I study how the colonial mita forced labor system (1573–1812) impacted Peruvian firms’ formalization, investment, and performance measured by the 2008 business census. Regression discontinuity models with granular geospatial controls reveal lower sales and fixed assets, less likely use of a commercial name, and less likely tax ID registration for firms within mita boundaries. Firms with banking relationships in mita regions struggle more financially. Evidence on centuries-long disadvantageous taxation in mita regions suggests a persistent channel of distrust. Individuals in mita regions surveyed today show lower levels of trust in the tax authority and more informality at their workplace.

I provide a new characterization of internal capital markets in an emerging economy using daily divisional data on all Peruvian fish-processing firms. A regression discontinuity model exploiting government production bans on regulated divisions (“fishmeal”) shows that the increased investment in the nonfishmeal divisions due to the bans is substantial (over 30 % of the mean value), after controlling for productivity. The redeployment of financial capacity into nonfishmeal investments is particularly sharper when external financing is more costly and when firms are more closely monitored by creditors. The value-creating nature of this redeployment is supported by its positive effects on nonfishmeal exports. (JEL G30, G31, G32, Q56) The pursuit of value-creating opportunities in emerging economies has become an increasingly important theme for investors and scholars. Accordingly, a growing body of research on global stock market integration, privatization waves, mergers and acquisitions, and banking has led to important lessons about financial markets in emerging economies. Yet surprisingly little is known about how real firms based in emerging economies allocate their internal capital to different investment opportunities. To address this major gap, it would be useful to understand whether and how firms in emerging economies operate their “internal capital markets, ” arguably the most active source of funding for Mark Garmaise provided generous feedback and his help is much appreciated. I am also grateful to Michael

How are neighboring firms affected when a bank learns more about a given firm? We analyze exchange-rate-induced movements of Peruvian firms across a threshold that governs their regulatory treatment by banks. Firms that cross the threshold supply more information to their banks and experience a substantial increase in financing. We find positive spillover effects: the neighbors of the above-threshold firms also experience increased financing. These spillovers are confined to neighbors sharing a bank, and the performance of new loans to these neighbors improves, suggesting that the bank has become better informed about other local firms.

The U.S. mortgage market exhibits competitive instability in which some lenders rapidly emerge from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we analyze the impact on a lender of a surge in originations by its competitors. We show that the quickest-growing (but not the largest) competitors divert applications and originations from other lenders. Facing a quickly growing competitor, lenders charge higher interest rates, partially because of the increased risk of their loans. Loan performance suffers for other lenders as the quickest-growing competitor’s originations increase.

Firms strategically borrow in different locations. Approximately one-quarter of Peruvian companies with operations in multiple areas source their financing from more than one province. Mining windfalls generate finance supply shocks, leading to the provision of more credit at lower average rates, and we show that firms exploit geographic financial flexibility by concentrating their borrowing in booming locations. Firms are less likely to initiate borrowing in new markets when their current borrowing provinces are thriving. The pursuit of flexibility in borrowing markets, however, degrades a firm’s relationships with its existing lenders, thereby heightening its risk of future financial distress.

We provide direct evidence on the impact of asymmetric information on both financing and operating activities through a study of credit evaluations of microfinance institutions (MFIs). We employ a regression discontinuity model that exploits the eligibility criteria of an evaluation subsidy offered by a nonprofit consortium. Evaluations dramatically cut the cost of financing. This effect is strongest for commercial lenders and for short-term MFI–lender relationships. The impact of evaluations on the supply of finance is mixed. Evaluated MFIs lend more efficiently, extending more loans per employee.

Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues, and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience.