning is more pronounced when the connected politicians serve on the banking-related committees. Constrained firms also experience significant decreases in costs of equity capital, bank loan spreads, and bond yields and receive more government contracts after obtaining more political connections, supporting the idea that alleviating firms’ financial constraints is the mechanism through which political connections affect the tax planning of constrained firms. Collectively, our paper highlights the importance of financial constraints in understanding the tax planning of politically connected firms.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"72 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115958045","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Robert M. Adams, Kenneth P. Brevoort, John C. Driscoll
Has information technology improved small businesses' access to credit by hardening the information used in loan underwriting and reducing the importance of proximity to lenders? Previous research, pointing to increasing average lending distances, suggests that it has. But this conclusion can obscure differences across loans and lenders. Using over 20 years of Community Reinvestment Act data on small business lending, we find that while average distances have increased substantially, distances at individual banks remain unchanged. Instead, average distance has increased because a small group of lenders specializing in high-volume, small-loan lending nationwide have increased their share of small business lending by 10 percentage points. Our findings imply that small businesses continue to depend on local banks.
{"title":"Is Lending Distance Really Changing? Distance Dynamics and Loan Composition in Small Business Lending","authors":"Robert M. Adams, Kenneth P. Brevoort, John C. Driscoll","doi":"10.2139/ssrn.3604308","DOIUrl":"https://doi.org/10.2139/ssrn.3604308","url":null,"abstract":"Has information technology improved small businesses' access to credit by hardening the information used in loan underwriting and reducing the importance of proximity to lenders? Previous research, pointing to increasing average lending distances, suggests that it has. But this conclusion can obscure differences across loans and lenders. Using over 20 years of Community Reinvestment Act data on small business lending, we find that while average distances have increased substantially, distances at individual banks remain unchanged. Instead, average distance has increased because a small group of lenders specializing in high-volume, small-loan lending nationwide have increased their share of small business lending by 10 percentage points. Our findings imply that small businesses continue to depend on local banks.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"198 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121157826","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The real-world insurance markets show that the experience of having an accident increases insurance purchases in the next period relative to insurance purchases when in the immediately prior period there was no accident. There have been several explanations put forward to explain such behaviour, with the leading explanation involving probability updating. In the present paper, using a simple two-period model of intertemporal insurance, we posit a second reason for the effect based upon decreasing absolute risk aversion and consumption smoothing. We argue that under the assumption that the insured has access to a mechanism of savings and loans, then any two consecutive periods of insurance become inter-dependent, whereas without savings they are independent. Our findings show that savings as a consumption smoothing mechanism leads to post-accident insurance being significantly greater than post-no-accident insurance.
{"title":"On a New Paradigm of Optimal Insurance Demand and Saving in an Intertemporal Framework: Why Is Post-Accident Insurance Demand So High?","authors":"Richard Mumo, J. Njagarah, Richard Watt","doi":"10.2139/ssrn.3779684","DOIUrl":"https://doi.org/10.2139/ssrn.3779684","url":null,"abstract":"The real-world insurance markets show that the experience of having an accident increases insurance purchases in the next period relative to insurance purchases when in the immediately prior period there was no accident. There have been several explanations put forward to explain such behaviour, with the leading explanation involving probability updating. In the present paper, using a simple two-period model of intertemporal insurance, we posit a second reason for the effect based upon decreasing absolute risk aversion and consumption smoothing. We argue that under the assumption that the insured has access to a mechanism of savings and loans, then any two consecutive periods of insurance become inter-dependent, whereas without savings they are independent. Our findings show that savings as a consumption smoothing mechanism leads to post-accident insurance being significantly greater than post-no-accident insurance.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123743103","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A common corporate cash management strategy is to delay payments owed to suppliers. We examine whether buyers pay suppliers faster in response to a recent regulatory change in the United Kingdom that mandates the public disclosure of buyers’ payment practices. We find that after the regulatory change, UK firms subject to this regulation shortened their payment periods relative to several control samples of firms that were not subject to the regulation. In cross-sectional tests, we predict and find that this shortening of the payment period is attenuated for firms that are less able to bear the costs of paying suppliers faster. Specifically, we find that the reduction in the payment period is smaller for buyers that (i) have longer operating cycles, (ii) depend more heavily on trade credit as a source of external financing, and (iii) pay dividends. In supplemental tests using proprietary data, we find that buyers subject to this regulation reduced their trade credit that is overdue by 30 days or more. However, this reduction is partially offset by an increase in the trade credit that is overdue by less than 30 days. Our findings are important in light of the ongoing debate in other regimes (e.g., the United States) on whether to require additional disclosures of trade credit.
{"title":"The Check Is in the Mail: Can Disclosure Reduce Late Payments to Suppliers?","authors":"E. Chuk, Ben Lourie, Il-Sun Yoo","doi":"10.2139/ssrn.3775656","DOIUrl":"https://doi.org/10.2139/ssrn.3775656","url":null,"abstract":"A common corporate cash management strategy is to delay payments owed to suppliers. We examine whether buyers pay suppliers faster in response to a recent regulatory change in the United Kingdom that mandates the public disclosure of buyers’ payment practices. We find that after the regulatory change, UK firms subject to this regulation shortened their payment periods relative to several control samples of firms that were not subject to the regulation. In cross-sectional tests, we predict and find that this shortening of the payment period is attenuated for firms that are less able to bear the costs of paying suppliers faster. Specifically, we find that the reduction in the payment period is smaller for buyers that (i) have longer operating cycles, (ii) depend more heavily on trade credit as a source of external financing, and (iii) pay dividends. In supplemental tests using proprietary data, we find that buyers subject to this regulation reduced their trade credit that is overdue by 30 days or more. However, this reduction is partially offset by an increase in the trade credit that is overdue by less than 30 days. Our findings are important in light of the ongoing debate in other regimes (e.g., the United States) on whether to require additional disclosures of trade credit.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"146 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122643514","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a novel corporate social responsibility (CSR) index that captures various aspects of an insurer's internal and external CSR activities. We first show that insurers worldwide have significantly increased their CSR activities with the average index value almost doubling between 2006 and 2015. CSR activities are particularly pronounced at large firms, composite insurers, and insurance companies in Europe. We find that insurers' exposure to market risk in previous times significantly drives future CSR engagement. Finally, we provide empirical evidence for a causal and decreasing effect of an insurer's CSR on its tail risk as well as its short- and medium-term exposure to systemic risk.
{"title":"The Impact of Corporate Social Responsibility on Firms' Exposure to Tail Risk: The Case of Insurers","authors":"D. Sonnenberger, Gregor N. F. Weiß","doi":"10.2139/ssrn.3764041","DOIUrl":"https://doi.org/10.2139/ssrn.3764041","url":null,"abstract":"We propose a novel corporate social responsibility (CSR) index that captures various aspects of an insurer's internal and external CSR activities. We first show that insurers worldwide have significantly increased their CSR activities with the average index value almost doubling between 2006 and 2015. CSR activities are particularly pronounced at large firms, composite insurers, and insurance companies in Europe. We find that insurers' exposure to market risk in previous times significantly drives future CSR engagement. Finally, we provide empirical evidence for a causal and decreasing effect of an insurer's CSR on its tail risk as well as its short- and medium-term exposure to systemic risk.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130840228","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Small businesses in the United States are a major source of innovation and economic growth and employ more scientists and engineers than either large businesses or universities. In spite of these facts, recent reform in the patent system has had a disproportionately negative impact on small business. Many of these reforms were drafted with the intent of supporting small business; the changes to the patent system under the Leahy-Smith America Invents Act have had unintended consequences. There is a significant body of literature discussing the negative effects of patent reform on small business and proposing legislative solutions, but there has been little discussion about practical solutions to help undercapitalized inventors now. To help fill this gap, this article offers a discussion of defense-side patent litigation financing as a potential practical solution for small businesses and independent inventors faced with new challenges under current law. Defense-side patent litigation financing could provide protection for innovators who currently have little to no recourse, such as those unable to afford patent insurance while also proving beneficial to lawyers, finance firms, and the economy overall.
{"title":"Defense-Side Patent Litigation Financing: a Practical Solution for Inventors Harmed by the Patent System","authors":"C. Jaccard","doi":"10.2139/ssrn.3759430","DOIUrl":"https://doi.org/10.2139/ssrn.3759430","url":null,"abstract":"Small businesses in the United States are a major source of innovation and economic growth and employ more scientists and engineers than either large businesses or universities. In spite of these facts, recent reform in the patent system has had a disproportionately negative impact on small business. Many of these reforms were drafted with the intent of supporting small business; the changes to the patent system under the Leahy-Smith America Invents Act have had unintended consequences. There is a significant body of literature discussing the negative effects of patent reform on small business and proposing legislative solutions, but there has been little discussion about practical solutions to help undercapitalized inventors now. To help fill this gap, this article offers a discussion of defense-side patent litigation financing as a potential practical solution for small businesses and independent inventors faced with new challenges under current law. Defense-side patent litigation financing could provide protection for innovators who currently have little to no recourse, such as those unable to afford patent insurance while also proving beneficial to lawyers, finance firms, and the economy overall.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"222 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131733650","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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