Justin Murfin

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.

CV

 8.   "The Supply-Side Determinants of Loan Contract Strictness" 

Journal of Finance, Lead Article 2012

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.

7.  The Implicit Costs of Trade Credit Borrowing by Large Firms," with K. Njoroge

Review of Financial Studies, 2014

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. 

6.  "Loans on Sale: Credit market seasonality, borrower need, and lender rent seeking," with M. Petersen 

Journal of Financial Economics, 2016

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. 

5.  "Comparables Pricing," with R. Pratt

Review of Financial Studies, 2018

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.

4.  "Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture," with R. Pratt

Journal of Finance, 2019

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.

3.  "Is the Risk of Sea Level Capitalized in Residential Real Estate?" with M. Spiegel

Review of Financial Studies, 2020

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. 

2.  "Equity Price Discovery with Informed Private Debt," with J. Addoum 

Review of Financial Studies, 2020

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. 

1.  "Young Firms, Old Capital" with S. Ma and R. Pratt

Journal of Financial Economics, 2022

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.

1.  "Contractual innovation and the evolution of boilerplate in credit agreements," with Haokun Sun

We use the terms and definitions sections from 21,380 corporate credit agreements to examine the evolution of boilerplate contracting from 1996-2019. We find large year-to-year changes in the preferred boilerplate language, but over time, the cross-sectional variation in language has shrunk dramatically. If improvements in boilerplate derive from experimentation in prior year contracts, what are the incentives to introduce new language? We find a large discount in the secondary market for novel contracts, even when those contracts are prescient of future changes to boilerplate. Small banks are more prone to produce off-market contracts, and as a result, have led to more innovation. At the same time, the novelty of small bank contracts is attenuated when public models of boilerplate are available and when standards move slowly, consistent with some amount of accidental innovation by small banks.