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Session Overview
FIIE-16: Credit standard and financial distress
Thursday, 22/Aug/2019:
13:30 - 15:00

Session Chair: Victoria Ivashina, Harvard University
Location: D -114

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Going the Extra Mile: Distant Lending and Credit Cycles

Joao Granja, Christian Leuz, Raghuram Rajan

University of Chicago, United States of America

Discussant: Florian Heider (European Central Bank)

We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

efa2019-FIIE-16-779-Going the Extra Mile.pdf

The Economic Costs of Financial Distress

Emilia Garcia-Appendini1, Cláudia Custódio2, Miguel Ferreira3

1University of Zurich, Switzerland; 2Imperial College Business School; 3Nova School of Business and Economics

Discussant: Daniel Carvalho (Indiana University)

We estimate the economic costs of financial distress using local real estate shocks. We identify these effects by exploiting variation in real estate assets and financial leverage across suppliers. We find that clients reduce their reliance on suppliers that are highly levered and own more real estate assets in response to declines in real estate prices. More affected suppliers suffer a 10% larger decline in sales for the same client and year than less affected suppliers. The effect is more pronounced in more competitive industries, for durable and less specific goods, and when switching costs are low. Our results suggest that indirect costs of financial distress are economically important.

efa2019-FIIE-16-938-The Economic Costs of Financial Distress.pdf

Securities laws and the choice between loans and bonds for highly levered firms

Robert Prilmeier1, René M. Stulz2

1Tulane University; 2The Ohio State University

Discussant: Victoria Ivashina (Harvard University)

In contrast to bonds, levered loans do not require SEC registration. We show that this distinction plays an important role in firms’ choice between funding through loans and bonds and helps understand why the market share of cov-lite loans has increased so much. Compared to cov-heavy loans, cov-lite loans are close substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans. SEC-reporting firms that borrow using cov-lite loans are more likely to deregister subsequently. Non-reporting firms are more likely to borrow through highly levered loans than through bonds, even though maturities, amounts, covenants, and ratings are similar between the two sources of funding. As expected from theory, we find that the liquidity advantage of cov-lite loans over cov-heavy loans is highest for non-registered issuers where information asymmetries are greater.

efa2019-FIIE-16-394-Securities laws and the choice between loans and bonds.pdf

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