Daniel Carvalho
Associate Professor of Finance
Blanche "Peg" Philpott Faculty Fellow
Kelley School of Business
Indiana University
Publications
The Working Capital Credit Multiplier (with Heitor Almeida and Taehyun Kim), Journal of Finance, forthcoming.
Abstract: We provide novel evidence that funding frictions can limit firms’ short-term investments in receivables and inventories, reducing their production capacity. We propose a credit multiplier driven by these considerations and empirically isolate its importance by comparing how a similar firm responds to shocks differently when these shocks are initiated in their most profitable quarter (“main quarter”). We implement this test using recurring and unpredictable shocks (e.g., oil shocks) and provide extensive evidence supporting our identification strategy. Our results suggest that funding constraints and credit multiplier effects are significant for smaller firms that heavily rely on financing from suppliers.
Loan Spreads and Credit Cycles: The Role of Lenders' Personal Economic Experiences (joint with Janet Gao and Pengfei Ma), Journal of Financial Economics 148(2), May 2023.
Abstract: We provide evidence that changes in lender optimism can lead to excessive fluctuations in credit spreads across the credit cycle. Using data on the real estate properties of loan officers originating large corporate loans, we find that credit spreads overreact to sophisticated lenders’ recent local economic experiences, captured by local housing price growth. These effects are only present when borrowers own real estate assets and during times of greater uncertainty about real estate values, i.e., boom-and-bust cycles in housing prices. Our analysis suggests that recent personal experiences shape sophisticated lenders’ beliefs about real estate values, which affect their pricing decisions.
The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity (with John Bai and Gordon Phillips), Journal of Finance 73(6), December 2018 (Internet Appendix).
Abstract: We provide evidence that the deregulation of U.S. state banking markets leads to a significant increase in the relative employment and capital growth of local firms with higher productivity, and that this effect is concentrated among young firms. Using financial data for a broad range of firms, our analysis suggests that this effect is driven by a shift in the composition of local bank credit supply towards more productive firms. We estimate that this effect translates into economically important gains in aggregate industry productivity and that changes in the allocation of labor play a central role in driving these gains.
How Do Financing Constraints Affect Firms’ Equity Volatility?, Journal of Finance 73(3), June 2018 (Internet Appendix).
Abstract: Higher firm equity volatility is often associated with non-fundamental trading by investors or constraints on firms’ ability to insulate their value from economic risks. This paper provides evidence that an important determinant of higher equity volatility among R&D-intensive firms is fewer financing constraints on firms’ ability to access growth options. I provide evidence for this effect by studying how persistent shocks to the value of firms’ tangible assets (real estate) affect their subsequent equity volatility. The analysis addresses concerns about the identification of these balance sheet effects and shows that these effects are consistent with broader patterns on the equity volatility of R&D-intensive firms.
Financing Constraints and the Amplification of Aggregate Downturns, Review of Financial Studies 28(9), September 2015 (Lead article, Editor’s choice, Internet Appendix).
Abstract: This paper shows that during industry downturns, firms experience significantly greater valuation losses when their industry peers’ long-term debt is maturing at the time of the shocks. Across a range of tests, the analysis addresses the endogenous determination of peer debt maturity structure. Overall, the evidence suggests that the negative externalities financially constrained firms impose on their industry peers can significantly amplify the effects of industry downturns. The evidence also provides support for the view that these amplification effects are driven by the adverse impact that financially constrained firms have on the balance sheets of their industry peers.
Lending Relationships and the Effect of Banks Distress: Evidence from the 2007-2008 Financial Crisis (with Miguel Ferreira and Pedro Matos), Journal of Financial and Quantitative Analysis 50(6), December 2015 (Lead article).
Abstract: We study the role of lending relationships in the transmission of bank distress to nonfinancial firms using the 2007-2008 financial crisis and a sample of publicly traded firms from 34 countries. We examine the effect of both bank-specific shocks (announcements of bank asset write-downs) and systemic shocks (the failure of Bear Stearns and Lehman Brothers) that produced heterogeneous effects across banks. We find that bank distress is associated with equity valuation losses to borrower firms that have lending relationships with banks. The effect is concentrated in firms with the strongest lending relationships, with the greatest information asymmetry problems, and with the weakest financial position at the time of the shock. Additionally, the effect of relationship bank distress is not offset by borrowers’ access to public debt markets. Overall, our findings suggest that the strength of firms’ lending ties with banks is important to explain differences across firms in the effects of bank distress.
The Real Effects of Government-Owned Banks, Journal of Finance 69(2), April 2014 (Internet Appendix).
Abstract: Government ownership of banks is widespread around the world. Using plant-level data for Brazilian manufacturing firms, this paper provides evidence that government control over banks leads to significant political influence over the real decisions of firms. I find that firms eligible for government bank lending expand employment in politically attractive regions near elections. These expansions are associated with additional (favorable) borrowing from government banks. Also, the expansions are persistent, take place just before elections, only before competitive elections, and are associated with lower future employment growth by firms in other regions. I find no effects for firms that are ineligible for government bank lending. The analysis suggests that politicians in Brazil use bank lending to shift employment towards politically attractive regions and away from unattractive regions, creating a direct link between the political process and firms’ real behavior.
Working Papers
Talent Management Under Uncertainty
Abstract: Firms often face significant uncertainty about their future conditions. How do persistent differences in this uncertainty shape a firm’s workforce and its human capital? I study the idea that firms with skill-intensive operations can have incentives to increase their skilled workforce when faced with uncertainty. Using a simple theoretical framework, I illustrate why these incentives can be important when training and learning by new workers take time. When this is the case, a firm’s current skilled workforce (previously hired and trained) determines its ability to expand in response to new opportunities, providing a growth option that becomes more valuable with uncertainty. To empirically analyze this idea, I develop a new approach to isolate the effect of persistent shocks to the volatility of importers’ firm-specific exchange rates and combine it with detailed plant- and worker-level data. This allows me to examine how uncertainty shocks shape firms’ employment through different margins at a granular level. Higher uncertainty leads the average firm to reduce its total hiring and employment. However, firms with skill-intensive plants significantly increase their skilled workforce by hiring new high skilled workers for jobs in these plants. These positive effects of uncertainty on hiring are consistent with the mechanism proposed in this paper. For example, these effects are not present for low skilled workers in skill-intensive plants or jobs outside of these plants, and they are driven by skill-intensive plants located inside smaller firms.
The Bank-Risk Channel of Financial Integration (joint with Nelson Camanho)
Abstract: Since banking sectors are concentrated in many countries, with a few large banks operating across different regions, large banks can lead to a significant integration of domestic credit markets (bank integration). We propose and analyze a new mechanism through which this integration contributes to aggregate fluctuations in the supply of bank credit, the bank-risk channel. When banks expose their different branches to similar firm-level policies (e.g., lending, risk-management, or personnel policies), bank integration can propagate and amplify the effect of bank-specific risks on lending decisions. We develop a test to isolate the importance of this mechanism by examining if integration exposes local bank branches in distant areas to volatile common shocks to lending. In the context of Brazil, we implement this test using a large-scale natural experiment that reshaped banks’ branch networks combined with detailed bank branch-level data. We find that the bank-risk channel is economically important and consistent with additional sources of evidence. Using a simple theoretical framework, we estimate that this channel can explain about 20 percent of aggregate fluctuations in bank lending and employment. We also estimate that this channel represents an important mechanism through which high bank concentration can amplify the aggregate volatility of credit markets and employment.