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Bank and Borrower Behavior

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Commonwealth Hall D
Hosted By: American Finance Association
  • Chair: Justin Murfin, Yale University

Drilling and Debt

Erik Gilje
,
University of Pennsylvania
Elena Loutskina
,
University of Virginia
Daniel Murphy
,
University of Virginia

Abstract

This paper documents a new mechanism through which debt affects the real investment decisions of firms. Using detailed project level data in oil and gas industry, we find that highly levered firms pull forward project completion at the expense of long run project returns and firm value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior, and find evidence consistent with equity holders sacrificing long run project returns to enhance collateral prior to debt renegotiations. Our evidence thus documents new type of debt market frictions.

Decision-making Delegation in Banks

Jennifer Dlugosz
,
Washington University-St. Louis
YongKyu Gam
,
Southwestern University of Finance and Economics
Radhakrishnan Gopalan
,
Washington University-St. Louis
Janis Skrastins
,
Washington University-St. Louis

Abstract

We introduce a novel measure of decision-making delegation within banks based on whether individual branches have the authority to set their own deposit rates. Using natural disasters as shocks to local economies, we show that this aspect of bank organizational structure has real effects. Branches that set rates locally increase deposit rates more and experience larger increases in deposit volumes in affected counties following a disaster. Banks with more branches setting rates locally expand mortgage lending more rapidly in affected counties. House prices recover more quickly in affected MSAs with more branches setting rates locally. These effects are distinct from those captured by other commonly used measures of decision-making delegation like bank size or “localness”. Our paper highlights the role that delegation of deposit funding decisions has on bank behavior and local economic outcomes.

Concentration of Control Rights in Leveraged Loan Syndicates

Mitchell Berlin
,
Federal Reserve Bank of Philadelphia
Greg Nini
,
Drexel University
Edison Yu
,
Federal Reserve Bank of Philadelphia

Abstract

Corporate loan contracts frequently concentrate control rights with a subset of lenders. In a large fraction of leveraged loans, which typically include a revolving line of credit and a term loan, the revolving lenders have the exclusive right and ability to monitor and renegotiate the financial covenants in the governing credit agreements. Concentration is more common in loans that include nonbank institutional lenders and in loans originated subsequent to the financial crisis, when recognition of bargaining frictions increased. We conclude that concentrated control rights maintain the benefits of lender monitoring and minimize the costs of renegotiation associated with larger and more diverse lending syndicates.
Discussant(s)
Michael Schwert
,
Ohio State University
Mark Egan
,
Harvard University
Gregor Matvos
,
University of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services