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Author:Agarwal, Sumit 

Working Paper
Loan commitments and private firms
Bank lending is an important source of funding for firms. Most loans are in the form of credit lines. Empirical studies of line demand have been complicated by their use of data on publicly traded firms, which have a wide menu of financing options. We avoid this problem by using a unique proprietary data set from a large financial institution of loan commitments made to 712 privately-held firms. We test Martin and Santomero's (1997) model, in which lines give firms the speed and flexibility to pursue investment opportunities. Our findings are consistent with their predictions. Firms facing higher rates and fees have smaller credit lines. Firms with higher growth commit to larger lines of credit and have a higher rate of line utilization. Firms experiencing more uncertainty in their funding needs commit to smaller credit lines. Almost all firms convert unused credit line portions into spot loans and take out new lines.
AUTHORS: Agarwal, Sumit; Chomsisengphet, Souphala; Driscoll, John C.
DATE: 2004

Working Paper
Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies
SUPERSEDED BY WP 18-22 We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders? bankruptcy risk in these neighborhoods. We show that bankruptcy filers can obtain secured but not unsecured debt, and lenders provide secured credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders reducing bankruptcy risk using soft information.
AUTHORS: Scholnick, Barry; Agarwal, Sumit; Mikhed, Vyacheslav
DATE: 2018-05-24

Journal Article
The asset-backed securities markets, the crisis, and TALF
Credit performs the essential function of moving funds from the savers who want to lend to the investors and consumers who wish to borrow. Under ideal conditions, this process ensures that funds are invested by the most skilled and productive individuals, thus improving efficiency and stimulating growth, and that consumers can get funds when they need them the most to satisfy their consumption needs.
AUTHORS: De Nardi, Mariacristina; Barrett, Jacqueline; Agarwal, Sumit
DATE: 2011

Working Paper
Spending responses to state sales tax holidays
Every year over 20 states offer sales tax holidays (STHs) on specific items like clothes, shoes and other items to encourage consumption, affecting over 100 million consumers. We use a unique dataset of credit cards transaction to study the spending response to these holidays. Using a diff-in-diff methodology, we find that STHs increase overall daily spending by 8%, with large percentage increases in spending on children?s clothes and shoes of 193% and 98% respectively. Consumers with children increase spending more during STHs. Our estimates of price elasticities range from 6 for big box merchants to 30 for kids clothing merchants (in absolute terms). There is no evidence of inter-temporal substitution either before or after the STH or cross-product substitution away from non-treated goods. Finally, we show that consumers from across state borders also take advantage of these tax holidays and shop in states offering holidays. Our falsification tests rule out concerns that our results are driven by spurious correlations.
AUTHORS: Agarwal, Sumit; McGranahan, Leslie
DATE: 2012

Working Paper
Cognitive abilities and household financial decision making
We analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example refers to consumers who transfer the entire balance from an existing credit card account to a new account, but use the new card for convenience transactions, resulting in higher interest charges. The second example refers to consumers who face higher APRs because they inaccurately estimate their property value on a home equity loan or line of credit application. We match individuals from the US military for whom we have detailed test scores from the Armed Services Vocational Aptitude Battery test (ASVAB), to administrative datasets of retail credit from a large financial institution. We show that our matched samples are reasonably representative of the universes from which they are drawn. We find that consumers with higher overall composite test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake later in life. ; These mistakes are generally not associated with the non-mathematical component scores. We also conduct some complementary analyses using two other data sources. We use the National Longitudinal Survey of Youth (NLSY) to show that higher ASVAB math scores are associated with lower subjective discount rates. Finally, we use the Health and Retirement Survey (HRS) to demonstrate that particular forms of cognitive ability matter for specific types of suboptimal behavior. We find that the mathematical component of the test is what matters most for financial decision making and financial wealth. In contrast, non-mathematical aptitudes appear to matter for non-financial forms of suboptimal behavior (e.g. failure to take medicine). The HRS results also demonstrate the large ramifications of low math ability on long-term economic success.
AUTHORS: Agarwal, Sumit; Mazumder, Bhashkar
DATE: 2011

