Research

Corporate Credit Markets, Cycles and Development

Geographical Segmentation of US capital markets, Journal of Financial Economics, 2007. Areas with a higher share of seniors have more deposits. Using this as an instrument, I show that more bank funding is associated with stronger lending, more capital-intensive economic activity locally. Effect has faded with the geographical integration of US commercial banking.

Cyclicality of Credit Supply: Firm Level Evidence, Journal of Monetary Economics, 2014, with Victoria Ivashina.  When bank loan supply is low, large firms tend to issue bonds instead. We use this observation to infer the time series of the aggregate corporate loan supply. This measure is free from demand effects (bank loans and bonds being close substitutes for large firms) and to compositional shifts in debt issuance (since we track individual firms). We show that loan supply is low at times of slow growth, low bank stock prices, and tight monetary policy. A simpler account, with an application to Europe, at is available at the European Financial Review.

Reaching for Yield in the Bond Market, Journal of Finance, 2015, with Victoria Ivashina. Many fixed income investors have an incentive to buy higher yielding assets within a category whose assets are treated as identical by investors, principals or regulators. We show such reaching-for-yield among US insurers. Summary at VoxEU. Richmond Federal Reserve article about reaching for yield.

Financial Repression in the European Sovereign Debt Crisis, Review of Finance, 2018, with Victoria Ivashina. European corporate loan markets have been exceptionally depressed during the European financial crisis, as evidenced by an unusually high share of bond issues in new corporate credit (holding issuer identity fixed). We show that the depth of the contraction in the loan supply is correlated with holdings of sovereign debt on bank balance sheets, both across countries and within countries, across banks. In particular, home country sovereign debt appears to use up bank financial resources: financial repression appears likely to share the blame. Finalist for the Pagano-Zechner price 2018.

Bad Times, Good Credit, Journal of Money, Credit and Banking, 2020, with Marieke Bos and Kasper Roszbach. Do information frictions contribute to cyclicality in corporate credit markets? We compare a Swedish bank's ability to predict defaults of its borrowers through the cycle. We find that the bank has more precise information in recessions. We conclude that information frictions in the corporate loan market likely do not contribute to cyclicality.

Covenant-light Contracts and Creditor Coordination, working paper, with Victoria Ivashina. We analyze the unprecedented rise in covenant-light loans (loans whose covenants are not tested continuously) in the US leveraged loan market. Both in the aggregate tim series and in the cross-section at a given time, cov-lite is strongly associated with having many relatively passive investors (mutual funds and collateralized loan obligations, CLOs). we interpret this as evidence that coordination among creditors drives contracting in the loan market.

Portfolio rebalancing and the transmission of large-scale asset programs: evidence from the euro area, Journal of Financial Intermediation, 2021, with Ugo Albertazzi and Miguel Boucinha. We examine portfolio rebalancing by European banks in response to the ECB's QE. In the weaker economies, banks tended to rebalance towards riskier securities, whereas banks in healthier economies appear more likely to have increased lending. ECB working paper 2125.  

Disruption and Credit Markets, Journal of Finance, 2023, with Victoria Ivashina. Successful new firms frequently reduce the performance of incumbents. We show that this mechanism represents an important force in corporate bond markets, and can account for most of the (substantial) increase in default risk since the 1970-ies. Since corporate bonds (where losses occur) are more widely held than new firm equity (which is where much of the gains from innovation and disruption appear), this has distributional implications. These results highlight how credit markets offer a useful window on long-term trends in corporate performance.

The resilience of the U.S. Corporate bond market during financial Crises, working paper, 2023, with Efraim Benmelech. The U.S. corporate bond market supplied around $500 billion of new financing in the first half of 2021, compared to an average of $157 in the preceding ten years. The syndicated loan market, which also supplies debt financing to large companies, saw much reduced issuance volumes in the same period. The resilience to the Covid-related dislocations in financial markets is not unique; in fact, similar resilience is apparent in the two preceding recessions. We discuss the contribution to the resilience of three factors: bond issuers' relative strength in downturns,  bank distress, and monetary policy. NBER working paper 28,868.

