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Corporate Borrowing

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 205-206-207
Hosted By: American Finance Association
  • Chair: Mark Leary, Washington University-St. Louis

Credit Lines and the Liquidity Insurance Channel

Viral V. Acharya
,
New York University, CEPR, and NBER
Heitor Almeida
,
University of Illinois
Filippo Ippolito
,
Pompeu Fabra University
Ander Perez-Orive
,
Federal Reserve Board

Abstract

We suggest a new mechanism—the liquidity insurance channel—based on the widespread reliance of high credit quality firms on bank credit lines for liquidity management. Our model matches the patterns of usage of loans and credit lines in the cross-section of firms, and defines the conditions under which shocks to bank health affect primarily low or high credit quality firms. Our framework can explain why credit line origination is more cyclical than loan origination. Overall, we uncover a novel interaction between bank health and economic activity through the provision of bank credit lines to high credit quality firms.

Short-Term Debt and Incentives for Risk-Taking

Marco Della Seta
,
APG Asset Management
Erwan Morellec
,
Swiss Federal Institute of Technology-Lausanne
Francesca Zucchi
,
Federal Reserve Board

Abstract

We challenge the commonly accepted view that short-term debt curbs moral hazard and show that, in a world with financing frictions, short-term debt does not decrease but instead increases incentives for risk-taking. To demonstrate this result, we develop a model in which firms are financed with equity and short-term debt and cannot freely optimize their default decision because of financing frictions. Using this model, we show that short-term debt can give rise to a "rollover trap," a scenario in which constrained firms burn revenues and cash reserves to absorb severe rollover losses. In this rollover trap, shareholders find it optimal to increase cash flow risk in an attempt to avoid inefficient closure. These incentives do not arise when debt maturity is sufficiently long.

Security Lending and Corporate Financing: The Case of the Debt Market

Jennie Bai
,
Georgetown University
Massimo Massa
,
INSEAD
Hong Zhang
,
Tsinghua University

Abstract

The securities lending market allows institutional investors to lend holding assets and collect cash collateral, an important but understudied source of funding for lenders who are also the primary investors of corporate bonds. We hypothesize that the funding demand from bond investors such as insurance companies, which is captured by the lending ability of corporate bonds, influences corporate financing policies, a demand-driven perspective. Using corporate bond lending data over a sample period from 2005 to 2014, we document a significant positive relationship between the lending ability and bond issuance as well as bond prices. We utilize instrumental variable specifications and a difference-in-difference approach to establish causality: higher lending ability in a specific maturity niche increases demand from bond investors and hence stimulates firms to issue more similar bonds. Our results provide new intuition on security pricing and on corporate financing policies.
Discussant(s)
Joao Santos
,
Federal Reserve Bank of New York
Konstantin Milbradt
,
Northwestern University
Heather Tookes
,
Yale University
JEL Classifications
  • G3 - Corporate Finance and Governance