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Corporate Capital Structure and Firm Value: International Evidence on the Special Roles of Bank Debt

We conduct the first broad-based international study on bank-level failures covering 92 countries over 2000–2014, investigating national cultural variables as failure determinants. We find individualism and masculinity are positively associated with bank failure, but they operate through different channels. Managers in individualist countries assume more portfolio risk, while governments in masculine countries allow banks to operate with less liquidity and less often bail out troubled institutions. Findings are robust to accounting for endogeneity, different techniques and measures, and additional controls. Results have implications for prudential policies, including regulation, supervision, and bailout strategies, that may partially mitigate some negative effects of culture.

High levels of subprime consumer debt can create social problems. We test the effects of the TARP and PPP bailouts during the Global Financial Crisis and COVID-19 crisis, respectively, on this debt. We use over 11-million credit-bureau observations of individual consumer debt combined with banking, bailout, and local market data. We find subprime consumers with more TARP institutions in their markets had significantly increased debt burdens following these bailouts. In contrast, PPP bailouts were associated with reduced subprime consumer debt. Findings are robust to addressing identification concerns, and yield policy implications regarding bailout structures and strings attached to bailout funds.

We examine how bank efficiency during normal times affects survival, risk, and profitability during subsequent financial crises using data from five U.S. financial crises and preceding normal times. We find that cost efficiency during normal times helps reduce bank failure probabilities, decrease risk, and enhance profitability during subsequent financial crises, while profit efficiency has limited benefits. Results suggest that cost efficiency better measures management quality, while profit efficiency may partially reflect temporary high returns from risky investments during normal times. Findings have policy implications and imply that improving bank cost efficiency during normal times may promote better financial crisis performance.

We investigate bank relationships in a rarely considered context – consumer and small business credit cards. Using over one million accounts, we find during normal times, consumer relationship customers enjoy relatively favorable credit terms, consistent with the bright side of relationships, while the dark side dominates for small businesses. During the COVID-19 crisis, both groups benefit, reflecting intertemporal smoothing, with more benefits flowing to safer relationship customers. Conventional banking relationships benefit consumers more than credit card relationships, with mixed findings for small businesses. Important identification issues are addressed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act consumer-delinquency reporting impediments reduce the informational value of consumer credit scores, penalizing safer borrowers.

We analyze loan contract terms, investigating whether relationship borrowers fare better or worse than others in times of need, using the COVID-19 crisis as a quasi-natural experiment. COVID-19 is superior to prior crises for such analysis because its public health and government restrictions shocks directly harm borrowers, rather than banks. Our dataset includes Y-14Q, covering syndicated and non syndicated loans and small and large firms, unlike some other datasets. We find the dark side of relationships dominates across four relationship measures, 14 COVID-19 shocks, and PPP participation. There are limited pockets of bright-side findings associated with smaller firms and smaller banks.

A key policy issue is whether bank bailouts weaken or strengthen market discipline. We address this by analyzing how bank bailouts influence deposit quantities and prices of recipients versus other banks. Using TARP bailouts, we find both deposit quantities and prices decline, consistent with substantially reduced demand for deposits by bailed-out banks that dominate market discipline supply effects. Main findings are robust to numerous checks and endogeneity tests. However, a deeper dive into depositor heterogeneity suggests nuance. Increases in uninsured deposits, transactions deposits, and deposits in banks that repaid bailout funds early suggest some limited support for weakened market discipline.

Economic agents pursue government funds using political connections, but it is sometimes unclear which types of connections and whose connections matter, and which agents have opportunities to benefit. We address these issues for the over one-half-trillion-dollar Paycheck Protection Program (PPP). Partisan political connections appear influential only for banks, nonpartisan connections work only for small businesses. Banks, rather than small businesses, had direct opportunities to apply for PPP funds. Banks benefited from higher profitability due to increased lending and competitive advantages, while existing research finds small businesses benefited. Thus, PPP bailed out both banks and small businesses, but through different connections.

Do business bailouts help alleviate recipient firms’ financial and economic constraints, are effects strongest for the primary targets of the bailouts, and are effects temporary or long-lasting? We address these questions for the Paycheck Protection Program (PPP) small business bailout during COVID-19. We analyze survey responses from small business owners for almost a year from the National Federation of Independent Business (NFIB) and Small Business Administration (SBA) data on PPP loans. Results suggest PPP loans significantly alleviated constraints, primarily for targeted firms – those in the most COVID-19-impacted industries, smaller firms, and firms in lower-income counties – but effects are temporary.

