As nonbanks’ market share increases in a local residential mortgage market, the quality of their postorigination mortgage servicing improves. This finding is confirmed by two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state. Evidence suggests that improvements in service quality arise through two channels. First, expansion in nonbank market share leads to greater lender specialization: nonbanks increasingly service lower-income borrowers, while traditional banks increasingly concentrate on higher-income segments. Second, higher nonbank market share is associated with increased investment in technology by nonbanks. (JEL G21, G23, L13, L15)Received: May 22, 2025

We show that household social connections transmit shocks that influence bank deposits. We find that counties experience an increase in bank deposits when they are more socially connected to counties affected by natural disasters. This effect is not driven by physical proximity, large disasters that attract significant media coverage, or other cross-county channels, including multimarket bank branch networks, population migration, or economic connections. Banks that collect deposits in highly socially-connected counties experience high deposit volatility, but geographic diversification reduces the volatility associated with depositor social connectedness.

Within the same debt contract, some financial covenants are considerably more restrictive than others. I exploit this heterogeneity in covenant design and show that the design of the most restrictive covenant is systematically associated with covenant outcomes - compliance, violations, or renegotiations. Consistent with an alleviation of moral hazard problems, tighter capital expenditure restrictions (performance covenants) are more likely to facilitate ex post creditor control through covenant renegotiations (violations). By contrast, borrowers are more likely to comply with contracts with tighter capital covenants, suggesting that these covenants more effectively align shareholder-creditor interests ex ante to avoid adverse selection problems.

Using a large sample of private debt renegotiations from 1996 to 2011, we report that, even in the absence of any covenant violation, debt covenants are frequently renegotiated. These renegotiations primarily relax existing restrictions and result in economically large changes in existing limits. Renegotiations of specific covenants are a response to both the distance the covenant variable is from its contractual limit and the firm׳s specific operating conditions and prospects. Moreover, the borrower׳s post-renegotiation investment and financial policies are strongly associated with the covenant changes resulting from the renegotiation. Overall, the findings imply that, even outside of default states, creditors have strong control rights over the borrower׳s operating and financial policies, and they exercise these rights in a state contingent manner through covenant renegotiations.

Applying a machine-learning algorithm to a large sample of U.S. public firms, we document that more than 30% of the firms substantially alter debt structures in a year, even when leverage ratio is stable, when short-term debt is trivial, and when little cash outlay is required for operations. The instability of debt structure reveals new costs of financial constraints: compared to high-credit-quality firms, low-credit-quality firms have to change debt structure more frequently to accommodate their financing needs, even with increased borrowing costs; low-credit-quality firms lack the opportunity available to high-credit-quality firms to reduce borrowing costs through switching debt instruments.

We explore theoretically and empirically the relationship between firm productivity and liquidity management in the presence of financial frictions. We build a dynamic investment model and show that, counter to basic economic intuition, more productive firms could demand less capital assets and hold more liquid assets compared to less productive firms when financing costs are sufficiently high. We empirically test this prediction using a comprehensive dataset of Chinese manufacturers and find that more productive firms indeed hold less capital and more cash. We do not, however, observe this for US manufacturers. Our study suggests a larger capital misallocation problem in markets with significant financing frictions than previously documented.

We show that syndicated loan spreads are lower as borrowers’ shareholders cross-hold more lenders’ equity. Apart from controlling for borrower and lender fixed effects and various other ownership measures, we address endogeneity concerns by conducting a difference-in-differences analysis exploiting the mergers of institutional investors. Additional tests on cross-holding shareholders’ holding period, the impact of active cross-holders, subsamples of borrowers subject to different degrees of shareholder–creditor conflicts, changes in borrower risk around loan initiation, and the number of financial covenants provide support for the hypothesis that borrower shareholders’ equity holdings of lenders reduce agency costs of debt.