Pages: 2855-2898 | Published: 8/2020 | DOI: 10.1111/jofi.12966 | Cited by: 227
YI HUANG, MARCO PAGANO, UGO PANIZZA
In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state‐owned firms' investment unaffected. We establish this result using a purpose‐built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow.
Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity, and Trading Costs
Pages: 2899-2927 | Published: 8/2020 | DOI: 10.1111/jofi.12969 | Cited by: 85
ANDRIY SHKILKO, KONSTANTIN SOKOLOV
Modern markets are characterized by speed differentials, with some traders being fractions of a second faster than others. Theoretical models suggest that such differentials may have both positive and negative effects on liquidity and gains from trade. We examine these effects by studying a series of exogenous weather episodes that temporarily remove the speed advantages of the fastest traders by disrupting their microwave networks. The disruptions are associated with lower adverse selection and lower trading costs. In additional analysis, we show that the long‐term removal of speed differentials results in similar effects and also increases gains from trade.
Credit Rating Inflation and Firms' Investments
Pages: 2929-2972 | Published: 7/2020 | DOI: 10.1111/jofi.12961 | Cited by: 47
ITAY GOLDSTEIN, CHONG HUANG
We analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop. The credit rating agency (CRA) inflates the rating, providing a biased but informative signal to creditors. Creditors' response to the rating affects the firm's investment decision and thus its credit quality, which is reflected in the rating. The CRA might reduce ex ante economic efficiency, which results solely from its strategic effect: the CRA assigns more firms high ratings and allows them to gamble for resurrection. We derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications.
Safety Transformation and the Structure of the Financial System
Pages: 2973-3012 | Published: 8/2020 | DOI: 10.1111/jofi.12967 | Cited by: 25
WILLIAM DIAMOND
This paper studies how a financial system that is organized to efficiently create safe assets responds to macroeconomic shocks. Financial intermediaries face a cost of bearing risk, so they choose the least risky portfolio that backs their issuance of riskless deposits: a diversified pool of nonfinancial firms' debt. Nonfinancial firms choose their capital structure to exploit the resulting segmentation between debt and equity markets. Increased safe asset demand yields larger and riskier intermediaries and more levered firms. Quantitative easing reduces the size and riskiness of intermediaries and can decrease firm leverage, despite reducing borrowing costs at the zero lower bound.
The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending
Pages: 3013-3053 | Published: 8/2020 | DOI: 10.1111/jofi.12958 | Cited by: 35
SALEEM BAHAJ, FREDERIC MALHERBE
Government guarantees generate an implicit subsidy for banks. A capital requirement reduces this subsidy, through a simple liability composition effect. However, the guarantees also make a bank undervalue loans that generates surplus in states of the world in which it defaults. Raising the capital requirement makes the bank safer, which alleviates this problem. We refer to this mechanism, which we argue is empirically relevant, as the forced safety effect.
Monetary Policy and Global Banking
Pages: 3055-3095 | Published: 7/2020 | DOI: 10.1111/jofi.12959 | Cited by: 31
FALK BRÄUNING, VICTORIA IVASHINA
When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—absent frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.
Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy
Pages: 3097-3138 | Published: 8/2020 | DOI: 10.1111/jofi.12965 | Cited by: 41
WENXIN DU, CAROLIN E. PFLUEGER, JESSE SCHREGER
We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk‐averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively countercyclical inflation ex post, which leads risk‐averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.
The Employment Effects of Faster Payment: Evidence from the Federal Quickpay Reform
Pages: 3139-3173 | Published: 8/2020 | DOI: 10.1111/jofi.12955 | Cited by: 45
JEAN‐NOËL BARROT, RAMANA NANDA
We study the impact of Quickpay, a reform that permanently accelerated payments to small business contractors of the U.S. government. We find a strong direct effect of the reform on employment growth at the firm level. However, we document substantial crowding out of nontreated firms' employment within local labor markets. While the overall net employment effect is positive, it is close to zero in tight labor markets. Our results highlight an important channel for alleviating financing constraints in small firms, but emphasize the general‐equilibrium effects of large‐scale interventions, which can lead to lower aggregate outcomes depending on labor market conditions.
Stock Market Returns and Consumption
Pages: 3175-3219 | Published: 8/2020 | DOI: 10.1111/jofi.12968 | Cited by: 95
MARCO DI MAGGIO, AMIR KERMANI, KAVEH MAJLESI
This paper employs Swedish data on households' stock holdings to investigate how consumption responds to changes in stock market returns. We instrument the actual capital gains and dividend payments with past portfolio weights. Unrealized capital gains lead to a marginal propensity to consume of 23% for the bottom 50% of the wealth distribution and about 3% for the top 30% of the wealth distribution. Household consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are consistent with households treating capital gains and dividends as separate sources of income.
Measuring Mutual Fund Flow Pressure as Shock to Stock Returns
Pages: 3221-3243 | Published: 7/2020 | DOI: 10.1111/jofi.12962 | Cited by: 68
MALCOLM WARDLAW
A large and rapidly growing literature examines the impact of misvaluation on firm policies by using mutual fund outflow‐induced price pressure to isolate nonfundamental price variation. I demonstrate that the standard approach to computing outflow‐induced price pressure produces a measure that is inadvertently a direct function of a stock's actual realized return during the outflow quarter, raising doubts about its orthogonality to fundamentals. After removing these direct measurements of return, outflows generate a fairly negligible quarterly decline in returns, with no subsequent reversal, and many established results in this literature no longer hold. I provide suggestions for future analysis.
Preliminary Program AFA 2021 ANNUAL MEETING EIGHTY‐FIRST ANNUAL MEETING AMERICAN FINANCE ASSOCIATION
Pages: 3248-3295 | Published: 11/2020 | DOI: 10.1111/jofi.12983 | Cited by: 0
Participant Schedule for the AFA 2021 Preliminary Program January 3–5, 2021
Pages: 3296-3369 | Published: 11/2020 | DOI: 10.1111/jofi.12984 | Cited by: 0
Pages: 3370-3370 | Published: 11/2020 | DOI: 10.1111/jofi.12985 | Cited by: 1
Laura Starks
Pages: 3371-3372 | Published: 11/2020 | DOI: 10.1111/jofi.12680 | Cited by: 0