Working Paper
Do financial counseling mandates improve mortgage choice and performance? Evidence from a legislative experiment
We explore the effects of mandatory third-party review of mortgage contracts on the terms, availability, and performance of mortgage credit. Our study is based on a legislative experiment in which the State of Illinois required ?high-risk? mortgage applicants acquiring or refinancing properties in 10 specific zip codes to submit loan offers from state-licensed lenders to review by HUD-certified financial counselors. We document that the legislation led to declines in both the supply of and demand for credit in the treated areas. Controlling for the salient characteristics of the remaining borrowers and lenders, we find that the ex post default rates among counseled low-FICO-score borrowers were about 4.5 percentage points lower than those among similar borrowers in the control group. We attribute this result to actions of lenders responding to the presence of external review and, to a lesser extent, to counseled borrowers renegotiating their loan terms. We also find that the legislation pushed some borrowers to choose less risky loan products in order to avoid counseling.
AUTHORS: Agarwal, Sumit; Amromin, Eugene; Ben-David, Itzhak; Chomsisengphet, Souphala; Evanoff, Douglas D.
DATE: 2009

Working Paper
The age of reason: financial decisions over the lifecycle
The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.
AUTHORS: Agarwal, Sumit; Driscoll, John C.; Gabaix, Xavier; Laibson, David I.
DATE: 2007

Working Paper
The reaction of consumer spending and debt to tax rebates – evidence from consumer credit data
We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that on average consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards spending increased, counter to the canonical Permanent-Income model. For people whose most intensively used credit card account is in the sample, spending on that account rose by over $200 cumulatively over the nine months after rebate receipt, which represents over 40% of the average household rebate. Because these results relied exclusively on exogenous, randomized variation, they represent compelling evidence of a causal link from the rebate to spending. ; Further, we found significant heterogeneity in the response to the rebate across different types of consumers. Notably, spending rose most for consumers who were initially most likely to be liquidity constrained according to various criteria, for example consumers who appeared to be initially constrained by their credit limits (before making additional payments). By contrast, debt declined most (so saving rose most) for unconstrained consumers. These results suggest that liquidity constraints are important. More generally, we found that there can be important dynamics in consumers? response to ?lumpy? increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.
AUTHORS: Agarwal, Sumit; Liu, Chunlin; Souleles, Nicholas S.
DATE: 2007

Working Paper
Benefits of relationship banking: evidence from consumer credit markets
This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, we estimate the effects of relationship banking on the customers' default, attrition, and utilization behavior. We find that relationship accounts exhibit lower probabilities of default and attrition, and have higher utilization rates, compared to non-relationship accounts, ceteris paribus. Such effects become more pronounced with increases in various measures of the strength of the relationships, such as relationship breadth, depth, length, and proximity. Moreover, dynamic information about changes in the behavior of a customer?s other accounts at the bank, such as changes in checking and savings balances, helps predict and thus monitor the behavior of the credit card account over time. These results imply significant potential benefits of relationship banking to banks in the retail credit market.
AUTHORS: Agarwal, Sumit; Chomsisengphet, Souphala; Liu, Chunlin; Souleles, Nicholas S.
DATE: 2010

Working Paper
Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program
The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an overall increase in the intensity of renegotiations while adversely affecting the effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in the rate of foreclosures and reached just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers?which is also observed before the program?does not reflect differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, it reflects servicer-specific factors that appear to be related to their preexisting organizational capabilities. We exploit regional variation in the share of loans serviced by intermediaries with high pre-program renegotiation activity to assess the economic effects in areas more exposed to the program. Regions where HAMP was used intensively saw a lower rate of house price decline as well as an increase in the pay-down rate on consumer debt. There was no change in non-durable and durable consumption in these regions, suggesting that distressed borrowers who are in the process of debt deleveraging may have a relatively low spending multiplier from moderate debt reduction. We conclude by discussing implications of our findings for debt relief programs in general and for other policy responses to crises that also require intermediaries for implementation.
AUTHORS: Agarwal, Sumit; Amromin, Eugene; Ben-David, Itzhak; Chomsisengphet, Souphala; Piskorski, Tomasz; Seru, Amit
DATE: 2013-11-30

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