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Loews Philadelphia, Commonwealth Hall A2
American Finance Association
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Gerard Hoberg, University of Southern California
Weathering Cash Flow Shocks
AbstractWe show that unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for the average bank-borrowing firm. Firms respond to such shocks by increasing credit line use, but do not significantly adjust cash reserves, non-cash working capital, or real activities. The increased credit line use occurs within one calendar quarter of the cash flow shock and is accompanied by an increase in credit line size, for all but the most distressed borrowers. These results highlight the role of banks in mitigating transitory cash flow shocks to firms.
Credit Default Swaps Around the World: Investment and Financing Effects
AbstractWe analyze the impact of credit default swaps (CDS) introduction on real decision-making within the firm, taking into account differences in the local economic and legal environment of firms. We extend the model of Bolton and Oehmke (2011) in order to consider uncertainty regarding whether the actions taken by the reference entity will trigger credit events for the CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001-2015. We find substantial evidence that the introduction of CDS affects real decisions within the firm, including leverage, investment, and the risk of investments taken by the firm. Importantly, we find that the legal and market environment in which the reference entity operates has an influence on the impact of CDS. The effect of CDS is larger where uncertainty regarding their obligations is reduced, and where they mitigate weak property rights. Our results shed light on the incomplete nature of CDS contracts in international capital markets, related to significant legal uncertainty surrounding the interpretation of underlying credit events.
Is This Time Different? Do Bank CEOs Learn from Crisis Experiences?
AbstractThis paper studies how the early-career exposure of bank holding company (BHC) CEOs to the 1980s savings and loans (S&L) crisis affects corporate policies and survival of the BHCs they subsequently manage. I measure the “Intensity” of crisis exposure by the bank failure rate in the states where CEOs worked during the S&L crisis. First, I identify the characteristics of BHCs managed by high-Intensity (“experienced”) CEOs and find that such BHCs exhibit lower systemic risk and are less likely to fail: a one-unit increase in Intensity is associated with 0.39% lower systemic risk and an 0.5% lower failure rate. Second, I identify the type of banking policies that account for these results; in particular, experienced CEOs adopt a BHC business model that is less affected by interest rate shocks, they exert more effective control over credit risk. Their BHCs have relatively larger holdings of liquid assets on the balance sheet. At the same time, there are no significant differences between experienced and other CEOs with respect to asset growth and diversification strategies. Finally, I use the exogenous turnover of CEOs to establish that these findings are not driven by bank–CEO matching.
London Business School
University of Toronto
London School of Economics
Imperial College London
- G3 - Corporate Finance and Governance