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Manchester Grand Hyatt, Seaport B
American Finance Association
Debt Financing and Growth
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Hui Chen, Massachusetts Institute of Technology
Debt, Innovation, and Growth
AbstractRecent empirical studies show that innovative firms heavily rely on debt financing. This paper develops a Schumpeterian growth model in which firms’ dynamic R&D, investment, and financing choices are jointly and endogenously determined. It then investigates the relation between debt financing and innovation and growth. The paper features a rich interaction between firm policies and predicts substantial intra-industry variation in leverage and innovation, consistent with the empirical evidence. It also demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level.
Collateral Eligibility of Corporate Debt in the Eurosystem
AbstractUnder the unique institutional framework of the Eurosystem, we study how central bank collateral eligibility of corporate bonds induces externalities that help the ECB to fulfill its policy mandate. Using the eligible asset list of the Eurosystem Collateral Framework, we identify the first inclusion date of both individual bonds and issuer firms. Following this event, we find that, due to the increased supply of and demand for pledgeable collateral, (i) trading activity in the secondary market for collateral, the securities lending market, increases, (ii) eligible bonds trade at lower yields due to the liquidity service of pledgeability, and (iii) newly issued bonds’ liquidity declines, whereas the liquidity of older bonds does not change, or even improves. Our evidence suggests that the existence of corporate bond lending relaxes the constraint of limited collateral supply, thereby making an otherwise fragmented market more cohesive and complete. Moreover, we observe that, following bond-issuing firms’ first-time eligibility list inclusion, they reduce bank debt and expand corporate bond issuance activity, thus increasing the overall size and their maturity of total debt.
(Debt) Overhang: Evidence from Resource Extraction
AbstractI study the empirical importance of debt overhang using a unique dataset on resource extraction firms, which provides ex ante measures of investment opportunities and important variation in the terms of a firm's obligations. In particular, reclamation liabilities create overhang that is costly to resolve and which induces firms to forgo and postpone positive NPV investments. Traditional debt, in contrast, imposes few overhang-related investment distortions. These results show that: (i) the overhang problem is potentially large and applies more broadly to a firm's non-debt liabilities; and (ii) overhang problems associated with traditional debt can be avoided through contracting and debt composition.
University of Rochester
University of Chicago
University of Pennsylvania
- G3 - Corporate Finance and Governance