We provide evidence that existing studies relating financial condition to product market cooperation produce mixed results because of unique features of the industries examined. In particular, all evidence suggesting that poor financial condition decreases cooperation comes from the airline industry during periods of high idle capacity. Using a unique data set of aggregate airfare hikes and a more recent low-idle-capacity period, we find that poor financial condition is positively associated with product market cooperation. Although financially weak airlines appear to value the immediate cash flows of increased cooperation, only liquidity-constrained firms seem willing to incur the cost of cooperative attempts.

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur the use of leverage. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium.

We directly measure banks’ monitoring of syndicated loans. Banks typically demand borrower information on at least a monthly basis. About 20% of loans involve active monitoring (i.e., site visits or third-party appraisals). Monitoring increases with the lead bank’s incentives and the value of information and is negatively associated with loan spreads and maturity. The monitoring captured by our measures can either complement or substitute for covenant-based monitoring, depending on whether the monitoring informs covenant compliance. Banks increase monitoring following deteriorations in borrower financial condition and credit line drawdowns. Finally, monitoring is positively related to future covenant violations and loan renegotiations.

Capital surcharges on global systemically important banks (GSIBs) decrease lending to firms but do not have any real effects. Banks subject to higher surcharges reduce loan commitments relative to other banks and also lower their estimates of firm risk. Firms’ total borrowing, however, does not fall, as firms switch to other banks. We establish these results using supervisory data on corporate loans and variation in surcharges in the United States. These results contribute to the debate on the costs and benefits of surcharges and regulatory tailoring and their effects on the reallocation of credit supply across financial institutions.

We estimate the effect of carbon pricing policy on bank credit to greenhouse-gas-emitting firms. Our analyses exploit the geographic restrictions inherent in California’s cap-and-trade bill and a discontinuity in the embedded free permit threshold of the federal Waxman-Markey cap-and-trade bill. Affected high emission firms face shorter loan maturities, lower access to permanent forms of bank financing, higher interest rates, and higher participation of shadow banks in their lending syndicates. These effects are concentrated among private firms, while credit terms of public firms are largely unaffected. Overall, we show that banks respond quickly to realizations of transition risk.

ABSTRACT Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank‐borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower‐friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the nonfundamental component of cash flow volatility, especially for solvent, small bank borrowers.