We evaluate how a positive, technology-driven shock to bank liquidity affects small business dynamics across different size distributions. We first show that banks receiving positive liquidity shocks increase lending to relatively larger SMEs, not to the smallest firms. This finding is consistent with the view that a positive liquidity shock enhances bank charter values, thereby reducing risk-taking incentives. Moreover, such disproportionate credit allocation leads to a crowding-out effect on micro firms. When larger SMEs grow faster and exit less because of better access to credit, their expansion stifles the development of micro firms, whose access to credit remains unchanged.
{"title":"Credit Environment and Small Business Dynamics: Evidence from Establishment-Level Data","authors":"Chen Lin, Mingzhu Tai, Wensi Xie","doi":"10.1093/rcfs/cfac037","DOIUrl":"https://doi.org/10.1093/rcfs/cfac037","url":null,"abstract":"We evaluate how a positive, technology-driven shock to bank liquidity affects small business dynamics across different size distributions. We first show that banks receiving positive liquidity shocks increase lending to relatively larger SMEs, not to the smallest firms. This finding is consistent with the view that a positive liquidity shock enhances bank charter values, thereby reducing risk-taking incentives. Moreover, such disproportionate credit allocation leads to a crowding-out effect on micro firms. When larger SMEs grow faster and exit less because of better access to credit, their expansion stifles the development of micro firms, whose access to credit remains unchanged.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"193 2","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509253","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}
How do firms invest when financial constraints are relaxed? We document that firms affected by a large positive credit supply shock predominantly increase borrowing for transaction-based purposes. These treated firms have larger asset and employment growth rates; however, growth entirely stems from the increased takeover activity. Announcement returns indicate a low quality of the credit-supply-induced takeover activity. These results offer the possibility that credit-driven growth can simply reflect redistribution, rather than net gains in assets or employment.
{"title":"Credit Supply Shocks: Financing Real Growth or Takeovers?","authors":"Tobias Berg, D. Streitz, M. Wedow","doi":"10.1093/rcfs/cfac034","DOIUrl":"https://doi.org/10.1093/rcfs/cfac034","url":null,"abstract":"\u0000 How do firms invest when financial constraints are relaxed? We document that firms affected by a large positive credit supply shock predominantly increase borrowing for transaction-based purposes. These treated firms have larger asset and employment growth rates; however, growth entirely stems from the increased takeover activity. Announcement returns indicate a low quality of the credit-supply-induced takeover activity. These results offer the possibility that credit-driven growth can simply reflect redistribution, rather than net gains in assets or employment.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":" ","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43092560","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 document novel evidence on the spillover effect of a corporate control regulation on local mortgage markets. We find that banks directly targeted by the Sarbanes-Oxley Act (SOX) to rectify their internal control weaknesses reduce mortgage originations following the regulation’s enactment. This causes mortgage credit to be reallocated toward other banks in the same local markets: while competing public banks expand lending to safer borrowers, private banks increase lending toward risky applicants. Consequently, loans originated by private banks in spillover counties report higher default rates.
{"title":"Regulatory Spillovers in Local Mortgage Markets","authors":"Ivan Lim, Duc Duy Nguyen, Linh Nguyen","doi":"10.1093/rcfs/cfac035","DOIUrl":"https://doi.org/10.1093/rcfs/cfac035","url":null,"abstract":"We document novel evidence on the spillover effect of a corporate control regulation on local mortgage markets. We find that banks directly targeted by the Sarbanes-Oxley Act (SOX) to rectify their internal control weaknesses reduce mortgage originations following the regulation’s enactment. This causes mortgage credit to be reallocated toward other banks in the same local markets: while competing public banks expand lending to safer borrowers, private banks increase lending toward risky applicants. Consequently, loans originated by private banks in spillover counties report higher default rates.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"59 3","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509238","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 develop a dynamic capital structure model in which interest rates are stochastic and driven by three state variables: level, slope, and curvature of the yield curve in an arbitrage-free Nelson-Siegel model. Our analysis suggests that the yield-curve factors are critical determinants of the capital structure of firms and that an increase in any of the three factors is followed by an increase of the firm’s leverage and a shortening of its debt maturity. We perform a two-stage least squares system of equations that accounts for the joint determination of leverage and debt maturity and confirms our model’s predictions.
