Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China

This paper assesses the risk arising from transition toward a low-emission economy and examines its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulation impairs firms' balance sheets in the short term, as it enforces firms to internalize the pollution costs, which consequentially escalates the risks facing the financial system. For the empirical analysis, we employ the Clean Air Action that the Chinese government launched in 2013 as a quasi-natural experiment. The analysis on a unique dataset containing more than one million loans indicates that the default rates of high-polluting firms rose by around 80% along their environmental policy exposure. Further analysis shows those joint equity commercial banks with lower degree of government intervention and better corporate governance structure were able to appropriately manage their exposure to transition risks, while the state-owned banks failed to factor in such risks when extending credit to the borrowers targeted by the environmental regulation.     

Exchange rate pass-through and credit constraints

The macroeconomic evidence of the short-term impact of exchange rates on exports and prices is notoriously weak. This paper examines the microfoundations of this disconnect. I study the response of firms' export and price setting decisions to fluctuations in exchange rates and credit conditions using firm-level survey data. Financially constrained firms pass through exchange rate changes to prices at almost twice the rate of unconstrained firms. Similarly, their export volumes are about twice as sensitive to exchange rate fluctuations. The effect of borrowing constraints is particularly strong during the recent financial crisis.     

Financial Constraints,Institutions, and Firm Productivity: Evidence from China

ABSTRACT

This paper investigates whether Chinese firms utilize trade credit as an alternative financial intermediation to alleviate financial constraints, and whether trade credit matters for firm productivity. The results show that trade credit significantly affects firm productivity in private and foreign-owned firms but not state-owned enterprises, indicating that trade credit is an efficient financial intermediation for non-state firms. Second, trade credit better helps firms that have severe financial constraints grow. Third, the mechanism of trade credit and TFP is by the substitution effect of cash flow, the smoothing effect of working capital and the drive of innovation. Finally, the impact of trade credit on productivity is driven by the regions under a more institutionally developed environment.     

Do some lenders have information advantages? Evidence from Japanese credit market data

Using detailed Japanese credit data, we test for the existence of a credit market hierarchy. Empirical tests indicate that firms with information problems are more likely to carry higher proportions of relationship loans from main banks than non-main banks, holding constant risk and control factors. We further examine credit specialization on the part of lenders by testing the relationship between client firms' information and risk characteristics and the concentration of loans obtained from depository institutions versus other financial institutions. However, no significant differences in information superiority between these two types of financial institutions are found. We conclude that our evidence supports the credit market hierarchy hypothesis for Japanese main banks in particular but not depository institutions in general.     

When green meets green

We investigate whether and how the environmental consciousness (greenness for short) of firms and banks is reflected in the pricing of bank credit. Using a large international sample of syndicated loans over the period 2011–2019, we find that green banks indeed reward firms for being green in the form of cheaper loans—however, only after the ratification of the Paris Agreement in 2015. Such loans are also more likely term loans, with fewer covenants and reflect firms' project choices. Thus, we find that environmental attitudes matter “when green meets green.”     

Do banks fuel climate change?

Do climate-oriented regulatory policies affect the flow of credit towards polluting firms? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms in relative terms. Specifically, euro area banks’ loan share to more polluting firms decreased by about 3percentage points compared to less polluting (or “green”) firms after the 2015 Paris Agreement (COP21). This result is stronger for banks that are well capitalized, have lower credit quality, and are less profitable.     

Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma

I study the implications for central bank discount window stigma of a workhorse model of adverse selection in financial markets. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts, which gives rise to the possibility of adverse selection. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms' credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these and other outcomes in detail and what they suggest about the relevance of stigma as an empirical phenomenon.     

The real effects of bank distress: Evidence from bank bailouts in Germany

How does bank distress impact their customers' probability of default and trade credit availability? We address this question by looking at a unique sample of German firms from 2000 to 2011. We follow their firm-bank relationships through times of distress and crisis, featuring the different transmission of bank distress shocks into already weakened firm balance sheets. We find that a distressed bank bailout, which is subject to restructuring and deleveraging conditions, leads to a bank-induced increase of firms' probabilities of default. Moreover, bailouts tend to reduce trade credit availability and ultimately firms' sales. We further find that the direction and magnitude of the effects depends on firm quality and the relationship orientation of banks.     

