Daniel Carvalho  

Associate Professor of Finance

Blanche "Peg" Philpott Faculty Fellow 

Kelley School of Business

Indiana University

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Publications  

The Working Capital Credit Multiplier  (with Heitor Almeida and Taehyun Kim), Journal of Finance 79(6), December 2024.   

(Internet Appendix)   

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   (with Janet Gao and Pengfei Ma), Journal of Financial Economics 148(2), May 2023.   (Internet Appendix)  

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)   

RFS Blog coverage

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            (Internet Appendix) 

Abstract: This paper studies how uncertainty shapes the demand for talent and the human capital of skill-intensive firms. When hiring new workers with the right set of skills is challenging, it can take significant time for firms to expand their skilled workforce when needed (i.e., there is a human capital lag). Therefore, 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 test the importance of this idea, I estimate how uncertainty shapes firms’ hiring decisions and employment at a granular level (e.g., specific jobs in certain plants) and examine the specific predictions from this mechanism. I implement this test by combining a new empirical methodology to isolate the effect of uncertainty on firms with detailed worker- and plant-level data. Higher uncertainty leads the average firm to reduce its total hiring and employment. However, firms with skill-intensive plants significantly increase their human capital by hiring new high skilled workers for jobs in these plants, especially for jobs associated with technical knowledge and skills. These positive effects of uncertainty on hiring are persistent, economically important, and support the detailed predictions from the growth-options mechanism. For example, these effects are only driven by skilled-intensive plants and high skilled workers/jobs within these plants. This mechanism is consistent with firm surveys, anecdotal evidence, and has implications for issues such as the allocation of skilled talent, inequality, and risk management.  

Do Financing Frictions Amplify Shocks to Exports?  (with Heitor Almeida and Yongseok Kim)     

Abstract: This paper shows how financing frictions can significantly amplify and prolong the effect of economic shocks to exports (e.g., shocks to export demand or tariff shocks). We propose a new financial multiplier effect leading to this effect, whereby changes in firms’ exports affect their balance sheet conditions, which then shape firms’ ability to finance new export transactions. Using customs data for Brazil, we first document a central prediction from this mechanism: shocks to economic conditions in certain export destinations lead to strong and persistent positive effects on the level of firms’ exports to other existing destinations (positive within-firm spillover). We develop an identification strategy to refine this evidence, and both isolate and estimate the magnitude of the multiplier we propose. We then build a structural model of this mechanism, calibrate it using detailed data on the cost and financial structure of firms, and use it to simulate the effects we study. We find that the multiplier effect we propose can explain our empirical results both quantitatively and qualitatively. Using this calibrated model (and our empirical results), we quantify the role of funding frictions in amplifying and prolonging the effect of economic shocks to exports.

 How Do Banks Build Deposit Stability? The Role of Initial Market Shares (with Nelson Camanho and Ricardo Schechtman)     

Abstract: We provide evidence on the importance of a new early-mover advantage in banking: high initial market shares allow banks to persistently build a more stable (stickier) demand for their deposits. We propose and test the idea that initial market shares matter by enabling banks to create stronger product differentiation when competing for customers, i.e., higher quality services and more differentiated brands. To isolate this effect, we combine plausibly exogenous historical shocks to the local market share of large Brazilian private banks with detailed data on their deposits and branches. We develop an approach to analyze how these local historical conditions shape deposit outflows during periods with high interest rates, conditional on bank risk and deposit contract terms. We estimate that this effect increases the deposit stability of large incumbent banks by around one third, creating an important barrier to entry. We also find evidence that this mechanism leads to significant heterogeneity in the competitive advantage and funding stability of a same bank across different markets (geographic areas).