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We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression using a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms’ ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

Investment in intangible capital such as R&D has increased dramatically since the 1990s. However, productivity growth remains sluggish in recent years. One potential reason is that a significant share of the increase in intangible investment is geared toward consumer products such as pharmaceutical drugs with limited spillovers to productivity. We document that a significant share of R&D spending in the United States is done by pharmaceutical firms and geared to developing drugs for older patients. Increased life expectancy and quality of life for the elderly increases welfare but may not be reflected in estimates of total factor productivity.

The success of non-pharmaceutical interventions to contain pandemics often depends greatly upon voluntary compliance with government guidelines. What explains variation in voluntary compliance? Using mobile phone and survey data, we show that during the early phases of COVID-19, voluntary social distancing was higher when individuals exhibit a higher sense of civic duty. This is true for U.S. individuals, U.S. counties, and European regions. We also show that after U.S. states began re-opening, social distancing remained more prevalent in high civic capital counties. Our evidence points to the importance of civic capital in designing public policy responses to pandemics.

Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.

There is mounting evidence of the influence of personal characteristics of CEOs on corporate outcomes. In this paper we analyze the relation between military service of CEOs and managerial decisions, financial policies, and corporate outcomes. Exploiting exogenous variation in the propensity to serve in the military, we show that military service is associated with conservative corporate policies and ethical behavior. Military CEOs pursue lower corporate investment, are less likely to be involved in corporate fraudulent activity, and perform better during industry downturns. Taken together, our results show that military service has significant explanatory power for managerial decisions and firm outcomes.

While credit rating agencies are of central importance to credit markets, it is still unclear how credit ratings decisions are being made. Are credit rating quantitatively hard-wired? Or, do ratings represent a more holistic approach to the evaluation of creditworthiness? I evaluate the quantitative content of rating decisions made by S&P Global Ratings Inc. and assess its development over time. I find that S&P rating decisions moved from being quantitative to being qualitative and then being highly quantitative again in the last few years. I also find that rating standards became more lenient during the global financial crisis suggesting that it is possible that ratings were artificially held up to avoid even further downgrades. My results suggest that, in general, S&P rating decisions are highly quantitative and can be predicted with a high degree of accuracy using firm characteristics. In fact, my analysis suggests that credit rating decisions can be replaced by an algorithm that uses just ten financial variables.

This paper evaluates and discusses methodologies for evaluating credit ratings of Investment Holding Companies. I analyze Standard & Poor’s and Moody’s rating approaches, evaluate their soundness based on theoretical grounding and empirical evidence, and suggest improvements.

Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-09, the structured credit market froze, issuance of corporate bonds declined, and secondary credit markets became highly illiquid. In this paper we analyze liquidity in bond markets during financial crises and compare two main theories of liquidity in markets: (1) asymmetric information and adverse selection, and (2) heterogenous beliefs. Analyzing the 1873 financial crisis as well as the 2008-09 crisis, we find that when bond value deteriorates, bond illiquidity increases, consistent with an adverse selection model of the information sensitivity of debt contracts. While we show that the adverse-selection model of debt liquidity explains a large portion of the rise in illiquidity, we find little support for the hypothesis that opinion dispersion explains illiquidity in financial crises.

This paper provides the first systematic analysis of the link between economic, political, and social conditions and the global phenomenon of ISIS foreign fighters. We find that poor economic conditions do not drive participation in ISIS. In contrast, the number of ISIS foreign fighters is positively correlated with a country's GDP per capita and Human Development Index (HDI). In fact, many foreign fighters originate from countries with high levels of economic development, low income inequality, and highly developed political institutions. Other factors that explain the number of ISIS foreign fighters are the size of a country's Muslim population and its ethnic homogeneity. Although we cannot directly determine why people join ISIS, our results suggest that the flow of foreign fighters to ISIS is driven not by economic or political conditions but rather by ideology and the difficulty of assimilation into homogeneous Western countries.

We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology, as well as firms with larger aircraft fleets. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies, and foster productivity.

Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.

