Finance and Economics
Columbia Business School
Credit markets, monetary policy, information economics
with Andrew Sutherland
Review of Financial Studies, forthcoming
We study how SME lenders react to information about their competitors' contracting decisions. To isolate this learning from lenders' common reaction to unobserved shocks to fundamentals, we exploit the staggered entry of lenders into an information sharing platform. Upon entering, lenders adjust their contract terms toward what others offer. This reaction is mediated by the distribution of market shares: lenders with higher shares or operating in concentrated markets react less. Thus, contract terms are shaped not only by borrower or lender fundamentals, but also by the interaction between information availability and competition.
Journal of Finance 2020
This paper estimates the magnitude of an informational friction limiting credit reallocation to firms during the 2007-2009 financial crisis. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to identify private information separately from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships. Quantitatively, these informational frictions seem too small to explain the credit crunch in the U.S. syndicated corporate loan market.
with Alexander Rodnyansky
Review of Financial Studies, 2017
Banks’ exposure to large-scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, affects lending following unconventional monetary policy shocks. Using a difference-in-differences identification strategy, this paper finds strong effects of the first and third round of quantitative easing (QE1 and QE3) on credit. Highly affected commercial banks increase lending by 3% relative to their counterparts. QE2 had no significant impact, consistent with its exclusive focus on Treasuries sparsely held by banks. Overall, banks respond heterogeneously and the type of asset being targeted is central to QE.
with Gabriel Chodorow Reich, Stephan Luck and Matthew Plosser
Revise and Resubmit, Journal of Financial Economics
Using supervisory loan-level data, we document that small firms obtain shorter maturity credit lines than large firms; have less active maturity management; post more collateral; have higher utilization rates; and pay higher spreads. We rationalize these facts as the equilibrium outcome of a trade-off between lender commitment and discretion. Using the COVID recession, we test the prediction that small firms with discretionary loan terms cannot draw credit in bad times. We show that only large firms drew on credit lines and provide evidence that differences in demand for liquidity cannot explain differences in drawdowns, but that PPP alleviated the shortfall.
with Kerry Yang Siani. New version!
Using corporate balance sheets data following the COVID-19 shock, we provide evidence that the bond market is central to firms' access to liquidity. Contrary to good times, bond issuers increased holdings of liquid assets rather than real investment. Moreover, even though the crisis did not originate in the banking sector, bonds were revealed-preferred to bank loans: many issuers left their bank credit lines untouched, while others used bond proceeds to repay existing bank loans. This liquidity-driven bond issuance implies that while the Federal Reserve intervention revitalized markets, its net effect on firms and the real sector was likely smaller than initially thought.
with Oliver Giesecke and Alexander Rodnyansky
Corporate bond markets are a growing source of funding for companies throughout the world. How does a firm's debt structure affect the transmission of monetary policy? This paper sheds light on a new corporate finance mechanism in which monetary policy disproportionately impacts bond-financed firms because bonds have higher costs of financial distress relative to bank loans. We present high-frequency evidence consistent with this channel in the euro area: firms with more bonds are more affected by surprise monetary actions than their counterparts. This finding stands in contrast to the predictions of a standard bank lending channel and suggests that bond financing is not a frictionless "spare tire."
with Lira Mota. Data available here
We construct a novel panel dataset to provide new evidence on how the largest nonfinancial firms manage the composition of their financial assets. Over the past decade, bond portfolios have grown to be at least as large as cash-like instruments, driven by the meteoric rise of corporate bond holdings. To shed light on the drivers of this growth, we conduct two event studies around the 2017 tax reform and the 2020 liquidity crisis. Our evidence suggests large firms often actively manage their financial portfolios in a way that reflects tax incentives and reach for yield as opposed to financial constraints.
with Melina Papoutsi. New version coming soon.
This paper uses a large panel of public and private firms to dissect the large aggregate growth in bond financing in the Euro Area since 2000 and highlight potential risks behind the expansion. First, the composition of bond issuers has shifted, with the entry of many smaller and riskier issuers in recent years. Second, entering the bond market implies a trade-off between growth and risk: new issuers invest and grow, but at the cost of higher leverage and interest rates. Moreover, the majority of firms downgraded in the 2020 crisis were small private firms that recently entered the bond market.
Horizon Effects and Adverse Selection in Health Insurance Markets (with Dan Zeltzer)
Work in Progress
"The Shape of the Credit Crunch" (with Nicola Pavanini and Stephan Luck)
"Pulp Friction: Long-Term Contracts as Quantity Insurance" (with Simon Essig Aberg and Juha Tolvanen)