We analyze the effects of capital controls on corporate debt and associated real effects. For identification, we exploit a tax on foreign-currency (FX) debt inflows in Colombia, the Global Financial Crisis, and firm-level and loan-level administrative datasets. Around the policy change, capital controls reduce FX-debt inflows. Firms that borrowed FX from foreign banks cannot fully substitute FX debt with local debt, thereby reducing total corporate debt and imports in the boom. However, results suggest that, by preemptively reducing corporate debt, capital controls boost exports during the subsequent Global Financial Crisis, especially for financially-constrained firms. Moreover, capital controls do not alter credit allocation across differently productive firms.
We show that lower monetary policy rates lengthen the maturity structure of corporate debt. A 1 standard deviation policy rate cut raises the share of long-term debt — i.e., with maturity above 1 year — by 87 basis points, explaining 20% of its variation. In the cross-section, large and bond-issuing firms drive the adjustment. We propose a theory rationalizing these findings. Lower policy rates increase long-term bond demand due to reach-for-yield. Financial frictions allow large firms only to benefit by refinancing at lower yield. Empirical evidence on corporate bond issuance and holdings by insurers and mutual funds supports this mechanism.
Media Coverage: World Bank's All About Finance Blog; Thorsten Beck's Blog
We show that inflation affects stock returns through a long-term leverage channel. Using a high frequency identification strategy, we analyze stock returns in response to inflation surprises for nonfinancial firms in the U.S. and the Euro Area from 2020 to 2022. We rely both on survey-based and market-based measures of inflation surprises. We find that firms with higher leverage experience larger stock returns following positive inflation surprises, and this is driven by long-term debt. The effect is stronger in countries with inefficient corporate debt resolution. Our findings align with a Fisherian mechanism, where inflation reduces the real value of long-term debt.
Presented at: Bank of Italy; EIEF; CEPR Annual MEF Meeting 2024Media Coverage: VoxEu; SUERFThe Ripple Effect: Supply Chain Reconfigurations and Cross-border Credit Dynamics (with Ricardo Correa, Matias Ossandone-Busch and Miguel Sarmiento)
Presented at: IMF*, Banca d'Italia, CEBRA 2024, 2025 Annual Conference of the Banco Central do Brasil*, BIS-CEPR-Gerzensee-SFI Conference on Financial Intermediation*, Central Bank of Colombia*, 31st Conference of the Society for Computational Economics*
We show that sustainable investment by mutual funds influences non-financial firms' stock prices and real outcomes. Our identification exploits the EU Sustainable Finance Disclosure Regulation (SFDR) -- requiring mutual funds to disclose no, mild, or strong commitment to sustainable investment -- and rich microdata. Funds disclosing a mild commitment reduce exposure to high ESG risk (“brown”) stocks, relatively to those with no commitment. Differently, strongly committed funds do not adjust, being already perceived as sustainable and facing little incentive to further signal their ESG strategy. The divestment of brown firms occurs independently of their prior sustainability pledges and reduces their stock prices. This reduction is in turn associated with lower environmental spending and higher carbon emissions. Our findings suggest that blanket divestment by ESG funds may unintentionally worsen environmental performance by weakening firms’ incentives to invest in sustainability.
Presented at: Bank of Italy; CEPR, University of Luxembourg and ESSEC Sustainable Financial Intermediation ConferenceMedia Coverage: Italia Oggi; Etica NewsMacroprudential Policy and the Bank-Lending Channel of US Monetary Policy Spillovers (with Riccardo Degasperi, Federico Maria Signoretti and Fabrizio Venditti)
Stranded in the ICE: Bank lending and the transition to electric vehicles (with Stefano Federico)