We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. In this paper, we alleviate this problem by focusing on a particular industry and examining its intensive, rather than extensive, margin of collateral use. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios -- an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

This paper shows that illiquidity in short-term credit markets during the financial crisis may have sharply curtailed the supply of non-bank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we show that the collapse of the asset-backed commercial paper market decimated the financing capacity of captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on captive-leasing companies declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market: the captive leasing arms of auto manufacturing companies. These results also imply that interventions aimed at arresting illiquidity in credit markets and supporting the automobile industry might have helped to contain the real effects of the crisis.

Yes, it did. We use exogenous variation in banks' incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

This paper examines whether house demolitions are an effective counterterrorism tactic against suicide terrorism. We link original longitudinal micro-level data on houses demolished by the Israeli Defense Forces with data on the universe of suicide attacks against Israeli targets. By exploiting spatial and time variation in house demolitions and suicide terror attacks during the second Palestinian uprising, we show that punitive house demolitions (those targeting Palestinian suicide terrorists and terror operatives) cause an immediate, significant decrease in the number of suicide attacks. The effect dissipates over time and by geographic distance. In contrast, we observe that Palestinian fatalities (regardless of whether or not they were killed in a targeted killing operation) do not have a consistent effect on suicide terror attacks, while curfews and precautionary house demolitions (demolitions justified by the location of the house but not related to the identity or any action of the house’s owner) cause a significant increase in the number of suicide terror attacks. The results are consistent with the view that selective violence is an effective tool to combat terrorist groups and may have contributed to bring an end to the Second Palestinian uprising. On the contrary, indiscriminate violence backfires.

In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by CLOs. We employ two different datasets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show underperformance relative to the rest of the CLO portfolio. While there is some evidence of underperformance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.

We analyze how firms strategically renegotiate labor contracts to extract concessions from labor. While anecdotal evidence suggests that firms tend to renegotiate down wages in times of financial distress, there is no empirical evidence that documents such renegotiation, its determinants, and its magnitude. This paper attempts to fill this gap. Using a unique data set of airlines that includes detailed information on wages and pension plans we document an empirical link between airline financial distress, pension underfunding, and wage concessions. We show that airlines in financial distress obtain wage concession from employees whose pension plans are underfunded. As part of our identification strategy, we exploit the fact that pension plans in the U.S are partially insured by the Pension Benefit Guaranty Corporation (PBGC). Using variation in the degree of pension coverage provided by the PBGC, we show that employees’ outside option in bargaining is crucial in determining the degree of wage concessions during labor contract renegotiation. Our empirical evidence highlights the strategic use of pension underfunding by firms and the resultant wage cuts which employees endure as a result.

We analyze the link between economic conditions and the quality of suicide terrorism. While the existing empirical literature shows that poverty and economic conditions are not correlated with the quantity of terror, theory predicts that poverty and poor economic conditions may affect the quality of terror. Poor economic conditions may lead more able, better-educated individuals to participate in terror attacks, allowing terror organizations to send better-qualified terrorists to more complex, higher-impact, terror missions. Using the universe of Palestinian suicide terrorists against Israeli targets between the years 2000 and 2006 we provide evidence on the correlation between economic conditions, the characteristics of suicide terrorists and the targets they attack. High levels of unemployment enable terror organizations to recruit more educated, mature and experienced suicide terrorists who in turn attack more important Israeli targets.

We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology as well as firms with larger aircraft fleets. Moreover, we find that more profitable airlines, airlines with lower leverage ratios, and airlines with less debt overhang are less sensitive to prevailing creditor rights in their country. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies and foster productivity.

Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.

How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downwards when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation.

We investigate the causes and consequences of financial regulation by studying the political economy of U.S. state usury laws in the 19th century. We find evidence that usury laws were binding and enforced and that lending activity was affected by rate ceilings. Exploiting the heterogeneity across states and time in regulation, enforcement, and market conditions, we find that regulation tightens when it is less costly and when it coexists with other economic and political restrictions that exclude certain groups. Furthermore, the same determinants of financial regulation that favor one group (and restrict others) are associated with higher (lower) future economic growth rates. The evidence suggests regulation is the outcome of private interests using the coercive power of the state to extract rents from other groups, highlighting the endogeneity of financial development and growth.