AFA Special Session-Finance and COVID-19: Corporate Finance and Banking
Paper Session
Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)
- Chair: Yueran Ma, University of Chicago
Corporate Flexibility in a Time of Crisis
Abstract
We use timely surveys of US CFOs to study how flexibility shapes companies’ responses to the onset of the COVID-19 crisis and drives longer-term changes in the corporate sector. The three dimensions of corporate flexibility that we study perform distinct functions, yet complement each other. We find that workplace flexibility, namely the ability for employees to work remotely, plays a central role in modulating firms’ employment and investment planning during the crisis. Investment flexibility allows firms to increase or decrease capital spending plans based on their conditions during the health crisis, which are shaped by workforce flexibility. Finally, financial flexibility contributes to stronger employment and investment plans. The role of workplace flexibility is new during the 2020 health crisis, as we find no such effects during the 2008 financial crisis. CFOs expect the workplace transformation of 2020 to have lasting effects for years to come: the magnitude and form of investment are expected to change as companies continue remote work and rely more on automation to replace labor.Public Guarantees for Small Businesses in Italy during Covid-19
Abstract
This paper assesses the public guarantee scheme for small businesses approved in Italy during the Covid-19 pandemic. In April 2020 the Italian government introduced a free 100% government guarantee on loans below €25,000 that requires no credit approval by banks. Using unique loan-level data from the Italian guarantee fund, we first show that funds initially (April and May) flowed to firms located in areas more affected by the pandemic. Moreover, smaller firms, those with less cash on hand, more pre-existing bank debt and lower z-score were more likely to participate in the program. In the less acute phase of the pandemic (June-August), funds flowed to areas that were less affected and to safer firms. Second, we show that lender heterogeneity matters for the allocation of guaranteed loans: firms located in areas with a higher presence of branches of largeand undercapitalized banks were more likely to receive guaranteed credit. Since credit with 100% government guarantee is not risk-weighted, the result suggests the presence of regulatory capital arbitrage. Moreover, using confidential data on guaranteed loan interest rates, we show that larger banks charge lower rates and that firm risk is priced in loan terms: safer firms are able to obtain a small discount even on guaranteed loans.
Bank Liquidity Provision Across the Firm Size Distribution
Abstract
Using loan-level data covering two-thirds all C&I loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizesthese facts as the equilibrium outcome of a trade-off between commitment and discretion. Finally, we test the model’s prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. We further show that large firms exhibited much higher sensitivity of drawdown rates to industry-level measures of exposure to the COVID recession than did small firms, suggesting that differences in demand for liquidity cannot fully explain the differences in observed drawdown rates across the firm size distribution. Finally, we show that recipients of PPP loans repaid existing credit lines in 2020Q2, suggesting that government-sponsored liquidity can overcome credit constraints.
How Did Depositors Respond to COVID-19?
Abstract
Why did U.S. banks experience massive deposit inflows during the first months of the COVID-19 pandemic? Using weekly branch-level data on deposit interest rates and weekly county-level data on COVID-19 cases, we shed empirical light on competing explanations for this surge in deposits. We discover that deposit rates at bank branches in counties with higher COVID-19 infection rates fell by more than branches—even branches of the same bank—in otherwise similar counties with lower infection rates, even after controlling for branch and bank-week fixed effects. The rate-reducing effects are stronger (a) when the stock market is more volatile and performing poorly, (b) in democratic-leaning counties, which tended tobecome for concerned about the economy in response to the pandemic, (c) in counties populated by more “COVID-19 sensitive” demographic groups, e.g., those with older populations, and (d) in counties with weaker community ties, as social capital can form a ballast against pandemic-induced anxieties about the economy. Taken together, the evidence pushes toward the view that COVID-19 triggered an increase precautionary savings and a
flight-to-safety that boosted the supply of deposits and lowered interest rates on deposits.
JEL Classifications
- G0 - General