Corporate Finance

Members of the NBER's Corporate Finance Program met on April 6 in Chicago. Research Associates Carola Frydman of Northwestern University and Gregor Matvos of University of Texas at Austin organized the meeting. These researchers' papers were presented and discussed:

Session 1: Banking and Shadow Banking

Christopher Martin and Alexander Ufier, Federal Deposit Insurance Corporation, and Manju Puri, Duke University and NBER

Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance (NBER Working Paper No. 24589)

Using unique, daily, account-level balances data Martin, Puri, and Ufier investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. They observe an outflow (run-off ) of uninsured depositors from the bank following bad regulatory news. They find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. The researchers also characterize which accounts are more stable (e.g., checking accounts and older accounts). They further provide important new evidence that, simultaneous with the run-off, gross funding inflows (run-in) are large and of first-order impact -- a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. The researchers show their results hold more generally using a large sample of banks that faced regulatory action. Their results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability.

Sergey Chernenko and Isil Erel, Ohio State University, and Robert Prilmeier, Tulane University

Nonbank Lending

Chernenko, Erel, and Prilmeier provide novel systematic evidence on the terms of direct lending by nonbank financial institutions. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, they find that nonbank lending is widespread, with 30% of all loans being extended by nonbanks. Firms are more likely to borrow from a nonbank lender if local banks are poorly capitalized and less concentrated. Nonbank borrowers are smaller, more R&D intensive, and significantly more likely to have negative EBITDA. Nonbank lenders are less likely to monitor by including financial covenants in their loans, but appear to engage in more ex-ante screening: origination of nonbank loans is associated with larger positive announcement returns. The researchers find that nonbank borrowers pay about 200 basis points higher interest rates than bank borrowers. Using fuzzy regression discontinuity design and matching techniques generates similar results. Overall, the results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending technologies and cater to different types of borrowers.

Session 2: Incentives and Limited Liability

Pat Akey, University of Toronto, and Ian R. Appel, Boston College

The Limits of Limited Liability: Evidence from Industrial Pollution

Akey and Appel study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Their empirical setting exploits a Supreme Court case that strengthened limited liability protection for parent corporations. Using a difference-in-differences framework, the researchers find that increased liability protection for parents leads to a 10% increase in toxic emissions by subsidiaries. This decision is also associated with abnormal returns of over 1% for parent firms with a relatively high exposure to the change in legal liability. They find evidence that the increase in pollution is driven by lower investment in abatement technologies rather than higher production. Cross-sectional tests suggest a risk-shifting motivation for these effects. Overall, the researchers' results highlight moral hazard problems associated with limited liability.

Peter Koudijs, Stanford University and NBER, and Laura Salisbury, York University and NBER

For Richer, For Poorer. Banker's Liability And Risk Taking In New England, 1867-1880

Koudijs and Salisbury study whether banks are riskier if managers have less liability. They focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. They find that banks with managers who married after a legal change had more leverage, were more likely to "evergreen" loans and violate lending rules and lost more capital and deposits in the Long Depression of 1873-1878. This effect was most pronounced for bankers whose wives were relatively wealthy. The researchers find no evidence that limiting liability increased capital investment at the county level.

Session 3: Fin Tech

Adair Morse, University of California, Berkeley and NBER, and Robert P. Bartlett III, Richard Stanton, and Nancy Wallace, University of California, Berkeley

Consumer-Lending Discrimination in the FinTech Era

Racial discrimination in lending can materialize in loan officer decisions or in algorithmic scoring, especially with big-data use by FinTech lenders. To investigate these discrimination channels, Bartlett, Morse, Stanton, and Wallace estimate a treatment-based Oaxaca-Blinder decomposition based on the unique mortgage-default-risk setting of the GSEs. Among approved loans, ethnic-minority borrowers pay higher rates of interest, with both traditional and FinTech lenders charging non-white borrowers 0.08% higher interest for purchase mortgages. This is about 14% of lenders' average profit margin per loan, and the present value of this difference represents nearly 1% of the loan balance. In aggregate, ethnic-minority borrowers pay almost $0.5B per year in extra interest. These findings are consistent with FinTech and non-FinTech lenders extracting rents in weaker competitive environments such as financial deserts. The researchers additionally estimate that lenders reject African-American and Hispanic applicants 5% more often, leaving money on the table. Discrimination in rejection rates is especially pronounced among low-credit-score applicants, but less pronounced for FinTech lenders. These latter results suggest that GSE underwriting plays a crucial role in minimizing algorithmic discrimination, at least with respect to credit rationing.

Harald Hau, University of Geneva; Yi Huang, The Graduate Institute, Geneva; and Hongzhe Shan, Swiss Finance Institute

TechFin at Ant Financial: Credit Market Completion and its Growth Effect

Session 4: Macro Finance

Atif R. Mian, Princeton University and NBER, and Amir Sufi, University of Chicago and NBER

Fueling a Frenzy: Private Label Securitization and the Housing Cycle of 2000 to 2010

Geographic areas more exposed to the 2003 acceleration of the private label mortgage securitization (PLS) market witness a sudden and large increase in mortgage originations and transaction volume from 2003 to 2006. These areas experience significant relative growth in the number of individuals with many mortgages, highlighting the importance of a small group of individuals in driving the rise in volume. House prices and construction activity grow substantially more in these areas. Cities such as Las Vegas and Phoenix with high exposure to the PLS market are significantly more likely to experience a simultaneous large increase in both house price growth and construction activity during the housing boom. These cities see a painful bust, with house prices and construction activity falling below pre-2003 levels. Mian and Sufi's results are inconsistent with the view that a general rise in housing market optimism can explain house price growth in cities most exposed to the PLS market, to the contrary, higher house price growth driven by the acceleration of the PLS market boosts the share of individuals saying it is a bad time to buy a house because prices are too high. Overall, the researchers' results suggest that credit supply expansion fueled by the PLS market allowed a small group of individuals to have large effects on the housing market.

Gita Gopinath and Jeremy C. Stein, Harvard University and NBER

Banking, Trade and the Making of a Dominant Currency (NBER Working Paper No. 24485)

Gopinath and Stein explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Their theory highlights the following points: 1) a currency's role as a unit of account for invoicing decisions is complementary to its role as a safe store of value, 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals, 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency, 4) the expected return on dominant currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an "exorbitant privilege" on the dominant currency. The researchers' theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.

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