Credit Reallocation,Deleveraging, and Financial Crises

This paper studies how the process of reallocation of credit across firms behaves before and after financial crises. Applying the methodology typically used for measuring job reallocation, we track credit reallocation across Korean firms for over three decades (1980–2012). The credit boom preceding the 1997 crisis featured a slowdown of credit reallocation. After the crisis and the associated reforms, the creditless recovery (deleveraging) masked a dramatic intensification and increased procyclicality of credit reallocation. The findings suggest that the intensification of reallocation was efficiency‐enhancing.     

Liquidity mergers

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions “liquidity mergers,” since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset-specificity is high and firm-level asset-specificity is low. We analyze firms' liquidity policies as a function of real asset reallocation, examining the trade-offs between cash and credit lines. We verify the model's prediction that liquidity mergers are more likely to occur in industries in which assets are industry-specific, but transferable across firms. We also show that firms are more likely to use credit lines (relative to cash) in industries in which liquidity mergers are more frequent.     

Capital reallocation and liquidity

This paper shows that the amount of capital reallocation between firms is procyclical. In contrast, the benefits to capital reallocation appear countercyclical. We measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross-sectional dispersion of the productivity of capital. We then study a calibrated model economy where capital reallocation is costly and impute the cost of reallocation. We find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion.     

Credit market frictions and the allocation of resources over the business cycle

In a seminal paper, Davis and Haltiwanger (1990) demonstrated that recessions are associated with increased job reallocation. The conventional view has interpreted this as evidence of “cleansing”: less productive jobs are destroyed in recessions, and resources are reallocated to more productive uses. This paper argues instead that in the presence of credit market frictions, reallocation might go the other way, directing resources from more efficient to less efficient uses. This will occur if more efficient production arrangements are also more vulnerable to credit constraints. I show that this pattern arises endogenously in an equilibrium model, and offer some evidence that firms with higher output per worker tend to borrow more, suggesting they are more vulnerable to credit constrains.     

Anomalies and financial distress

This paper explores commonalities across asset pricing anomalies. In particular, we assess implications of financial distress for the profitability of anomaly-based trading strategies. Strategies based on price momentum, earnings momentum, credit risk, dispersion, idiosyncratic volatility, and capital investments derive their profitability from taking short positions in high credit risk firms that experience deteriorating credit conditions. In contrast, the value-based strategy derives most of its profitability from taking long positions in high credit risk firms that survive financial distress and subsequently realize high returns. The accruals anomaly is an exception. It is robust among high and low credit risk firms in all credit conditions.     

Informational Frictions and the Credit Crunch

In this paper, I estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007 to 2009 financial crisis. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships. Quantitatively, these informational frictions appear to be too small to explain the credit crunch in the U.S. syndicated corporate loan market.     

Credit ratings and the cross-section of stock returns

Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.     

Momentum and Credit Rating

This paper establishes a robust link between momentum and credit rating. Momentum profitability is large and significant among low‐grade firms, but it is nonexistent among high‐grade firms. The momentum payoffs documented in the literature are generated by low‐grade firms that account for less than 4% of the overall market capitalization of rated firms. The momentum payoff differential across credit rating groups is unexplained by firm size, firm age, analyst forecast dispersion, leverage, return volatility, and cash flow volatility.     

Credit channel,trade credit channel,and inventory investment: Evidence from a panel of UK firms

In this paper, we use a panel of 609 UK firms over the period 1980–2000 to test for the existence of a trade credit channel of transmission of monetary policy, and for whether this channel plays an offsetting effect on the traditional credit channel. We estimate error-correction inventory investment equations augmented with the coverage ratio and the trade credit to assets ratio, differentiating the effects of the latter variables across firms more or less likely to face financing constraints, and firms making a high or low use of trade credit. Our results suggest that both the credit and the trade credit channels operate in the UK, and that the latter channel tends to weaken the former.     

The Trade Credit Channel of Monetary Policy Transmission: Evidence from Nonfinancial Manufacturing Firms in Turkey

This study investigates the trade credit channel of monetary policy transmission in Turkey by using a large panel of corporate firms and includes detailed information on balance sheets and income statements of firms that regularly reported to the Central Bank of the Republic of Turkey during the period 1996-2008. The study suggests that the composition of external finance differs considerably across firm types based on size and export performance under tight and loose financial conditions. Small and medium-size manufacturing firms and firms with a low export share are less likely to have access to bank finance, especially in tight periods. In addition, financially constrained firms with limited access to bank finance (small, low-export-share firms) tend to substitute trade credits for bank loans more aggressively in tight periods as monetary policy tightens. The large volume of trade credit on firms' balance sheets and its positive response to contractionary monetary shocks imply that the trade credit channel might subdue the traditional credit channel of monetary transmission.     