{"title":"Capital Structure and the Yield Curve","authors":"Diogo Duarte, Özde Öztekin, Yuri F Saporito","doi":"10.1093/rcfs/cfac036","DOIUrl":"https://doi.org/10.1093/rcfs/cfac036","url":null,"abstract":"We develop a dynamic capital structure model in which interest rates are stochastic and driven by three state variables: level, slope, and curvature of the yield curve in an arbitrage-free Nelson-Siegel model. Our analysis suggests that the yield-curve factors are critical determinants of the capital structure of firms and that an increase in any of the three factors is followed by an increase of the firm’s leverage and a shortening of its debt maturity. We perform a two-stage least squares system of equations that accounts for the joint determination of leverage and debt maturity and confirms our model’s predictions.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"60 3","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-10-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509236","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 use an exogenous, forward-looking measure of price uncertainty to examine the effect of uncertainty on the use of covenants in private and public debt contracts. The effect of uncertainty differs significantly in loans versus bonds, suggesting that private and public lenders face different incentives when contracting under high uncertainty. In loans, uncertainty increases the use of performance-based covenants. In contrast, covenant usage decreases in bonds, but firms with low agency conflicts mainly drive this effect. However, bondholders require higher spreads to offset the lack of protection with fewer covenants. Hedging does not affect the covenant-uncertainty relationship for debt contracts.
{"title":"Price Uncertainty and Debt Covenants: Evidence from U.S. Oil Producers","authors":"Sandrine Docgne, Diogo Duarte","doi":"10.1093/rcfs/cfac033","DOIUrl":"https://doi.org/10.1093/rcfs/cfac033","url":null,"abstract":"We use an exogenous, forward-looking measure of price uncertainty to examine the effect of uncertainty on the use of covenants in private and public debt contracts. The effect of uncertainty differs significantly in loans versus bonds, suggesting that private and public lenders face different incentives when contracting under high uncertainty. In loans, uncertainty increases the use of performance-based covenants. In contrast, covenant usage decreases in bonds, but firms with low agency conflicts mainly drive this effect. However, bondholders require higher spreads to offset the lack of protection with fewer covenants. Hedging does not affect the covenant-uncertainty relationship for debt contracts.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"35 1","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509254","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}
Between 2010 and 2020, the U.S. coal industry experienced a 50% drop in production, employment, and active mines, driven by regulatory factors and technological innovation in alternative energy sources. We study the impact of this energy transition on household employment, wages, migration, and home ownership in affected communities. Compared to non-coal-producing, resource-rich counties, coal-producing counties experience 6% and 4% drops in employment and wages, respectively, during this period. Economic mobility and access to banking services significantly moderate these real effects, suggesting a potential role for finance to shape the industrial and economic changes associated with climate transitions.
{"title":"Energy Transitions and Household Finance: Evidence from U.S. Coal Mining","authors":"Ding Du, Stephen A Karolyi","doi":"10.1093/rcfs/cfac031","DOIUrl":"https://doi.org/10.1093/rcfs/cfac031","url":null,"abstract":"Between 2010 and 2020, the U.S. coal industry experienced a 50% drop in production, employment, and active mines, driven by regulatory factors and technological innovation in alternative energy sources. We study the impact of this energy transition on household employment, wages, migration, and home ownership in affected communities. Compared to non-coal-producing, resource-rich counties, coal-producing counties experience 6% and 4% drops in employment and wages, respectively, during this period. Economic mobility and access to banking services significantly moderate these real effects, suggesting a potential role for finance to shape the industrial and economic changes associated with climate transitions.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"56 3","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509227","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 board reforms on stock liquidity using data from 37 countries. We document that board reforms significantly increase stock liquidity: the effective spread on average decreases by 12.7% after a board reform. As information asymmetry is a key determinant of stock liquidity, we further find that board reforms decrease information asymmetry, and the treatment effect of board reforms on stock liquidity is stronger for firms with ex ante higher information asymmetry. Finally, board reforms facilitate healthy stock market development, with the effect being stronger for countries with lower aggregate stock market liquidity prior to reforms.