Banking without branches, working paper, 2024, with Niklas Amberg. We examine large-scale closures of bank branches in Sweden to estimate the impact on credit supply. We find significant negative effects, concentrated in firms with limited fixed assets. We hypothesize that continued reductions in branch networks globally will reduce the ability to fund SMEs without good collateral.

Insolvency and distress

Fiduciary Duties and Equity-Debtholder Conflicts, Review of Financial Studies, 2012, with Per Strömberg.  A 1991 legal ruling introduced fiduciary duty toward creditors for corporate officers in Delaware-incorporated firms. We trace the effect on distressed firms which were affected: they became more conservative, in line with a stronger regard for creditors' interests. In response, non-distressed firms incorporated in Delaware could increase leverage and have fewer covenants.

Insolvency Resolution and the Missing High Yield Bond Markets, Review of Financial Studies, 2016, with Jens Josephson. In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage of other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model: inefficient bankruptcy in a country is associated with less bond issuance by risky, but not by safe, borrowers there. This pattern holds for both levels and changes in bankruptcy recovery. Our results establish a link between bankruptcy reform and corporate bond markets, especially high yield markets.

Debt Overhang and the Life Cycle of Callable Bonds, Review of Finance, forthcoming, with Murillo Campello, Viktor Thell, and Dong Yan. A large share of corporate bonds are callable, i.e. can be repurchased by issuer at a pre-determined price. We provide evidence consistent with the theory that the right to call limits debt overhang. This theory explains why high risk issuers, longer maturity bonds are callable; that calls happen when firms see improvements in credit quality; that callable bonds see no gains in takeovers; that callable debt issuers are more responsive to shocks to investment opportunities in an industry.

Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending, AEA Papers & Proceedings, 2022, with Victoria Ivashina. Bank lending at subsidized rates to less productive firms - "zombie lending"  - can be motivated by a desire to hide problems from investors or regulators (as in Caballero Hoshi Kashyap 2008). We propose that an alternative mechanism is that creditors face poor restructuring options, and therefore avoid restructuring. The consequences in terms of lost productivity and growth are similar, but the policy prescriptions differ - when zombie lending is caused by poor restructuring systems, better bank capitalization and stricter regulatory oversight have no impact. Instead, reform of insolvency systems is key. We show cross-country evidence that poor restructuring is associated with more zombie-like loan terms in periods of stress. Longer version ECB working paper: Corporate Insolvency Rules and Zombies.

[NEW] Non-Financial Liabilities and Effective Corporate Restructuring, working paper, 2024, with Jens Josephson. We examine the role of non-financial liabilities in corporate distress and in the successful restructuring of insolvent firms. We show in a model that fewer firms will be liquidated if long-term contracts can be rejected in an insolvency procedure. Empirically, this has large predictive power for corporate capital structures in industries which rely on long-term contracts, such as retail, restaurants and hotels. A blog post about the paper available at Duke's FinReg blog and at Oxford Law Blog.

Credit ratings

How did increased competition affect credit ratings?, Journal of Financial Economics, 2011, with Todd Milbourn. The rise of a third big rating agency, Fitch, provides an opportunity to examine the benefits or costs of competition in a reputation-based market. We find that a higher market share of Fitch is associated with higher and less informative ratings from the two incumbents, Moody's and S&P. This suggests that competition can aggravate conflicts of interest between users of ratings and rating agencies which are paid by issuers.

Non-rating revenue and conflict of interest, Journal of Financial Economics, 2018, with Ramin Baghai. Indian rating agencies have been required to report consulting relationships and the associated financial flows from issuers. We use this setting to examine whether issuers who hire agencies for non-ratings business receive different (better) ratings than those that do not. Issuers who also hire rating agencies on average have ratings that are 0.3 higher (than the ratings they are assigned by a rating agency which they do not hire). This effect is larger when the amount of revenues generated by the consulting is higher. The better ratings are not likely to be explained by differences in perceived default risk. Vox EU blog post about the article. Harvard Law School Blog about the article.

Reputations and credit ratings: evidence from commercial mortgage-backed securities, Journal of Financial Economics, 2020, with Ramin Baghai.  We examine an incident when, due to a procedural mistake, S&P was shut out of rating commercial mortgage-backed securities (CMBS) starting in mid-2011. Comparing their ratings of particular securities (CMBS tranches) to those of other agencies suggests S&P issued better ratings (closer to AAA) after the loss of market share (but not before). This evidence is consistent with theories suggesting that rating agencies can inflate ratings to gain market share.

Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class, Review of Financial Studies, 2022, with Marcus Opp and Farzad Saidi. This paper supersedes Becker and Opp (2014). We examine long-run consequences of a large reduction in capital requirements associated with holding mortgage-backed securities, instituted for for U.S. insurance companies in 2009 and 2010. The industry received capital relief of $18bn, especially important for riskier assets. The reduction targeted high risk and MBS, and the industry responded by holding much of these, compared to safer MBS as well as compared to other risky assets. 

The Use of Credit Ratings in Financial Markets, Management Science, 2023, with Ramin Baghai and Stefan Pitschner. We use text analysis to quantify the references to credit ratings in investment mandates, which constitute an important private use of ratings. The use of ratings in fixed income funds' mandates is high and has not fallen around or after the financial crisis. This suggests that credit ratings are not easy to replace. Blog post at ProMarket about the paper.

Governance

Wealth and Executive Compensation, Journal of Finance, 2006. Wealthy CEOs receive stronger incentives. Evidence suggests wealth proxies for risk aversion, not power or skill. 

Local Dividend Clienteles, Journal of Finance, 2011, with Zoran Ivkovic and Scott Weisbenner. Firms with more senior owners pay more dividends, consistent with policies being set to agree with owners' preferences. We use location to instrument for seniors, ruling out reverse causality. The effect is absent for very large firms.

Estimating the Effects of Large Shareholders Using a Geographic Instrument, Journal of Financial and Quantitative Analysis, 2011, with Henrik Cronqvist and Rudiger Fahlenbrach. We use a geographical instrument (the density of very high net worth individuals) based on tax data to instrument for the likelihood of local firms having non-institutional blockholders. We find that having a block generates lower investment, cash holdings and executive pay, but higher dividends and profitability. The public shares of firms with blockholders become less liquid.

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge, Journal of Law and Economics, 2013, with Dan Bergstresser and Guhan Subramanian. We use an unexpected ruling to examine the value of proxy access, which would have facilitated board representation for non-controlling owners of public firms. The results suggest that the stock market put positive value on such access. This is consistent with agency conflicts between owners and managers and a beneficial governance role of owner representation on corporate boards. Opinion piece in the Huffington Post

Improving Director Elections, Harvard Business Law Review, 2013, with Guhan Subramanian. Corporate boards in the U.S. do not reflect shareholder democracy, typically consisting of incumbents nominating themselves to uncontested elections. We document the lack of competition and contest for the last ten years, and show that none of the many recent reforms (e.g., majority voting, eProxy, etc.) have been impactful in this regard.

Other Corporate Finance

The Effect of Financial Development on the Investment-Cash Flow Relationship: Cross-Country Evidence from Europe, The B.E. Journal of Economic Analysis & Policy, 2010, with Jagadeesh Sivadasan.  Financial development, across Europe, predicts higher investment for constrained firms. The effect is absent for subsidiaries with access to internal capital markets, suggesting this is not due to variation in investment opportunities.

Payout taxes and the allocation of investment, Journal of Financial Economics, 2013, with Marcus Jacob and Martin Jacob. Taxes on corporate payout are predicted to raise the cost of equity for firms that fund investment with outside equity, but not for those that can fund investment from profits. Consistent with this, we document that countries and periods with high taxes on dividends and repurchases see investment distorted toward firms with internal cash flow. Summary in the NBER Digest 

Financial Development, Fixed Costs and International Trade, Review of Corporate Finance Studies, 2013, with Jinzhu Chen and David Greenberg.  Better financial development helps exports by facilitating firm-level intangible investments. Exports become more responsive to exchange rates with better finance. Crisis in 2008-2010 serves as example.

Book chapters

"Reaching for yield, avoiding high yield: the price impact"; on seasonality of the IG-HY yield difference in corporate bond markets (likely driven by regulatory capital), in the book High Yield, Future Tense (2015, ed M Fridson, NYSSA)

How the insurance industry’s asset portfolio responds to regulation in book The Economics, Regulation and Systemic Risk of Insurance Markets (2017, eds. F Hufeld, R Koijen, C Thimann, Oxford University Press).