The impact of corporate governance on financial performance of Indian and GCC listed firms: An empirical investigation

Corporate governance plays a vital role in creating a corporate culture of consciousness, transparency, and openness. In this context, this paper provides a brief view about the background of corporate governance mechanisms in India and Gulf Corporation Council (GCC) countries, corporate legal system and monitoring policies laid down by Indian and GCC governments. Furthermore, it analyzes the impact of corporate governance mechanisms on the financial performance of Indian and GCC listed firms. The study uses a sample that consists of 53 non-financial listed companies from India and 53 non-financial listed companies from GCC countries for the period 2009–2016. Results revealed that board accountability (BA) and audit committee (AC) have an insignificant impact on firms' performance measured by ROE and Tobin’s Q. Similarly, transparency and disclosure (TD) have an insignificant negative impact on firms' performance measured by Tobin’s Q. Moreover, the country dummy results show that Indian firms are performing better than Gulf countries ones in terms of corporate governance practices and financial performance. The current study is considered as a battery for further research and studies particularly in India & GCC listed firms in the context of corporate governance and financial performance.     

How does corporate social responsibility have influence on firms' access to trade credit

This study identifies and examines the channels through which corporate social responsibility (CSR) impacts firms' access to trade credit. Using a sample of Chinese firms, we identify two channels through which CSR impacts firms' access to trade credit: (i) better CSR performance reduces firms' systematic risk; and (ii) better CSR performance enhances trust from suppliers. We also document that the positive effect that CSR has on firms' access to trade credit is more pronounced in firms with limited access to formal financial resources, i.e., in non-state-controlled enterprises, especially those without political connections, and in firms located in regions with a lower level of social trust. Our findings are robust to a series of tests that address the endogeneity issue. Overall, we argue that CSR performance enhances firms' access to trade credit through the channels of systematic risk and trust enhancing.     

How do firms overcome financial constraint anxiety to survive in the market? Evidence from large manufacturing data

In so far as financial constraints affect firm performance, they may expose firms to survival risks. Using a large panel of Chinese firms observed from 1998 to 2013, I analyse the causal relationship between firm survival and financial constraints and how firm performance impacts this relationship. I find that financial constraints play an important role in influencing firm survival. Moreover, financial constraints are the mechanism underlying the relationship between firm performance and survival, and productive and profitable firms can alleviate financial constraints. Privately owned and foreign-owned firms with more leverage face more difficulties surviving in the market; however, state-owned enterprises with more leverage can ease their financial limitations. Finally, I provide evidence that high dependency and high coverage ratios can facilitate firms' survival through alleviating financial constraints.     

Creditor control rights and firm investment policy

We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance.     

Comparative advantages of regional versus national banks in alleviating SME's financial constraints

This paper provides new evidence on the impact of local banking market structure on SME's access to credit and emphasize the comparative advantages of regional versus national banks in alleviating SME's financial constraints. Matching a unique dataset on bank branch-level and firm-level information for a sample of 33,165 French manufacturing firms over the 2005–2013 period, we rely on two alternative indicators to capture different dimensions of SMEs financial constraints and find significant differences in the drivers of these constraints. While higher market share of regional banks or stronger presence of geographically-focused banks helps to alleviate SMEs' short-term credit constraint, higher market share of national banks or stronger presence of geographically-diversified banks is beneficial to reduce SMEs investment cash-flow sensitivity. Moreover, in both cases, SMEs' financial constraints are strengthened in functionally-distant markets. In addition, during crisis times, the benefits of relationship banking on short-term credit constraint remain and, in some cases, are reinforced. We also find that these benefits differ according to SMEs pre-crisis financial health. Regional banks facilitate access to short term credit for firms which were more profitable before the global financial crisis and particularly those who experienced a sharp decline in profitability in troubled times, supporting the hypothesis of continuation lending by relationship banks during economic downturns.     