We analyze comparative advantages/disadvantages of small and large banks in improving household sentiment regarding financial conditions. We match sentiment data from the University Of Michigan Surveys Of Consumers with local banking market data from 2000 to 2014. Surprisingly, the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment. Findings are robust to instrumental variables and other econometric methods. Additional analyses are consistent with both scale economies and the superior safety of large banks as channels behind the main findings. These channels appear to more than offset stronger relationships with and greater trust in small banks.

Governments provide guarantees to banks, such as deposit insurance, often increasing them during financial crises. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries on bank liquidity creation, a comprehensive bank output measure. We address the reverse-causality identification challenge by examining effects of home country guarantees on liquidity creation by subsidiary banks in foreign host nations, and tackle omitted-variables concerns by specifying host country × year fixed effects. Our striking findings suggest that home-country guarantees increase decrease subsidiary bank liquidity creation by as much as 15%.

We contribute to the corporate capital structure and bank specialness literatures by studying the effects of bank debt on corporate value. We apply novel methodology to almost 60,000 firms in 110 countries over 17 years—over 300,000 total observations. We find that bank term loans and credit lines are strongly positively associated with firm value, but only when employed very intensively—at 90% or more of total corporate debt. These effects are consistent with bank specialness at high-intensity levels. These findings support previously untested theoretical predictions that bank specialness would be stronger or exist only at high bank debt intensities. Our results hold broadly but are stronger for credit-constrained firms—small firms and those in low-income countries. Channel analysis suggests that term loans boost short-term firm performance more, while credit lines better promote long-run growth. The findings suggest future research topics and have policy implications, particularly during the COVID-19 crisis.

In this chapter, we discuss implications for both bank policymakers and bank managers. We tailor our suggestions to the stability conditions of the financial system and to the short-run versus long-run orientations of the decision makers depending on these conditions. Section 28.1 focuses on implications under different conditions for bank policymakers, and Section 28.2 gives analogous implications for bank managers.

Chapter 23 provides information and research findings for prudential regulatory activity restrictions – limits or outright bans on what are considered risky activities – in order to reduce the incidence of financial distress and reduce the likelihood of resolutions. The theory behind the restrictions is discussed, numerous examples of the restrictions are provided, and the empirical research on the restrictions is reviewed. Similar to the other policies designed to reduce bank risk, the theory is ambiguous about whether prudential activity restrictions operate through the Prudential and Certification Mechanisms. The empirical evidence is also unclear regarding these two mechanisms. Prudential regulatory activity restrictions do not operate through the Subsidy Mechanism.

FinTech growth raises questions about its competitive advantages vis-a-vis traditional providers, the relative risks of FinTech products, and real economic effects. We study FinTech platform small business lending, yielding new answers that may apply to FinTech more generally. Findings suggest that FinTech tends to replace loans by large/out-of-market banks more than small/in-market banks. This is consistent with FinTech advantages in more efficient processing of hard information, rather than hardening of soft information. Additional results suggest that FinTech loans are relatively risky, but become safer after replacing bank loans. Both FinTech and bank loans are found to benefit the real economy.

We investigate how relationship borrowers fare relative to others in loan contract terms (spread, collateral, maturity, amount) during times of need using the COVID-19 quasi-natural experiment. COVID-19 is superior for such analysis because it primarily affects borrowers rather than banks. Our Y-14Q loan-level dataset has broader representation than other datasets. We find the dark side of relationships dominates across relationship measures, COVID-19 shocks, and PPP participation. Additional bank-level analysis suggests dark-side dominance for contract terms at the intensive margin is not offset by increased credit access at the extensive margin. Limited brightside findings hold for smaller firms and smaller banks.

Chapter 29 concludes the book by identifying the important unresearched and underresearched questions that need the most attention, and suggesting how future researchers might address them. The chapter gives five general suggestions for future research to help keep the financial system and real economy safe, including a focus on reducing the likelihood and severity of financial crises; comparing multiple policy tools in the same study; measuring the indirect effects of policies on non-treated banks; comparing long-term and short-term program outcomes; and investigating policy tools in developing as well as developed nations. The chapter also points researchers toward key unanswered questions regarding each of policy approaches for dealing with the financial distress of the banking industry – bailouts, bail-ins, and other resolution approaches; first lines of defense; and countercyclical policies.

This chapter covers the effects of the program on systemic risk. Ideally, we would like to know if Troubled Asset Relief Program (TARP) rescued the financial system from collapse or at least prevented the system from further substantial deterioration, but events that did not occur are fundamentally unobservable. However, as we show in this chapter, the research can provide consistent and highly statistically and economically significant results suggesting whether or not the TARP program reduced the systemic risk contributions of the publicly traded TARP banks. As discussed in Chapter 14, only one paper directly measures these systemic risk contributions. However, as will become clear, a number of other studies provide useful additional information on this important issue.

