Winner of 2017 WFA-CFAR Best Finance PhD Paper Award
This paper presents evidence that personal relationships between corporate borrowers and bank loan officers improve the outcomes of loan renegotiation. Exploiting a bank reorganization in Greece in the mid-2010s, I find that firms that experience an exogenous interruption in their loan officer relationship confront three consequences: one, the firms are less likely to renegotiate their loans; two, conditional on renegotiation, the firms are given tougher loan terms; and three, the firms are more likely to alter their capital structure. These results point to the importance of lending relationships in mitigating the cost of distress for borrowers in loan renegotiations.
The Rise of Bond Financing in Europe, with Olivier Darmouni
In the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending, leaving many firms exposed to the recent bond market turmoil. We use micro-level evidence from European public firms to dissect the steady rise of bond financing and document that it has reached well beyond the largest and safest firms. There is a constant stream of firms entering the bond market for the first time which are significantly smaller and less profitable than historical issuers, but have comparable levels of leverage. New issuers expand their balance sheet, instead of just repaying bank loans, and increase their debt maturity, partially mitigating their exposure to rollover risk. We argue theoretically and empirically that monetary policy and firms' risk are important drivers of bond financing. Unconventional monetary policy lowers the bond-loan spread, with policies reducing long-term rates starting in 2012 having noticeable effects even before corporate bond purchases started in 2016. Moreover, rating downgrades lead firms to issue more loans as their cost of bond financing increases. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.
Understanding the Effects of Unconventional Monetary Policy on Corporate Bond Market in the Euro Area,
with Lira Mota
In light of the recent COVID-19 crisis, it is clear that unconventional monetary policies have become part of the standard tool kit of developed countries central banks. A set of such policies affects directly corporate bonds. Understanding the underlying mechanisms through which they operate is of paramount importance for optimal policy design. In this paper, we study the impact of three unconventional monetary policy packages adopted by the European Central Bank (ECB) on the corporate bond market. We use information on credit default swaps to decompose, in a model-free manner, corporate spreads into a default and a non-default component. While all ECB policies caused a decrease in corporate spreads, we find that the default component is small across all packages and the impact on corporate spreads is almost fully explained by the effect on the non-default component. We show evidence that this result is driven by the increase in demand for safer bonds as these are more affected by the ECB interventions.
Securing the Unsecured: How do stronger creditor rights impact firms?
This paper identifies the impact of stronger creditor rights on firms' financing as well as on local economic development. The passage of an enforcement on cash assets reform in Croatia benefited mostly the unsecured creditors, as it made safer the collection of unsecured debt. Using a novel dataset on courts' efficiency and identifying geographical and sectoral variation on the exposure to the reform, I find that firms receive higher levels of trade credit and short term loans when the enforcement of creditor rights is stronger. Moreover, it is shown that such reforms could cause a distortion on firms' cash management, profitability, and investment. Lastly, more firms are incorporated in cities that have a higher exposure to the reform and the local level of employment and of investment is higher in those cities. These results provide evidence that a stronger enforcement of creditor rights decreases the barriers to entry for firms both at the extensive and at the intensive margin but at the same time it distorts the way that pre-existing firms operate.
Work in Progress: