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Financial Intermediaries and Economic Outcomes

Paper Session

Sunday, Jan. 7, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Bonham B
Hosted By: American Economic Association
  • Chair: Lillian Trotter, Wofford College

Household Stock Market Participation, Local Banks, and Local Economic Development

Chelsea Yang
,
University of British Columbia
Shiqi Zhang
,
University of British Columbia

Abstract

Is there a friction of the financing flows between the nationwide stock market and the local credit market? In perfect financial markets, local households’ capital reallocations from the nationwide stock market to the local credit market are expected to have no real effects on local economic development. However, due to limited access to the deep internal capital market, deposits from local households make up a large proportion of the local credit supply. Prior literature studies the household capital allocation between the stock market and local bank deposits (Gurun, Stoffman, and Yonker 2018) and banks’ deposit-taking and lending activities (Gilje, 2019; Yang 2022). Little empirical evidence exists to examine the friction of the financing sources between the national stock market and the local credit market. In this proposal, we aim to explore the role of local banks in mitigating the friction of the funding between two markets and its impact on local economic development.
There are at least two reasons why it is useful to use the Madoff Ponzi Scheme as a natural quasi-experiment. Firstly, this shock is exogenous, uncovered in December 2008 and unrelated to the county-level bank lending and economic performance. Secondly, Madoff Ponzi Scheme has a huge impact, which triggered a $363 billion outflow from the stock market. Does $363 billion outflow driven by the Madoff Ponzi Scheme increase the local bank deposit? If so, do banks increase the credit to the local small businesses, and thus improve the local economic development, such as entrepreneurial activities, jobs, and new firm entry? What do banks do differently concerning the heterogeneity of the banks, such as size and balance sheets? The literature has been remarkably silent on these questions despite the importance of the limited credit access of local small businesses, compared with the funding sources of the public firms.

The Credit Channel of Public Procurement

Ricardo Duque Gabriel
,
Federal Reserve Board and NBER

Abstract

Public procurement accounts for one third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase the amount of cash-flow based lending. I use Portuguese administrative data over 2009-2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning an additional €1 from a procurement contract increases firm credit by €0.05 at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash-flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity. Consequently, this enhanced access to credit promotes higher investment and employment with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, I empirically estimate that an additional €1 in public procurement increases regional output by €1.8 with the credit channel accounting for 10% of it.

Tracing Banks' Credit Allocation to their Funding Costs

Farzad Saidi
,
University of Bonn
Adrien Matray
,
Princeton University
Anne Duquerroy
,
Bank of France

Abstract

We quantify how banks' funding costs affect their lending behavior and the real economy. For identification, we exploit banks' heterogeneous liability structure and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage-point increase in funding costs reduces credit by 17%. To insulate their profits, banks also reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less affected banks at the aggregate city level, which implies that firms have to adjust their investment. Finally, As the government collects regulated deposits through banks and uses them to finance social housing, this creates a link between government spending and the private sector. We estimate that the total loss of credit accruing to firms is smaller than previous estimates of the crowding-out of credit by governments borrowing from the same banks.

Understanding the Bankruptcy Liquidation Auction Market

Yuan Shi
,
University of Michigan

Abstract

I study the bankruptcy liquidation market by constructing a new judiciary bankruptcy auction data that covers all bankruptcy liquidations (265,665 auctions) from 2017 to 2022 in China and structurally estimating an auction model to recover the valuation and information structure for all participants: the bankrupt firm (going concern value), the creditor and the bidders. The bankrupt firm on average suffers from a 14.2\% of liquidation discount on its asset value. Only 0.7\% of such welfare loss is captured by the buyer from their information advantage on their private value of the asset. Information friction about asset quality and high asset specificity both contribute to suboptimal transaction results. On the bright side, given the liquidation decision, selling the asset instead of forcing the creditor to seize it creates an economy-wide 8\% of welfare gain. Overall, my results point to the misallocation of assets, instead of limited competition among bidders, as the main driver of the liquidation discount.

“Let Us Put Our Moneys Together:” Minority-Owned Banks and Resilience to Crises

Allen Berger
,
University of South Carolina
Maryann P. Feldman
,
Arizona State University
W. Scott Langford
,
Arizona State University
Raluca A. Roman
,
Federal Reserve Bank of Philadelphia

Abstract

Financial constraints facing small businesses and households, particularly racial and ethnic minorities, hinder community economic resilience to crises. Minority-owned banks pursue missions resolving such issues. We propose a novel mechanism – shared borrower-lender identity – through which lenders may collect and process both soft and hard borrower information of value. Under this mechanism, borrowers and lenders sharing minority characteristics reduce informational asymmetries via tacit understandings, engage in better moral behavior through mutual trust and community reinforcement, and avoid taste-based/statistical discrimination, yielding fewer constraints and greater resilience. Shared identity may be particularly helpful when financial constraints originate from racial or ethnic discrimination. To test this proposition, we analyze individual banks in their local market context from 2006-2020. We estimate the impacts of minority-owned banks through the Global Financial Crisis (GFC) and COVID-19 Crisis. We find statistically and economically significant evidence that minority-owned banks improve employment growth for both minority and non-minority populations in their communities during the two crises via increased small business and household lending. Our results imply that if ten percent of all banks in the US behaved in a manner consistent with minority-owned banks, 170,000 more individuals would have maintained employment per year of the GFC. These results also imply each minority-owned bank provided approximately $8.47 million in additional small business credit per year of the GFC. These findings are consistent with predictions of the economic resilience literature. Results stand up to treatments of identification concerns, including propensity score matching (PSM) and instrumental variables (IV).
JEL Classifications
  • G3 - Corporate Finance and Governance