Using detailed loan level data, we examine bank lending to corporate customers relying on principal suppliers. Customers experience larger loan spreads, higher intensity of covenants and greater likelihood of requiring collateral when they depend more on the principal supplier for inputs. The positive association between the customer’s loan spread and its dependence on the principal supplier is less pronounced when the bank has a prior loan outstanding with the principal supplier, and when the bank has higher market share in the industry. Longer relationships between the customer and its principal supplier, and between the bank and the principal supplier, mitigate lending constraints. The evidence is consistent with corporate suppliers serving as an informational bridge between the lender and the customer.

Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we find that democratization has a sizable negative effect on loan spreads: a 1-point increase in the zero-to-ten Polity IV index of democracy shaves at least 19 basis points off spreads, but likely more. Reversals to autocracy hike spreads more strongly. Our findings are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of other sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization can affect economic development.

Using a sample of around 30 countries over the period 2001–2015, this study provides evidence that deeply rooted cultural differences are significantly associated with the use of mortgage debt. More detailed, we find that power distance and uncertainty avoidance have a negative impact on the value of the total outstanding residential loans to GDP. This finding is robust across various specifications and the use of alternative measures of mortgage debt. In contrast, trust has a positive and robust impact on all the measures of mortgage debt. Other dimensions of national culture like long-term orientation, individualism, and indulgence, also appear to matter; however, their impact depends on the control variables and the employed measure of mortgage debt.

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.

We investigate the relationship between Chief Executive Officer (CEO) compensation and firm innovation and find that long‐term incentives in the form of options, especially unvested options, and protection from managerial termination in the form of golden parachutes are positively related to corporate innovation, and particularly to high‐impact, exploratory (new knowledge creation) invention. Conversely, non‐equity pay has a detrimental effect on the input, output and impact of innovation. Tests using the passage of an option expensing regulation (FAS 123R) as an exogenous shock to option compensation suggest a causal interpretation for the link between long‐term pay incentives, patents and citations. Furthermore, we find that the decline in option pay following the implementation of FAS 123R has led to a significant reduction in exploratory innovation and therefore had a detrimental effect on innovation output. Overall, our findings support the idea that compensation contracts that protect from early project failure and incentivize long‐term commitment are more suitable for inducing high‐impact corporate innovation.

This paper analyses whether Christian moralities and rules formed differently by Catholics and Protestants impact the likelihood of households to become overindebted. We find that over-indebtedness is lower in regions in which Catholics outweigh Protestants, indicating that Catholics‘ forgiveness culture and a stricter enforcement of rules by Protestants serve as explanations for our results. Our results provide evidence that religion affects the financial situations of individuals and show that even 500 years after the split between Catholics and Protestants, the differences in the mind-sets of both denominations play an important role for situations of severe financial conditions.

We show that banks that are facing relatively high locally non-diversifiable risks in their home region expand more across states than banks that do not face such risks following branching deregulation in the 1990s and 2000s. These banks with high locally non-diversifiable risks also benefit relatively more from deregulation in terms of higher bank stability. Further, these banks expand more into counties where risks are relatively high and positively correlated with risks in their home region, suggesting that they do not only diversify but also build on their expertise in local risks when they expand into new regions.

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.

We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.

Since the global financial crisis, economic literature has highlighted banks’ inclination to bolster up their liquid asset positions once the aggregate interbank funding market experiences a dry-up. To this regard, we show that liquidity hoarding and its detrimental effects on credit can also be triggered by idiosyncratic, i.e. bankspecific, interbank funding shocks with implications for monetary policy. Combining a unique data set of the Brazilian banking sector with a novel identification strategy enables us to overcome previous limitations for studying this phenomenon as a bankspecific event. This strategy further helps us to analyse how disruptions in the bank headquarters’ interbank market can lead to liquidity and lending adjustments at the regional bank branch level. From the perspective of the policy maker, understanding this market-to-market spillover effect is important as local bank branch markets are characterised by market concentration and relationship lending.