{"title":"Board Reforms, Stock Liquidity, and Stock Market Development","authors":"Buhui Qiu, T. To","doi":"10.1093/rcfs/cfac030","DOIUrl":"https://doi.org/10.1093/rcfs/cfac030","url":null,"abstract":"\u0000 This paper studies the effect of board reforms on stock liquidity using data from 37 countries. We document that board reforms significantly increase stock liquidity: the effective spread on average decreases by 12.7% after a board reform. As information asymmetry is a key determinant of stock liquidity, we further find that board reforms decrease information asymmetry, and the treatment effect of board reforms on stock liquidity is stronger for firms with ex ante higher information asymmetry. Finally, board reforms facilitate healthy stock market development, with the effect being stronger for countries with lower aggregate stock market liquidity prior to reforms.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":" ","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-09-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48793908","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}
Matthias Efing, Rüdiger Fahlenbrach, Christoph Herpfer, Philipp Krueger
Past research has suggested that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17% on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, particularly in competitive industries. Firms’ exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints.
{"title":"How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?","authors":"Matthias Efing, Rüdiger Fahlenbrach, Christoph Herpfer, Philipp Krueger","doi":"10.1093/rcfs/cfac024","DOIUrl":"https://doi.org/10.1093/rcfs/cfac024","url":null,"abstract":"Past research has suggested that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17% on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, particularly in competitive industries. Firms’ exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"57 6","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509223","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 analyze rights and public offerings when informed shareholders strategically choose to subscribe. Absent wealth constraints, rights offerings achieve the full information outcome and dominate public offerings. When some shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights. In both rights and public offerings, there is a trade-off between investment efficiency and wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low types opt for rights offerings, while intermediate types select public offerings.
{"title":"Equity Issuance Methods and Dilution","authors":"Mike Burkart, Hongda Zhong","doi":"10.1093/rcfs/cfac029","DOIUrl":"https://doi.org/10.1093/rcfs/cfac029","url":null,"abstract":"We analyze rights and public offerings when informed shareholders strategically choose to subscribe. Absent wealth constraints, rights offerings achieve the full information outcome and dominate public offerings. When some shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights. In both rights and public offerings, there is a trade-off between investment efficiency and wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low types opt for rights offerings, while intermediate types select public offerings.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"57 4","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138509224","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 how the nature of managerial skills affects firms’ governance decisions. As required skills shift from firm specific toward more general abilities, replacing an underperforming CEO with an outside hire becomes more profitable for shareholders. Therefore, firms adopt stronger governance arrangements to limit the entrenchment of incumbent CEOs and exploit the improved opportunities offered by the market for talent. The analysis rationalizes the observed trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size, and the nature of managerial skills.
{"title":"Managerial Entrenchment and the Market for Talent","authors":"Fabio Feriozzi","doi":"10.1093/rcfs/cfac028","DOIUrl":"https://doi.org/10.1093/rcfs/cfac028","url":null,"abstract":"This paper studies how the nature of managerial skills affects firms’ governance decisions. As required skills shift from firm specific toward more general abilities, replacing an underperforming CEO with an outside hire becomes more profitable for shareholders. Therefore, firms adopt stronger governance arrangements to limit the entrenchment of incumbent CEOs and exploit the improved opportunities offered by the market for talent. The analysis rationalizes the observed trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size, and the nature of managerial skills.","PeriodicalId":44656,"journal":{"name":"Review of Corporate Finance Studies","volume":"6 1","pages":""},"PeriodicalIF":11.3,"publicationDate":"2022-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138543094","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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