Knowledge that Transforms

Small leases and loans are excellent contracts to study the impact of information costs on the contract choice. Using a specially constructed dataset, we can directly compare the costs of leasing to borrowing for small firms. With a 15% average yield in our overall sample, we show that leases average about 12.5% while loans average 24%. After matching paired-samples of true leases and loans and correcting for selection bias, the differential is smaller but remains significant, while true and non-true leases show very little difference in yields. In our unique time series analysis, the average lease yields are significantly related to proxies for macroeconomic risk and demand factors. In sum, we reject the hypothesis that leasing is a more costly form of financing than “equivalent” borrowing and there are reasonable economic factors, related to enhanced collateral rights, that reduce information costs and account for the pricing differentials.

When tight monetary policy curtails domestic supply of credit and raises domestic borrowing costs, some firms can mitigate higher local borrowing costs by tapping global bond markets. This paper investigates whether this prediction holds for non-financial companies in the euro area. I first show that euro area firms exploit borrowing cost differentials between USD and EUR by issuing corporate bonds in USD when swap-adjusted U.S. dollar funding costs fall below euro rates. Using proxies for such opportunistic borrowing behavior, I then find that firms capable of seizing these opportunities in global corporate bond markets do not reduce their fixed capital investment to the same extent as other firms in response to monetary tightening. Further findings reveal that this differential investment response is not explained by differences in financial constraints or investment opportunities; instead, it reflects the ability to switch to lower cost offshore bond finance. Overall, the results underscore heterogeneity in the real effects of monetary policy and suggest that capital market openness can attenuate the domestic investment channel when global conditions allow lower cost funding abroad.

On average, wages in the finance industry are higher compared to the rest of the economy. Two explanations suggested for this finance wage premium are (1) the positive correlation between risk-taking and wages, and (2) industry differences in information technology intensity. Using a comprehensive worker-firm panel dataset for the Netherlands, we estimate wage models with additive worker and firm fixed effects, and compute the finance wage premium as the average of the firm fixed effects in an industry. We then relate the estimated cross-section of firm fixed effects to a range of firm characteristics, and find that information technology investment, the average level of educational attainment at a firm, and the complementarity of the two are the main drivers of the finance wage premium, while firm risk only makes a small contribution.