No Risk, No Growth: The Effects of Stress Testing on Entrepreneurship and Innovation
Job Market Paper (link to pdf)
This paper shows that post-crisis financial regulation reduces credit supply to young firms and leads to a decline in entrepreneurship and innovation. I provide evidence that banks subject to stress tests strongly cut small businesses lending secured by real estate collateral. Home equity is an important source of financing for start-ups and young firms, so counties with higher exposure to stress tested banks see a relative decline in the number and share of entrepreneurs during the recovery, relative to counties with low exposure. The decline is stronger in sectors with a higher share of firms using home equity financing, i.e. where the reduction in credit supply hits hardest. Counties with higher exposure also see a decline in innovation: patent applications by young firms fall significantly, but not by old. Since young firms contribute disproportionately to aggregate growth, my findings suggest that financial regulation reduces dynamism and innovation in the U.S. and contributes to the productivity slowdown. Results are robust to controlling for unobservable local and industry characteristics through granular fixed effects.
Bank Loan Supply during Crises: The Importance of Geographic Diversification (2017)
With Philipp Schaz (link to pdf, revision requested at Review of Financial Studies)
We classify a large sample of banks according to the geographic diversification of their international syndicated loan portfolio. Our results show that diversified banks maintain higher loan supply during banking crises in borrower countries. The positive loan supply effects lead to higher investment and employment growth for firms. Diversified banks are stabilizing due to their ability to raise additional funding during times of distress, which also shields connected markets from spillovers. Further distinguishing banks by nationality reveals a pecking order: diversified domestic banks are the most stable source of funding, while foreign banks with little diversification are the most fickle. Our findings suggest that the decline in financial integration since the recent crisis increases countries’ vulnerability to local shocks.
From Finance to Extremism: The Real Effects of Germany’s 1931 Banking Crisis (2018)
With Stefan Gissler, José-Luis Peydró and Hans-Joachim Voth (link to pdf)
Do financial crises radicalize voters? For identification, we analyze the canonical case of Germany in the 1930s exploiting a large bank failure in 1931 caused by fraud, foreign shocks and political inaction. We use detailed bank-firm connections on banks that (unlike the US) served the whole country. We provide causal evidence from banking crisis to economic distress and extreme radical voting, while the literature in general has found no clear effect of economic distress on Nazi Party support. We show that, first, the failure of Jewish-led Danatbank induced a strong reduction in the wage bill for connected firms. This led to increasing city-level unemployment in cities with more Danat-connected firms. The effects are notably stronger in cities with a higher share of non-exporting firms, where local demand spillovers are higher. Second, Danat exposure significantly increased Nazi Party support between 1930 and 1933 elections, but not between 1928 and 1930 -before the banking crisis but after the start of the Great Depression and high unemployment. The financial crisis increased support for the Nazi party the most in areas with both deep-seated historical anti-Semitism, and more net savers than borrowers. Not only did the banking crisis help the Nazis rise to power, but cities with higher Danat exposure saw fewer marriages between Jews and gentiles after the banking crisis. Also, after 1933, there were more attacks on Jews and their property in Danat-exposed cites, and deportation rates were higher.
Collateral, Reallocation, and Aggregate Productivity: Evidence from the U.S. Housing Boom (2018)
Young Economist Award, EEA-ESEM Annual Congress 2018 (link to pdf)
I show that rising real estate prices reduce industry productivity, because they reallocate capital and labor towards inefficient firms. Rising real estate values relax collateral constraints, so firms borrow to invest and increase output. However, firms owning real estate are significantly less productive than non-owners. Higher real estate prices thus allocate resources to unproductive firms, and industries with stronger growth in real estate values see a significant reduction in total factor productivity growth. Banks with superior information about borrowers are better at identifying productive borrowers and supply less credit to unproductive firms when collateral values rise.
Credit-Supply Shocks and Firm Productivity in Italy (2018)
With Mehdi Raissi and Anke Weber (link to pdf, Journal of International Money and Finance, Vol 87, p. 155-171)
The Italian economy has been struggling with low productivity growth and bank balance sheet strains. This paper examines the implications for firm productivity of adverse shocks to bank lending in Italy, using a novel identification scheme and loan-level data on syndicated lending. We exploit the heterogeneous loan exposure of Italian banks to foreign borrowers in distress, and find that a negative shock to bank credit supply reduces firms' loan growth, investment, capital-to-labor ratio, and productivity. The transmission from changes in credit supply to firm productivity relates to labor market rigidities, which delay or distort the adjustment of firms' desired labor and capital allocations, and thereby reduce firms' productivity. Effects are stronger for firms with higher capital intensity and external financial dependence.
Work in Progress
Bank Specialization and Spillover Effects: Evidence from the Syndicated Loan Market (2018), with Ana Boskovic and Philipp Schaz
Identifying the Economic Origins of Segregation: Evidence from US Cities during the First Great Migration (2018), with Sebastian Ottinger (funded by UCLA Ziman Center Research Grant)