This article discusses the effects of credit market competition on a bank's incentive to keep its commitment to lend to a borrower when the borrower's credit quality deteriorates. It is shown that, unlike in the borrower's commitment problem to keep borrowing from the same bank in "good" times, the increased competition may strengthen a bank's incentive to keep its commitment. Banks offer loans with commitment to the highest quality borrowers but, when faced with competition from bond markets, they also give these loans to lower quality borrowers. An increase in the number of banks has a non-monotonic effect; new banks reinforce a bank's incentive only if there are a small number of banks. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The literature on distressed firms has focused on these firms’ investment, capital structure, and labor decisions. This paper investigates a novel aspect of firm behavior in distress: how financial health affects a firm׳s lobbying and, consequently, its relationship with the government. We exploit the shock to nonfinancial firms during the 2008 financial crisis and the availability of the stimulus package in the first quarter of 2009. We find that firms with weaker financial health, as measured by credit default swap spreads, lobbied more. We also show that the amount spent on lobbying was associated with a greater likelihood of receiving stimulus funds.

This article studies bank failures in twenty-one emerging market countries in the 1990s. By using a competing risk hazard model for bank survival, we show that a government is less likely to take over or close a failing bank if the banking system is weak. This Too-Many-to-Fail effect is robust to controlling for macroeconomic factors, financial crises, the Too-Big-to-Fail effect, domestic financial development, and concerns due to systemic risk and information spillovers. The article also shows that the Too-Many-to-Fail effect is stronger for larger banks and when there is a large government budget deficit.

Most empirical studies estimate the impact of fire sales either without the benefit of market prices from frequent trades, as with aircraft sales, or without observing transaction prices, as with the forced sales of equity securities by mutual funds facing outflows. We observe both by studying firms’ sales of minority equity stakes in publicly listed third parties. We estimate the distressed sale discount to be about 8% while controlling for liquidity and for industry, or about double the 4% estimated for equity sales by distressed mutual funds. The discount becomes 13–14% if the stake sold is more than 5% of the firm or is sold as a block. Prices recover after distressed sales.

The U.S. House of Representatives Financial Services Committee considered many important banking reforms in 2009 to 2010. We show that, during this period, foreclosure starts on delinquent mortgages were delayed in the districts of committee members although there was no difference in delinquency rates between committee and noncommittee districts. In these areas, banks delayed the foreclosure starts by 0.5 months (relative to the 12‐month average). The estimated cost of delay to lenders is an order of magnitude greater than the campaign contributions by the political action committees of the largest mortgage servicing banks to the committee members in that period.