Managerial Effect or Firm Effect: Evidence from the Private Debt Market
Bill Francis, Iftekhar Hasan, Yun Zhu
Financial Review,
No. 1,
2020
Abstract
This paper provides evidence that the managerial effect is a key determinant of firms’ cost of capital, in the context of private debt contracting. Applying the novel empirical method developed by an earlier study to a large sample that tracks the job movement of top managers, we find that the managerial effect is a critical and significant factor that explains a large part of the variation in loan contract terms more accurately than firm fixed effects. Additional evidence shows that banks “follow” managers when they change jobs and offer loan contracts with preferential terms to their new firms.
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Interactions between Bank Levies and Corporate Taxes: How is the Bank Leverage Affected?
Franziska Bremus, Kirsten Schmidt, Lena Tonzer
Abstract
Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only partially.
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Corporate Misconduct and the Cost of Private Debt: Evidence from China
Xian Gu, Iftekhar Hasan, Haitian Lu
Comparative Economic Studies,
No. 3,
2019
Abstract
Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.
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Deleveraging and Consumer Credit Supply in the Wake of the 2008–09 Financial Crisis
Reint E. Gropp, J. Krainer, E. Laderman
International Journal of Central Banking,
No. 3,
2019
Abstract
We explore the sources of the decline in household nonmortgage debt following the collapse of the housing market in 2006. First, we use data from the Federal Reserve Board's Senior Loan Officer Opinion Survey to document that, post-2006, banks tightened consumer lending standards more in counties that experienced a more pronounced house price decline (the pre-2006 "boom" counties). We then use the idea that renters did not experience an adverse wealth or collateral shock when the housing market collapsed to identify a general consumer credit supply shock. Our evidence suggests that a tightening of the supply of non-mortgage credit that was independent of the direct effects of lower housing collateral values played an important role in households' non-mortgage debt reduction. Renters decreased their non-mortgage debt more in boom counties than in non-boom counties, but homeowners did not. We argue that this wedge between renters and homeowners can only have arisen from a general tightening of banks' consumer lending stance. Using an IV approach, we trace this effect back to a reduction in bank capital of banks in boom counties.
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A Capital Structure Channel of Monetary Policy
Benjamin Grosse-Rueschkamp, Sascha Steffen, Daniel Streitz
Journal of Financial Economics,
No. 2,
2019
Abstract
We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.
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26.06.2019 • 14/2019
Study: How financial crises lower life satisfaction and how to prevent this
Financial crises not only result in severe disruptions to the economic system, they also affect people’s life satisfaction. A new study by Martin Luther University Halle-Wittenberg (MLU) and the Halle Institute for Economic Research (IWH) shows that weaker members of society are more affected by increased uncertainty during crisis times, even if they may not be speculating on the stock market themselves. This could potentially also lower their propensity to consume, thereby intensifying the impact of a financial crisis. The study was recently published in “The B.E. Journal of Economic Analysis & Policy”.
Lena Tonzer
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The Economic Impact of Changes in Local Bank Presence
Iftekhar Hasan, Krzysztof Jackowicz, Oskar Kowalewski, Łukasz Kozłowski
Regional Studies,
No. 5,
2019
Abstract
This study analyzes the economic consequences of changes in the local bank presence. Using a unique data set of banks, firms and counties in Poland over the period 2009–14, it is shown that changes strengthening the relationship banking model are associated with local labour market improvements and easier small and medium-sized enterprise access to bank debt. However, only the appearance of new, more aggressive owners of large commercial banks stimulates new firm creation.
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Banks Response to Higher Capital Requirements: Evidence from a Quasi-natural Experiment
Reint E. Gropp, Thomas Mosk, Steven Ongena, Carlo Wix
Review of Financial Studies,
No. 1,
2019
Abstract
We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks.
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Senior Debt and Market Discipline: Evidence from Bank-to-bank Loans
Bill Francis, Iftekhar Hasan, Liuling Liu, Haizhi Wang
Journal of Banking and Finance,
2019
Abstract
We empirically investigate whether taking senior bank loans would enhance market discipline and control risk-taking among borrowing banks. Controlling for endogeneity concern arising from borrowing bank self-select into taking senior bank debt, we document that both the spreads and covenants in loan contracts are sensitive to bank risk variables. Our analysis also reveals that borrowing banks reduce their risk exposure after their first issuance of senior bank debt. We also find that lending banks significantly increase their collaboration with borrowing banks and increase their presence in the home markets of borrowing banks.
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Politics, Banks, and Sub-sovereign Debt: Unholy Trinity or Divine Coincidence?
Michael Koetter, Alexander Popov
Deutsche Bundesbank Discussion Paper,
No. 53,
2018
Abstract
We exploit election-driven turnover in State and local governments in Germany to study how banks adjust their securities portfolios in response to the loss of political connections. We find that local savings banks, which are owned by their host county and supervised by local politicians, increase significantly their holdings of home-State sovereign bonds when the local government and the State government are dominated by different political parties. Banks' holdings of other securities, like federal bonds, bonds issued by other States, or stocks, are not affected by election outcomes. We argue that banks use sub-sovereign bond purchases to gain access to politically distant government authorities.
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