Olivier Darmouni
Associate Professor, HEC Paris
Pierre Andurand Chair in Sustainability
Research Interests: Corporate finance, credit markets, energy transition, monetary policy
darmouni@hec.fr Curriculum Vitae Google Scholar page
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Working Papers
Working Papers
“Financing Investment in Electricity” (with Pari Sastry and Clemens Lehner)
Draft available upon request.
Global electricity demand is expected to grow dramatically, making investing in electricity generation capacity a priority. Renewables, once installed, have very low marginal costs and near-zero carbon emissions but are widely believed to be "harder to finance" than fossil fuel alternatives. This paper provides an unifying perspective to understand the economics of financing different technologies and their implications for the path of real investment. Even though renewables and fossil fuels produce the same homogenous good (electricity), renewables are typically financed via a more complex "project finance" structure that relies on power purchase agreements (PPAs) and off-balance sheet vehicles. We develop a model that rationalizes the differential use of project finance based on the risk properties of each technology and provide detailed micro-evidence supporting the model's key assumptions. Taking the finance side seriously is crucial since risk and financial frictions affect discount rates and thus the NPV of investment. We calibrate the model to show quantiatively that the project finance structure generally increases investment in renewables mainly through a capital structure channel. For renewables, project finance and PPAs reduce discount rates by "de-risking" cash-flows, which relaxes debt constraints and limits the use of costly equity financing. Because of differences in technology, a PPA does not de-risk the cash-flows of a gas plant in the same way. However, we identify a downside of PPAs: the amplification of macro-economic risk and higher investment volatility across the business cycle. We use the model to understand the slowdown of renewable investment after the 2021-2022 inflationary episode. State-dependent investment subsidies indexed to cost shocks are natural policy instruments to mitigate this cyclicality.
We study capital allocation in the coal power sector - the largest single source of carbon emissions. Using a novel dataset, we find public equity ownership of European coal plants has declined significantly, while state ownership has risen steadily and increased sharply after recent episodes of nationalization. We calibrate a model of brown capital (re)allocation with externalities and financial frictions to understand how environmental concerns and competing government objectives shape the energy transition. Environmental pressure incentivizes coal plant closures but state investors who value social factors (jobs, "energy security") endogenously respond to mitigate it, especially during energy shortages.
The Rise of Bond Financing in Europe: Five Facts About Small and New Issuers
with Melina Papoutsi. New version!
Using newly available micro-data, this paper documents new evidence on the rise of bond financing to mid-size firms in the euro area. Recent new issuers of debt securities are typically small, private, and unrated. Their spreads are comparable to high-yield bonds. Traditional "buy-and-hold" investors are small for unrated and smaller issuers, while non-bank intermediaries are large. These non-bank intermediaries were as stabilizing as insurers during the March 2020 turmoil. Nevertheless, the subsequent bond issuance wave was restricted to large and rated firms. These facts imply that new and small issuers are largely disconnected from the traditional bond market.
Publications
Publications
Nonbank Fragility in Credit Markets: Evidence from a Two-Layer Asset Demand System
Journal of Finance, forthcoming
with Kerry Siani and Kairong Xiao
We develop a two-layer asset demand framework to analyze fragility in the corporate bond market. Households allocate wealth to institutions, which allocate funds to specific assets. The framework generates tractable joint dynamics of flows and asset values, featuring amplification and contagion, by combining a flow-performance relationship for fund flows with a logit model of institutional asset demand. The framework can be estimated using micro-data on bond prices, investor holdings, and fund flows, allowing for rich parameter heterogeneity across assets and institutions. We match the model to the March 2020 turmoil and quantify the equilibrium effects of unconventional monetary and liquidity policies on asset prices and institutions.
Policy impact: System-Wide Stress Test for Banking and Insurance Sector in France use our model for demand-based stress testing (slides)
Pulp Friction: The Value of Quantity Contracts in Decentralized Markets
RAND Journal of Economics, forthcoming
with Simon Essig Aberg and Juha Tolvanen
Firms in decentralized markets often trade using quantity contracts, agreements that specify quantity prior to the point of sale. These contracts are valuable because they provide quantity assurance, as trading frictions could prevent a buyer and seller from matching in the spot market. However, quantity contracts prevent sellers from optimally allocating production across buyers after market conditions realize. Using proprietary invoice data, we estimate a model of quantity contracts in the pulp and paper industry. The average value of a quantity contract is 10% of profits, but would be 55% larger if sellers could optimally allocate production after market conditions realize.
How do asset purchases by central banks transmit to the real economy? Using micro-data on corporate balance sheets, we study firm behavior after the unprecedented policy support to corporate bond markets in 2020. As bond yields fell, firms issued bonds to accumulate large and persistent amounts of liquid assets. The effects on real investment was generally weak: many issuers already had access to bank liquidity and maintained equity payouts, while others used bond funds to pay back bank debt. This evidence sheds light on how corporate liquidity and financial heterogeneity matter for the macro-economy and the transmission of unconventional policy.
Formally titled: Crowding-Out Bank Loans: Liquidity-Driven Bond Issuance
Investment when New Capital is Hard to Find
Journal of Financial Economics, 2024
with Andrew Sutherland
We examine how the supply of fixed capital affects firm investment. Using equipment transaction-level data, we find pandemic-driven production disruptions significantly altered capital reallocation patterns across firms. A surge in used capital trading activity softened the investment decline, as firms acquired used capital from distant and dissimilar counterparts. Younger firms were disproportionately affected even though they rarely purchase new capital: while in normal times older firms sell their capital to younger firms, following a supply shock, older firms compete for used capital, pricing out younger firms. Our evidence highlights the crucial role of secondary markets and distributive externalities for corporate investment.
The Savings of Corporate Giants
Review of Financial Studies, 2024
with Lira Mota. Data available here: www.corporategiants.net/
We construct a novel panel dataset to provide new evidence on how the largest nonfinancial firms manage their financial assets. Our granular data shows that, 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 a pair of event studies around the 2017 tax reform and the 2020 liquidity crisis. Large holdings of marketable securities are primarily driven by cross-border tax incentives, while cash-like instruments are driven by liquidity motives.
Bank Liquidity Provision Across the Firm Size Distribution
Journal of Financial Economics, 2022
with Gabriel Chodorow Reich, Stephan Luck and Matthew Plosser
We use supervisory loan-level data to document that small firms (SMEs) obtain shorter maturity credit lines than large firms; 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 SMEs are subject to greater lender discretion. Consistent with this hypothesis, SMEs did not drawdown in contrast to large firms, even in response to similar demand shocks. PPP recipients reduced non-PPP loan balances, indicating the program bolstered their liquidity and alleviated the shortfall.
Learning about Competitors: Evidence from SME Lending
Review of Financial Studies, 2021
with Andrew Sutherland
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.
Informational Frictions and the Credit Crunch
Journal of Finance, 2020
2020 JF Brattle Prize for Distinguished Paper
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.
The Effects of Quantitative Easing on Bank Lending Behavior
Review of Financial Studies, 2017
with Alexander Rodnyansky
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.
Other papers
Other papers
Corporate Bond Issuance and Bank Lending in the United States (with Kerry Siani), European Economy: Banks, Regulation, and the Real Sector - Banking and Covid, 2021
Horizon Effects and Adverse Selection in Health Insurance Markets (with Dan Zeltzer) Canadian Journal of Economics 2022
The Bond Lending Channel of Monetary Policy (with Oliver Giesecke and Alexander Rodnyansky)
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