Igor Cunha

Publications/Forthcoming Papers

Do Credit Rating Agencies Influence Elections?, 2022 (With Miguel Ferreira and Rui Silva)

• Review of Finance 26(4), 937-969

We show that credit rating agencies can influence political elections. We find that incumbent political parties experience an increase in their vote shares following municipal bond upgrades. The evidence is consistent with rating agencies affecting elections indirectly by expanding local governments’ debt capacity and directly through an impact on voters’ perceptions of the quality of incumbent politicians. To identify these effects, we examine election outcomes within neighboring counties by exploiting exogenous variation in municipal bond ratings due to Moody’s recalibration of its scale in 2010.

Why Do Firms Hold Cash? Evidence from Demographic Demand Shifts, 2020 (With Josh Pollet)

• Review of Financial Studies 33(9), 4102-4138

We exploit variation in demand induced by demographics to provide causal evidence of the precautionary motive of cash holdings. Specifically, we show that firms significantly increase their cash levels in response to exogenous increases in investment opportunities. We also present the dynamics of accumulation and use of cash in response to changes in forecasted demand. Financially constrained firms build their cash reserves using internal sources. Consequently, they start saving earlier and keep high cash levels longer. Unconstrained firms rely on external financing both to invest and build cash reserves, allowing them to save less and incur lower costs of carry.

The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration, 2017 (With Manuel Adelino and Miguel Ferreira)

• Review of Financial Studies 30(9), 3223-3268

We show that municipalities’ financial constraints can have a significant impact on local employment and growth. We identify these effects by exploiting exogenous upgrades in U.S. municipal bond ratings caused by Moody’s recalibration of its ratings scale in 2010. We find that local governments increase expenditures because their debt capacity expands following a rating upgrade. These expenditures have an estimated local income multiplier of 1.9 and a cost per job of $20,000 per year. Our findings suggest that debt-financed increases in government spending can improve economic conditions during recessions.  

The Real Effects of Credit Ratings: The Sovereign Ceiling Channel, 2017 (With Heitor Almeida, Miguel Ferreira and Felipe Restrepo)

• Journal of Finance 72(1), 249-290

We study the real effects of credit rating downgrades by exploring the exogenous variation on ratings that is due to the rating agencies' sovereign ceiling policies. Sovereign downgrades have a disproportional effect on the rating of firms whose rating is equal to or above the sovereign rating prior to the downgrade (bound firms). This asymmetric effect leads to greater reductions in investment and net debt issuance of bound firms relative to otherwise similar firms that are below the sovereign bound. Consistent with a contraction in the supply of debt capital, bond yields of bound firms increase more than yields of firms below the bound following a sovereign downgrade. Our findings suggest that poor public debt management has real effects on the corporate sector through the sovereign ceiling channel, and not only through changes in macroeconomic fundamentals.

Corporate Liquidity Management: A Conceptual Framework and Survey, 2014 (With Heitor Almeida, Murillo Campello and Michael  Weisbach )

• Annual Review of Financial Economics 6, 132-145 

Ensuring that a firm has sufficient liquidity to finance valuable projects that occur in the future is at the heart of the practice of financial management. Yet, while discussion of these issues goes back at least to Keynes (1936), a substantial literature on the ways in which firms manage liquidity has developed only recently. We argue that many of the key issues in liquidity management can be understood through the lens of a framework in which firms face financial constraints and wish to ensure efficient investment in the future. We present such a model and use it to survey many of the empirical findings on liquidity management.

Much of the variation in the quantity of liquidity can be explained by the precautionary demand for liquidity. While there are alternatives to cash holdings such as hedging or lines of credit, cash remains “king”, in that it still is the predominate way in which firms ensure future liquidity for future investments. We discuss theories on the choice of liquidity measures and related empirical evidence. In addition, we discuss agency-based theories of liquidity, the real effects of liquidity choices, and the impact of the 2008-9 Financial Crisis on firms’ liquidity management.

Endogenous leverage and expected stock returns, 2011 (With T. Johnson, T. Chebonenko, F. D'Almeida, X. Spencer) 

• Finance Research Letters, 8(3),132-145 (2011)

• Finance Research Letters Ross Best Paper Award, 2011

This note clarifies conditions under which endogenous choice of debt induces a negative relation between leverage or default risk and expected stock returns. In the context of the model of George and Hwang [2009. Journal of Financial Economics 96, 56–79], we correct the contention that variation in bankruptcy costs across firms is sufficient. Variation in asset risk parameters can lead to the desired relation, but may not when also controlling for variation in book-to-market ratios. A simple parameterization of cross-sectional heterogeneity in risk and profitability implies a negative association of expected return with leverage and distress risk and a positive association with book-to-market. 

Working Papers

A Century of Municipal Bond Financing, 2022 (With Gustavo Cortes and Klenio Barbosa)

• Presented at:

•  2023 WFA

• Yale Junior Conference

• Texas A&M University Young Scholars

• Virtual Municipal Finance Workshop

We study the evolution of municipal bond issuers' debt structure over 100 years. We identify two significant declines in maturities in the 1930s and 1980s, accounting for a 50\% decline in bond maturities. These events are linked to macroeconomic shifts during the Great Depression and legal changes that impacted banks' demand for municipal bonds and facilitated mutual funds' market access. We document that shorter maturities have real consequences. When natural disaster strikes, local governments with shorter bond maturities face significant hurdles in meeting unexpected expenditure spikes. Our findings highlight how clientele matters for the resilience of municipal financing.

The Real Effects of Politicians' Compensation, 2019 (With Paulo Manoel)

• Presented at the 2020 EFA

• Presented at the 2021 AFA

We study how improvements in the local public administration affect real economic activity by examining exogenous variation in elected municipal officials' salaries steaming from population-based wage caps in Brazil. We find that higher wages for local elected offices are associated with increases in firm creation, job generation, and initial capital contributions for new establishments. We show that higher salaries for municipal elective offices induce more accountability through increased political competition. Better-paid officials improve public administration's quality by reducing patronage and increasing access to state funding. Our evidence highlights the positive spillovers of higher political wages on business activity, particularly in economically vulnerable settings.

Internal vs. External Cash: Evidence on M&As and Share Repurchases, 2012

Previously circulated as "Easy Come, Easy Go: Free Cash and Bad Investment Decisions"

• Presented at the 2014 AFA meeting

Large cash reserves have typically been associated with agency problems and poor investment decisions. I explore the cross sectional variation on the sources of cash holdings (internal vs. external to the firm) and find that previous evidence on overinvestment is mainly driven by firms that build their cash reserves using internal funds. Firms that use external funds do not engage in empire-building acquisitions that destroy shareholder value. I also find that these firms present higher announcement returns to their share repurchases in response to a signal they send to the market that they are no longer dependent on external capital.

Back in Style (Limited Edition): Contrasts in Style and CEO impact on corporate policy, 2011 (With Rafael Ribas)

This paper proposes a new method to estimate the CEOs' influence on corporate finance policies. We develop a measure that explores the contrasts between the exiting and the new CEO's style to observe their effects on different corporate policies around a turnover. Our measure also allows us to quantify the influence of biases on the results found in the existing literature. We find that CEO's preferences impact the firm's decision (Back in Style), but not as much as previously thought (Limited Edition). Using exogenous turnovers we find that CEOs' style affect investment policy, leverage levels, selling and general expenses, advertising expenses and performance. However, we are unable to identify the impact of a CEO on interest coverage, cash holdings, dividends and R&D expenses.