Research

Government Owned Banks (GOBs) have other explicit or implicit objectives apart from profit maximization. In this paper, I study whether this affects the liquidation risk of firms borrowing from GOBs. Using the natural experiment of securitization reform in India that increased firms' liquidation risk, I find that the firms borrowing exclusively from GOBs did less reduction in secured debt usage compared to other firms. In the cross-section, the effect is more substantial in the subsample of firms that are more likely to face financial distress. These results suggest that borrowing from GOBs have less liquidation risk.

Recent work on the debt composition of non-financial firms finds that most of the large firms' debt is cash flow-based with earnings-based borrowing constraints (EBCs), limiting the maximum debt relative to firms' EBITDA. During the 2007-09  crisis, EBCs tightened in the syndicate loan market. Consistent with the reduction in the supply of credit, I find that investments and debt issue of firms with binding EBCs reduce significantly compared to control firms.  Furthermore, firms with binding EBCs cut their share repurchase and total payout during the crisis, whereas control firms increase it. In the cross-section, the reduction in investments and the payout is concentrated in the subsample of firms whose marginal debt issue is more likely to be cash flow-based debt. 

Using Facebook's social network data for the US counties, we examine whether social connectedness reduces the informational disadvantage in lending to small businesses at a distance. We find that for a given distance, there is a pecking order of lending. Banks first lend to more socially connected counties, and later, banks expand credit to socially less connected areas.  The probability of loan charge-off decreases in social connectedness and more so for the loans originated by small banks.   In the cross-section, the positive effect of social connectedness on loan performance is higher for the loans originated by out of state banks. These findings suggest that loan officers get valuable information on the local economic dynamics of borrowers' counties through their social networks. 

In this paper, we study the evolution of firms' leverage around systemic banking crises. Using a sample of 40 recent systemic banking crises, we find that firms' leverage is procyclical around banking crises, similar to the evolution of aggregate credit around financial crises documented in the literature. In the cross-section, firms' leverage is more procyclical in banking crises in which aggregate bank credit is also more procyclical. Furthermore, firms' leverage is more procyclical for banking crises in countries with less developed financial markets proxied emerging market economy,  bank based financial system, the small size of public debt market, and high reliance of firms on short term debt.