In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage over other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model: inefficient bankruptcy in a country is associated with less bond issuance by risky, but not by safe, borrowers. This pattern holds for both levels of and changes in bankruptcy recovery. Our results establish a link between bankruptcy reform and corporate bond markets, especially high-yield markets.

[We use an important legal event to examine the effect of managerial fiduciary duties on equity-debt conflicts. A 1991 legal ruling changed corporate directors' fiduciary duties in Delaware firms, limiting managers' incentives to take actions that favor equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher values. Fiduciary duties appear to affect equitybondholder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.]

Demographic variation in savings behavior can be exploited to provide evidence on segmentation in US bank loan markets. Cities with a large fraction of seniors have higher volumes of bank deposits. Since many banks rely heavily on deposit financing, this affects local loan supply and economic activity. I show a positive effect of local deposit supply on local outcomes, including the number of firms, the number of manufacturing firms, and the number of new firms started. The effect is stronger in industries that are heavily dependent on external finance. The deregulation of intrastate branching reduced the effect of local deposit supply by approximately a third.

Exports require significant up-front costs in product design, marketing, and distribution. These are intangible, firm-specific investments that are likely difficult to finance externally. We argue that a developed financial system can therefore facilitate exports. We test this prediction and find support for it. First, financial development is associated with more exports in industries in which fixed costs are high as well as to importers that require high costs. Second, trade dynamics are affected by financial development. In countries with better finance, exports are more sensitive to exchange rates. Finally, we predict and document that countries with more developed finance experience more volatile exports. (JEL F14, F36, G20, G30)

Abstract At the end of 2013, the share of domestic government debt held by the banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that these increased bond holdings generated a crowding out of corporate lending. We find that the corporate loan supply was depressed by domestic sovereign bonds exclusively during the crisis period (2010–11). The crowding-out pattern holds across firms with different relationship banks within a given country. These findings suggest that sovereign bond holdings negatively impact private capital formation and reflect financial repression. We show that direct government ownership, as well as government influence through banks’ boards of directors, is among the channels used to influence banks.

ABSTRACT Using new data on the wealth of Swedish CEOs, I show that higher wealth CEOs receive stronger incentives. Since high wealth (excluding own‐firm holdings) implies low absolute risk aversion, this is consistent with a risk aversion explanation. To examine whether wealth is likely to proxy for power, I use lagged wealth (typically measured before the CEO was hired), and the results remain for one of two incentive measures. Also, the wealth–incentive result is not stronger for CEOs likely to face limited owner oversight. Finally, wealth is unrelated to pay levels, and is hence unlikely to proxy for skill.

The European Central Bank's large-scale asset purchase program targeted safe assets, but also aimed to impact prices of risky assets. The mechanism for this is the “portfolio rebalancing channel”, where financial institutions’ portfolio decisions impact financial prices more broadly. We examine this mechanism using cross-sectional heterogeneity in how the financial portfolios of different sectors of the European economy were affected around the purchase program. We find evidence of rebalancing. In vulnerable countries, where macroeconomic unbalances and relatively high risk premia remained, we document rebalancing towards riskier securities. In less vulnerable countries, based on granular information for large European banks, we document rebalancing toward bank loans.

ABSTRACT We show that over the past half‐century, innovative disruptions were central to understanding corporate defaults. In a given year, industries experiencing abnormally high venture capital or initial public offering activity subsequently see higher default rates, higher segment exits by conglomerates, and higher yields on bonds issued by the firms in these industries. Overall, we find that disruption is a broad phenomenon, negatively affecting incumbent firms across the spectrum of age, valuation, and levers, with the exception of very large and low‐leverage firms, in line with our central hypothesis.

ABSTRACT This paper studies reaching for yield—investors’ propensity to buy riskier assets to achieve higher yields—in the corporate bond market. We show that insurance companies reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirements, insurance firms prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior is related to the business cycle being most pronounced during economic expansions. It is also characteristic of firms with poor corporate governance and for which the regulatory capital requirement is more binding.

The credit rating industry has historically been dominated by just two agencies, Moody's and Standard & Poor's, leading to long-standing legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how increased competition affects the credit ratings market. What we find is relatively troubling. Specifically, we discover that increased competition from Fitch coincides with lower quality ratings from the incumbents: Rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.