Justin Murfin
Associate Professor of Finance, Cornell University
301 Warren Hall, Dyson School of Applied Economics and Management
SC Johnson College of Business
justin.murfin at cornell.edu
301 Warren Hall, Dyson School of Applied Economics and Management
SC Johnson College of Business
justin.murfin at cornell.edu
My research interests include financial intermediation, financial contracting, and the mechanisms by which price and non-price terms of credit are established. Prior to my appointment at Cornell, I served as an associate and assistant professor of finance at the Yale School of Management. I completed my PhD at Duke University, have a masters in economics from SMU, and an undergraduate degree from Princeton University. From 1998-2003, I worked for Barclays Capital in New York, Miami and Bogotá, Colombia.
Using a novel measure of contract strictness based on the ex-ante probability of a covenant violation, I investigate how lender-specific shocks impact the strictness of the loan contract that a borrower receives. Exploiting between-bank variation in recent portfolio performance, I find evidence that banks write tighter contracts than their peers after suffering payment defaults to their own loan portfolios, even when defaulting borrowers are in different industries and geographic regions than the current borrower.
We examine a novel, but economically important, characterization of trade credit relationships in which large investment-grade buyers borrow from their smaller suppliers. Using a matched sample of large retail buyers and their much smaller suppliers, we find that slower payment terms by large retailers are associated with lower investment and the supplier level. The effects are sharpest during periods of tight bank credit and for firms which we might otherwise characterize as financially constrained. The opportunity cost of extending credit to large buyers appears to be positive and sharply increasing in the financial frictions facing a firm.
The market for corporate credit is characterized by significant seasonal variation, both in interest rates and the volume of new lending. Firms borrowing from banks during seasonal “sales” in late spring and fall issue at 19 basis points cheaper than winter and summer borrowers. Issuers during cheap seasons appear to have less immediate or uncertain needs, but are enticed by low rates to engage in precautionary borrowing. High interest rate periods capture borrowers with unanticipated, non-deferrable investment needs. Consistent with models of intertemporal price discrimination, seasonality is strongly associated with market concentration among a few large banks with repeated interactions.
We explore the role of comparables in price formation. Using data on corporate loans, we exploit the lag between loans’ closing dates and their inclusion in a widely-used comparables database to identify the causal effect of past transactions on new transaction pricing. We find that comparables pricing is an important determinant of individual loan spreads, but a failure to account for the overlap in information across loans leads to pricing mistakes. A comparable’s influence grows with repeated use through its impact on intervening transactions. Moreover, market conditions prevailing at the time a comparable was priced also unduly influence subsequent loans.
We propose an explanation for the prominent role of manufacturers in the financing of their own product sales, often referred to as "captive financing." By lending against their own product as collateral, durable goods manufacturers commit to support resale values in future periods, thereby raising prices and preserving rents today. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models retain higher resale values. This, in turn, conveys higher pledgeability, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints.
Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise (SLR). The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative SLR due to vertical land motion. This provides variation in the expected speed of SLR for properties of similar elevation and distance to the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects.
Equity markets fail to account for value-relevant non-public information enjoyed by syndicated loan participants and reflected in publicly posted loan prices. A strategy that buys the equities of firms whose debt has recently appreciated and sells the equities of firms whose loans have recently depreciated earns as much as 1.4 to 2.2% alpha per month. The strategy returns are unaffected when focusing on loan returns that are publicly reported in the Wall Street Journal. However, when we condition on the subsample of equities held by mutual funds that also trade in syndicated loans, returns to the strategy are eliminated.
Across a broad range of equipment types and industries, we document a pattern of local capital reallocation from older firms to younger firms. Start-ups purchase a disproportionate share of old physical capital previously owned by more mature firms. The evidence is consistent with financial constraints driving differential demand for vintage capital. The local supply of used capital influences start-up entry, job creation, investment choices, and growth, particularly when capital is immobile. Meanwhile, as suppliers of used capital, incumbents accelerate capital replacement in the presence of younger firms. The evidence suggests previously undocumented benefits to co-location between old and young firms.
We examine the evolution of debt contracting language from 1996-2019 based on a comprehensive sample of credit agreements. Changes to market standards are constant and derive from prior-period experimentation, although cross-sectional variation has shrunk over time. What are the incentives to introduce new language? We document discounts in the secondary market for novel and even ex-post innovative contracts. Small banks produce more novel contracts, and as a result, have led to more innovation. Contract novelty of smaller banks attenuates when public contract models are available and when standards move slowly, suggesting a preference for matching market terms, given the opportunity.
Using the debt and equity response to the release of textual information from earnings calls, we demonstrate that stock and bond investors for the same firm interpret different aspects of firm information as value-relevant. These differences in interpretation — captured by distinct functions mapping text to returns — cannot be explained by differences in security payoffs. If anything, the importance of investor-specific approaches to information processing increases as debt and equity payoffs converge. In our strongest test, we examine junior bonds with equity- like payoffs (positive convexity with respect to firm value) and find that investors continue to interpret information through a creditor’s lens. Using a combination of structural topic modeling and large language models, we show that debt investors systematically emphasize news about crises, economic challenges, liquidity, and operational issues, while equity investors focus more on growth opportunities, technology, and innovation.