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Session Overview
FIIE-8: Investment and Information
Thursday, 24/Aug/2017:
8:30am - 10:00am

Session Chair: Jennifer Dlugosz, Washington University in St. Louis
Location: O151

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The Causal Effects of Proximity on Investment: Evidence from Flight Introductions

Leonardo Madureira1, Jesse Ellis2, Shane Underwood3

1Case Western Reserve University; 2North Carolina State University; 3Baylor University

Discussant: Marcin Kacperczyk (Imperial College Business School)

We address fundamental endogeneity issues inherent in the local bias literature by using direct flight introductions as an exogenous shock to the travel time between mutual funds and firms, thereby allowing us to understand the causal effects of proximity on fund investment decisions and performance. We find that a fund invests significantly more in firms that become more proximate due to the introduction of direct flights that reduces the fund’s cost of traveling to the firm, and that these more proximate investments exhibit superior performance. Our findings are robust to the inclusion of a variety of fixed effects and specifications that control for potential confounders such as firm-level shocks, fund-level shocks, and time trends. Collectively, our results indicate that proximity enhances investors' ability to acquire value-relevant information about firms.

EFA2017-274-FIIE-8-Madureira-The Causal Effects of Proximity on Investment.pdf

Local Crowding Out in China

Yi Huang1, Marco Pagano2, Ugo Panizza3

1Graduate Institute of International and Development Studies; 2UniversitĂ  di Napoli Federico II; 3Graduate Institute of International and Development Studies

Discussant: Hong Ru (Nanyang Technological University)

In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing firms by tightening their funding constraints, while it did not affect state-owned and foreign firms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing firms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative effect on investment by private firms in industries more dependent on external funding. Finally, in cities with high government debt, firm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the firm's likelihood of being credit-constrained. Altogether, these results suggest that, by curtailing private investment, the massive public debt issuance associated with the post-2008 fiscal stimulus sapped long-term growth prospects in China.

EFA2017-1045-FIIE-8-Huang-Local Crowding Out in China.pdf

Asymmetric Information and the Securitization of SME Loans

Ugo Albertazzi1, Margherita Bottero1, Leonardo Gambacorta2, Steven Ongena3

1Banca d'Italia; 2Bank for International Settlements; 3University of Zurich

Discussant: Viktors Stebunovs (Federal Reserve Board)

Using credit register data for loans to Italian firms we test for the presence of asymmetric information in the securitization market by looking at the correlation between the securitization (risk-transfer) and the default (accident) probability. We can disentangle the adverse selection from the moral hazard component for the many firms with multiple bank relationships. We find that adverse selection is widespread but that moral hazard is limited to the weak relationships, indicating that a strong relationship is a credible enough commitment to monitor after securitization. Importantly, the selection of which loans to securitize based on observables is such that it largely compensates for the (negative) effects of asymmetric information, rendering the overall unconditional quality of securitized loans significantly better than that of non-securitized ones. Thus, despite the presence of asymmetric information, our results are not in line with the view that credit-risk transfer leads to lax credit standards.

EFA2017-1846-FIIE-8-Albertazzi-Asymmetric Information and the Securitization of SME Loans.pdf

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