Abstract: Firms borrowing from both banks and the corporate bond market pay a substantial premium on bank loans, as shown by Schwert (2020), raising questions about firms' bargaining power and banks' competition. In this paper, I show that a large portion of this premium compensates banks for facilitating out-of-court restructurings. I re-estimate the loan premium and use a 2014 U.S. court ruling, which impeded out-of-court restructurings, as a natural experiment. Following the ruling, affected firms experienced an 80–90 bps reduction in the loan premium, due to reduced restructuring opportunities and a diminished potential to avoid bankruptcy costs. These findings suggest that the renegotiation flexibility provided by banks is a key driver of the loan premium, highlighting the unique value that bank lending offers beyond the capital market.
Abstract: Open banking enables small businesses to share their bank financial data with potential lenders. I examine the effect of open banking on collateralization in small business lending. For identification, I exploit institutional features of the UK’s open banking policy that creates a discontinuity in firms’ eligibility to share data. Using a novel loan-level dataset covering the entire UK secured business loan market, I document that open banking eases the pledge of assets like accounts receivable and inventory. Firms eligible to share data are more likely to pledge such assets as collateral, thereby improving their access to credit. These effects are more pronounced for firms facing greater information asymmetry and those with greater information available to share. These findings highlight the role of open banking in reducing collateral constraints by mitigating information asymmetry.
Heitor Almeida, University of Illinois-Urbana-Champaign
Timothy Johnson, University of Illinois-Urbana-Champaign
Sebastiao Oliveira, University of Illinois-Urbana-Champaign
Yucheng Zhou, University of Illinois-Urbana-Champaign
Abstract: Our study reveals that equity financing constraints play a unique role in the amplification of monetary policy shocks. By using a text-based metric of financial constraint that distinguishes between a company’s emphasis on equity versus debtfinancing, we show that equity-focused constrained firms endure more substantial declines in stock prices and implement deeper cuts in capital expenditure and R&D when faced with a contractionary monetary policy shock. These declines are translated into reductions in innovation output (e.g., patents). Equity-focused constrained firms significantly reduce equity issuance and are more reluctant to run down cash holdings in response to tighter monetary policy, while debt-focusedconstraints do not seem to play an economically significant role in magnifying the impact of monetary policy shocks. Our findings suggest that the transmission of monetary policy shocks to the corporate sector may not significantly rely on changes in debt financing terms.
Discussant: Gerard Hoberg, University of Southern California