Impact of late payment on Firms' profitability: Empirical evidence from Malaysia

This paper examines whether late payment (LP) by customers impacts firms' profitability, using a cross-sectional sample of 287 Malaysian public-listed manufacturing firms for the financial year 2007. This is an important issue given that trade credit is commonly seen as a significant short-term financing practice in Asia. However, in Malaysia, trade credit has not been explored, largely due to the unavailability of relevant published data and the reluctance of firms to divulge information regarding their trade credit practices. To overcome this, we suggest a new measure of LP using the Pareto 80:20 rule to take cognisance of local nuances and industry practice, and argue that Pareto Days Overdue is an appropriate measure of LP for Malaysia. We find that 60% of the sampled firms experience LP and LP has a significant inverse effect on their profitability; and those with shorter credit terms and Days Sales Outstanding (DSO) perform better than those with longer credit terms and longer DSO. The paper also discusses implications for policy makers and regulators since the accounting rules related to the disclosure of receivables in Malaysia are converging towards the International Financial Reporting Standards (IFRS).     

CEOs' hometown connections and access to trade credit: Evidence from China

In this study, we investigate how informal institutions, namely, chief executive officers' hometown connections with suppliers, impact firms' access to trade credit. Using unique data manually collected from China, we find that hometown connections significantly increase access to trade credit. The hometown effect is more pronounced for non-state-owned firms, firms in provinces with poorly developed financial institutions, and firms whose chief executive officers come from hometowns with a strong merchant guild culture or hold an important position in the hometown's chamber of commerce. We suggest two plausible channels for the hometown effect: information and social trust. Overall, this study contributes to the literature by documenting how hometown connections help firms to obtain external financing in emerging markets.     

Demand collapse or credit crunch to firms? Evidence from the World Bank's financial crisis survey in Eastern Europe

This paper assesses whether the primary effect of the global crisis on Eastern European firms took the form of an adverse demand shock or a credit crunch. Using a unique firm survey conducted by the World Bank in six Eastern European countries during the 2008–2009 financial crisis, the paper shows that the drop in demand for firms' products and services was overwhelmingly reported as the most damaging adverse effect of the crisis. Other “usual suspects”, such as rising debt or reduced access to credit, were reported as minor. The paper also finds that the changes in firms' sales and installed capacity are significantly and robustly correlated with different demand sensitivity measures of the sector in which the firms operate. However, they are not robustly correlated with various proxies for firms' credit needs.     

How common are credit-less recoveries? Firm-level evidence on the role of financial markets in crisis recovery

We study firm recoveries from systemic sudden stops in developing countries, where firms' cash flows suffer exogenous shocks. Contrary to macro studies suggesting that output recovery precedes that of the financial sector, firm-level data shows that only in less than a third of firms, operating cash flows recover without a recovery in external credit, and even these firms have access to other sources of cash. Specifically, firms with high prior short-term debt exposure do experience a sharp reduction in short-term credit but increase operating cash flows during a crisis. Firms with high prior cash holdings experience negative cash flows and deplete their cash holdings. Thus, firms' financial prepositioning predicts recovery in cash flows and is consistent with trade-off theories of capital structure and with precautionary motives for cash holdings. We find no support for the maturity mismatch hypothesis, which predicts that firms with high short-term debt should have harder recoveries post crisis.     

Foreign institutional ownership and the speed of leverage adjustment: International evidence

Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.     

Collateral damaged? Priority structure,credit supply,and firm performance

A unique legal reform in 2004 in Sweden redistributed collateral rights from banks holding floating liens to unsecured creditors without changing the value of assets on firms’ balance sheets. Using a country-wide panel of all incorporated firms, we document that a zero-sum redistribution of collateral rights and the resulting reduction in collateral capacity towards banks contracts the amount and maturity of corporate debt and leads firms to slow investment and forego growth. Altering their allocation of assets, firms reduce particularly those assets with a low collateralizable value for banks and also hoard more cash. However, the reform has no impact on corporate capital intensity or efficiency, suggesting that under these newly binding credit constraints firms simply shrink their operations.     

Firm dynamics and financial development

Using comprehensive firm-level datasets, this paper studies the impact of cross-country variation in financial market development on firms' financing choices and growth. In less financially developed economies, small firms grow faster and have lower leverage than large firms. As financial development improves, the growth difference between small and large firms shrinks, while the leverage difference rises. The paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. The model explains the observed cross-country variations in firm size, leverage and growth in response to changes in financial frictions.