Conference Agenda

We study the role of Export Credit Agencies—the predominant tool of industrial policy—on firm behavior by using the effective shutdown of the Export-Import Bank of the United States (EXIM) from 2015–2019 as a natural experiment. We show that a 1% reduction in EXIM trade financing reduces exports in an industry by approximately 5%. The impact on firms’ total revenues implies that the export shock has positive pass-through to domestic sales, and firms contract investment and employment. These negative effects for the average firm are amplified by increased capital misallocation across firms as those with higher ex-ante marginal revenue product of capital contract more. We model the effect of EXIM trade financing as lowering two types of input cost wedges: an exporting firm’s financing friction, and an importer market friction. We show that both frictions are empirically relevant, indicating that even in well-developed financial markets, the supply of trade financing is plausibly constrained. These results provide a framework for the conditions under which Export Credit Agencies can boost exports and firm growth, and can act as a tool of industrial policy without necessarily leading to a misallocation of resources.

Firms with ample financial slack are unconstrained... or are they? In a field experiment that randomly expands debt capacity on business credit lines treated small-and-medium enterprises (SMEs) draw down 35 cents on the dollar of expanded debt capacity in the short-run and 55 cents in the long-run despite having debt levels far below their borrowing limit before the intervention. SMEs direct new borrowing to financing investment gradually over time and do not exhibit a measurable impact on delinquencies. Heterogeneity analysis by the risk of being at the credit line limit supports the SME motive to preserve financial flexibility.

Asset pricing research indicates that the long and short term do not contribute equally to the market risk premium, and that their relative contribution is time-varying. While having notable implications for firm discount rates, corporate finance models typically abstract from these aspects. In a dynamic model with financing frictions, we show that firms should extend (shorten) their horizon if short-term shocks have a greater (smaller) market price than long-term ones, i.e., if the term structure of risk prices is downward-sloping (upward-sloping). Ignoring a downward-sloping term structure leads to underinvestment, excessive payouts, inadequate cash reserves and equity issuances, and excessive liquidations