Michael Schwert

Assistant Professor of Finance

schwert at wharton dot upenn dot edu


Bank Capital and Lending RelationshipsJournal of Finance (2018), 73(2), 787-830.

Municipal Bond Liquidity and Default RiskJournal of Finance (2017), 72(4), 1683-1722.

Working Papers

This paper investigates the pricing of bank loans relative to capital market debt. The analysis relies on a novel sample of syndicated loans matched with bond spreads from the same firm on the same date. After accounting for seniority, banks earn an economically large premium relative to the market price of credit risk. To quantify the premium, I apply a structural model that accounts for priority structure, prices the firm's bonds, and matches expected losses given default and secondary market bid-ask spreads. In a sample of secured term loans to non-investment-grade firms, the average loan premium is 143 bps, equal to 43% of the all-in-drawn spread. These findings are the first direct evidence of firms' willingness to pay for the unique qualities of bank loans and raise questions about the nature of competition in the loan market.

This paper shows that the frequency of capital structure adjustment varies significantly across firms. The most active 25% of firms account for 51% of leverage adjustments, while the least active 50% of firms account for only 19% of such events. Using new hand-collected data from detailed corporate filings, we find that frequently rebalancing firms tend to use lines of credit to fund operating losses and working capital needs. In contrast, infrequently rebalancing firms use long-term debt and equity to fund investment and rebalance capital structure. These findings underscore the importance of adjustment costs in financing decisions and show that the reasons for rebalancing are much broader than those covered by contemporary capital structure theories. Our results demonstrate the advantage of complementing accounting data with rich textual data from corporate filings.

PIPEs are an important source of finance for small public corporations. PIPE investor returns decline with holding periods, while time to exit depends on the issue’s registration status and underlying liquidity. We estimate PIPE investor returns adjusting for these factors. Under plausible assumptions, the average PIPE investor holds the stock for 384 days and earns an abnormal return of 21.2%. More constrained firms tend to issue PIPEs to hedge funds and private equity funds in offerings that have higher expected returns and higher volatility. PIPE investors’ abnormal returns appear to reflect compensation for providing capital to financially constrained firms.

Systematic risk is an important determinant of corporate capital structure. A one standard deviation increase in asset beta corresponds to a decrease in leverage of 13%, controlling for total asset volatility. This evidence is consistent with recent dynamic capital structure models that relate financing decisions to macroeconomic factors and provides further impetus for exploring the impact of systematic risk on corporate decisions.