As told by the supplier: Trade credit and the cross section of stock returns

With superior information about their customers’ prospects, suppliers extend trade credit to capture future profitable business. We show that this information advantage generates significant return predictability. After controlling for major firm characteristics, firms that rely more on trade credit relative to debt financing have higher subsequent stock returns. The return predictability by trade credit is stronger among firms with lower borrowing capacity or profitability, and is more significant for firms with a higher degree of information asymmetry. Our findings suggest that trade credit extension reveals suppliers’ information that diffuses gradually across the investing public.     

Is there an employee-based gender gap in informal financial markets? International evidence

We study the impact of female production workers on firms' access to trade credits across the world. Using two sources of plausibly exogenous variations in gender bias and a difference-in-differences framework, we document that firms with more female production workers have less access to trade credits in countries with stronger gender beliefs that favor males. This relationship is largely driven by firms in industries with unexpected credit shortages and industries dominated by males. Since female firms rely more on informal finance, this study is relevant for policies that direct female firms towards formal credit markets in highly gender-biased places.     

Information sharing and credit: Firm-level evidence from transition countries

We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms. This correlation is stronger for opaque firms than transparent ones and stronger in countries with weak legal environments than in those with strong legal environments. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level, as well as for changes in macroeconomic variables and the legal environment.     

When arm's length is too far: Relationship banking over the credit cycle

We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.     

Government Credit,a Double‐Edged Sword: Evidence from the China Development Bank

Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state‐owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows.     

Tenant Quality and REIT Liquidity Management

Property values depend upon quality tenants and consistency (Smith: The RMA Journal 50-60, 2009). REIT firms are only as strong as their properties. In this research I examine how tenant quality affects REIT firm liquidity management (i.e. cash holdings and utilization of line of credit). I find that 1) tenant Altman Z-score and size are inversely related to total liquidity (cash plus unused credit line) and unused credit lines of REIT firms; 2) tenant size is inversely related to the total corporate liquidity and unused credit lines of REIT firms, but has no affect on REIT cash holdings; 3) tenant credit ratings are negatively related to total credit available and unused credit lines; 4) tenant book-to-market ratio and tenant profitability are negatively related to REIT cash holdings, but positively correlated to the total available credit lines and unused credit lines of REIT firms; 5) these effects vary across different property types. These results suggest that the analysis of tenant quality can offer insights into the firm policy and decision makings of REIT firms.     

Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification

We show that a firm's CSR policy is significantly influenced by the CSR policies of firms in the same three‐digit zip code, an effect possibly due to investor clienteles, local competition, and/or social interactions. We then exploit the variation in CSR across the zip codes to estimate the effect of CSR on credit ratings under the assumption that zip code assignments are exogenous. We find that more socially responsible firms enjoy more favorable credit ratings. In particular, an increase in CSR by one standard deviation improves the firm's credit rating by as much as 4.5%.     

Trade Credit Use as Firms Approach Default

Using a sample of distressed firms with information about suppliers, we document an average fall in the use of trade credit as firms approach bankruptcy compared to a control sample of nonbankrupt firms. However, we uncover a large degree of heterogeneity across suppliers. Suppliers facing high switching costs maintain their business ties with the distressed firms as they approach bankruptcy, and provide them more trade credit. Suppliers in concentrated markets provide temporary support to their clients. Overall, the findings of this paper suggest that switching costs are fundamental to explain whether suppliers provide liquidity to their distressed clients or not.     

Sovereign to Corporate Risk Spillovers

The first Greek bailout on April 11, 2010 triggered a significant reevaluation of sovereign credit risk across Europe. We exploit this event to examine the transmission of sovereign to corporate credit risk. A 10% increase in sovereign credit risk raises corporate credit risk on average by 1.1% after the bailout. The evidence is suggestive of risk spillovers from sovereign to corporate credit risk through a financial and a fiscal channel, as the effects are more pronounced for firms that are bank or government dependent. We find no support for indirect risk transmission through a deterioration of macroeconomic fundamentals.     

Cross-sectional heterogeneity and the persistence of aggregate fluctuations

The microevidence indicates that small firms grow faster than big firms. I argue that this relationship between the expected growth rate of a firm and its size may provide a microfoundation for the well-known high degree of persistence of shocks to aggregate output. The logic goes as follows. Almost any shock tends to temporarily alter firms' incentive to invest in growth thereby leading to a reallocation of firms across size categories. If small firms grow faster than big ones, the impact effect of the shock on aggregate output is gradually absorbed. But, as fast growing small firms become big and start to grow at the lower rate of big firms, the rate at which the shock is absorbed decreases over the adjustment path. As a result, shocks are absorbed, yet at a very low decreasing rate which induces long memory in aggregate output. I argue that this transmission mechanism may reconcile the microevidence with the observed degree of aggregate persistence. It requires changes in neither the number of firms in the market nor the rate of technological progress. It is merely the result of the cross-sectional heterogeneity that we observe in real economies.