This chapter evaluates the effects of TARP on the credit customers of the recipient banks, whose expenditures may in turn have real economic effects. The effects on corporate borrowers from TARP banks as well as their expenditures are mixed, and the impacts on small businesses are missing from the research literature

This chapter discusses the conditions that typically bring about bailouts, bail-ins, and other types of bank resolution. Bailouts and bail-ins are usually triggered by financial crises, but may also occur during normal times in response to the distress of too-big-to-fail (TBTF), too-important-to-fail (TITF), or too-many-to-fail (TMTF) banks.

This chapter reviews the methodologies employed in most of the TARP empirical research studies. Most of the studies the difference-in-difference (DID) methods as the main specification. Many also use instrumental variables (IV), propensity score matching (PSM), Heckman sample selection models and/or placebo tests to take into account potential endogeneity, sample selection problems, or check for robustness.

We begin this chapter on Troubled Asset Relief Program (TARP) and the real economy by revisiting the two paths through which the TARP program might improve the real economy. Both involve increasing credit supply, which in turn may help credit customers increase their real spending and boost the real economy. The direct path begins with the primary channels through which TARP banks may increase their credit supply, followed by increased spending by the recipients of this credit on investment, employment, and/or other real goods and services. The indirect path begins with reducing systemic risk by bailing out banks that might otherwise fail or threaten the financial system. The safer financial system with healthier, better capitalized banks may increase credit supply by both TARP and non-TARP banks, which may, in turn, result in increased real spending by the borrowers from both types of banks. The remainder of this chapter reviews the evidence on the success of the program through both paths.

This chapter addresses the research concerning which banks applied for TARP funds, which of these institutions were successful in obtaining the funds, and which banks exited the TARP program early. Section 6.1 covers determinants of applying for and receiving TARP funds. We focus on the voluntary participants only, given that involuntary participants were required to take the capital injections. Section 6.2 covers determinants of banks' decisions to exit the program early and includes both voluntary and involuntary participants. Section 6.3 provides concluding remarks.

We describe in this chapter the only three empirical research studies to our knowledge that estimate the effects of Troubled Asset Relief Program (TARP) on bank competition, and to the extent possible, investigate which of the channels are behind the results. Section 10.1 reviews the findings of Berger and Roman (2015) and Cao-Alvira and Nunez-Torres (2019) on the extent to which TARP banks gained competitive advantages from the program. Section 10.2 discusses the findings of Koetter and Noth (2016) on competitive distortions for banks that did not receive bailout funds. Finally, Section 10.3 concludes and discusses some additional issues and caveats.

This chapter introduces the topics of the book and summarizes all of the other chapters. We take the broadest possible view of what constitutes a bailout or bail-in in order to ensure that we leave no stone unturned. We also cover methods to reduce the need for such costly procedures. We place a large focus on the Troubled Asset Relief Program (TARP) bailout because of its importance and depth of research, but the coverage of other alternatives is quite extensive.

In this chapter, we go beyond the effects of credit quantities and focus on three additional ways in which Troubled Asset Relief Program (TARP) banks may have changed their portfolio risk. Section 12.1 discusses the extent to which TARP banks may have shifted into safer versus riskier credits. Section 12.2 describes the effects on portfolio risk of changing the contract terms of the loans and loan commitments issued, and Section 12.3 deals with how these contract term changes differed between safer and riskier borrowers. Section 12.4 provides conclusions and caveats from this research. Notably, many of the research papers reviewed in this portfolio risk chapter are also reviewed in Chapter 11 on credit supply, as these papers investigate both credit supply and the risks of the borrowers to which the credits were supplied.

This chapter reviews the effects of Troubled Asset Relief Program (TARP) on bank credit supply. Section 11.1 examines the consequences for credit supply from the changes in bank competition associated with TARP documented in Chapter 10. Sections 11.2 and 11.3 that follow cover the research findings on the direct effects of TARP on credit supply at the extensive and intensive margins, respectively. Section 11.4 provides conclusions from this research and caveats about drawing strong conclusions from the research findings.

We analyze how managerial sentiment embedded in accounting statements affects corporate liquidity hoarding. We choose banks as our empirical setting due to superior detailed accounting data, a comprehensive research-based liquidity hoarding measure, and avoidance of interindustry differences in liquidity needs. We derive managerial sentiment from negative and positive tones in annual reports (10-K) language. We find more negative managerial sentiment results in more liquidity hoarding, consistent with our hypothesis. Further analysis confirms that findings incorporate bank volition rather than being driven only by customers. We also address endogeneity using exogenous weather conditions as instruments. We finally derive potential policy implications.